Egregious Conduct Needed to Bring Bad Faith Suit

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Posted on April 6, 2022 by Barry Zalma

Richard Converse and Stephanie Converse contended that State Farm violated a contract between the parties to insure rental property the Plaintiffs owned in Watertown, New York. That property burned on December 8, 2019, and Plaintiffs contend that State Farm has refused to pay their valid claim for the proceeds of their insurance policy.

In Richard Converse, and Stephanie Converse v. State Farm Fire And Casualty Company, No. 5:21-CV-457 (TJM/ATB), United States District Court, N.D. New York (March 31, 2022) the USDC applied New York law and dismissed the bad faith causes of action.
BACKGROUND

Plaintiffs sued on March 22, 2021 raising three causes of action; Count One alleged breach of contract. Count Two sought a declaratory judgment; Count Three alleged a breach of the covenant of good faith and fair dealing. Plaintiffs sought compensatory and punitive damages, along with attorneys fees.

State Farm filed a motion to dismiss, which seeks dismissal of Counts Two and Three, as well as any claim for punitive damages or attorneys fees.
ANALYSIS
Declaratory Judgment and Attorney’s Fees

Plaintiffs conceded that they cannot maintain a claim for declaratory judgment when they have an appropriate remedy in a breach-of-contract claim. The Court granted the motion on that basis.

As a general matter, federal courts disfavor awarding fees to the prevailing party unless “unusual circumstances” exist. Faraci v. Hickey-Freeman Co., 607 F.2d 1025, 1028 (2d Cir. 1979). Since Plaintiffs offered no opposition to this portion of the motion and thus appear to have abandoned that claim, and because the general rule is not to award such fees, the Court will grant the motion in this respect as well.
Good Faith and Fair Dealing

Under New York law, parties to an express contract are bound by an implied duty of good faith, but breach of that duty is a breach of the underlying contract.

New York law does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled. When a complaint alleges both a breach of contract and a breach of the implied covenant of good faith and fair dealing based on the same facts, the latter claim should be dismissed as redundant.

Plaintiffs alleged that they filed an insurance claim on December 11, 2019, three days after the fire in question. They claimed they assisted in Defendant’s investigation, including by sitting for an interview with an agent, and participating in an examination under oath. Plaintiffs produced documents and complied with all aspects of the investigation. Police and fire reports of the incident that gave rise to them found no “intent occurred in ignition of the fire.”
Fire Allegedly Caused by a Cigarette in the Trash

The Watertown Fire Department concluded that the source of the fire was “‘unintentional, ‘” caused by someone who “inadvertently” threw a cigarette in the trash. Defendant denied Plaintiffs’ claim in its entirety, finding that Plaintiffs had breached the policy’s terms in three ways.
THE CONTRACT CLAIM

With respect to their Contract Claim, Plaintiffs allege that State Farm breached the terms of the contract (the insurance policy) with Plaintiffs by denying coverage for the losses sustained by Plaintiffs because of the December 8, 2019 fire.

Plaintiffs contended that they fully cooperated with Defendant in their investigation of the claims, the Proof of Loss Forms, the Examination under Oath, and all other requests made by Defendant to Plaintiffs. They also claimed that the reasons for the denial are spurious and unsupported by any evidence. Plaintiffs allege that their good faith and fair dealing claim relates to Defendant’s conduct in processing Plaintiff [Stephanie Converse’s] claim under the policy. They raise a separate good faith and fair dealing claim “for [Defendant’s] handling of the claims submitted by Plaintiffs and conduct surrounding this [sic] claims that demonstrates a willful disregard for Plaintiff’s [sic] rights.”

Plaintiffs alleged that “as with any other insured on an insurance contract, ” they “relied on the representations of Defendant that they would process and handle claims fairly and without malice, ” and that Defendant breached this promise. They further alleged that Plaintiffs understood that there is no private cause of action under N.Y. Ins. Law ¶ 2601(a). However, Plaintiff[s], and any other insured on an insurance contract, were assured that Defendant would not process claims in violation of law and stated public policy in New York State.
ANALYSIS

The Court found that the breach-of-contract claim and the good-faith-and-fair-dealing claim are based on the same set of facts. In their contract claim Plaintiffs allege that the they suffered a loss that the insurance contract covered, they made a claim, and that Defendant denied that claim without reason. Their good-faith-and-fair-dealing claim likewise alleges that Defendant denied a valid claim. That claim also adds facts about the length of time it took the Defendant to deny the claim and the improper basis for the denial. That is a complaint about the claims process and the decision to deny the claim. Both claims rely on the same set of facts.
PUNITIVE DAMAGES

Finally, Defendant seeks to dismiss Plaintiffs’ claim for punitive damages. The only claim that remains here is a contract claim. In New York, punitive damages are not recoverable for an ordinary breach of contract as their purpose is not to remedy private wrongs but to vindicate public rights. A party may obtain punitive damages where the conduct constituting, accompanying, or associated with the breach of contract is first actionable as an independent tort for which compensatory damages are ordinarily available, and is sufficiently egregious to warrant the additional imposition of exemplary damages.

Plaintiffs here have alleged that Defendant breached the contract. They have also alleged that Defendant waited nearly ten months to deny their claim, did so for improper reasons, and may have told a State agency some of the facts the Defendant alleged led to denying the claim. None of that conduct is the sort of egregious conduct aimed at the public that would permit punitive damages on a contract claim.

For the reasons stated above, Defendant’s motion to dismiss was granted.
ZALMA OPINION

Cigarettes are often claimed to be the cause of a fire when the investigator is unable to find another cause. Years ago a fire cause investigator and I tried to set a fire using a lit cigarette. We put tissue paper and napkins in a trash can and threw lit cigarettes into the can. Nothing happened although we used almost twenty cigarettes. At best some tissue paper turned brown as the cigarette burned down. In most situations cigarettes only cause a fire when they are used as a fuse when placed in a book of matches. The court’s decision was not forthcoming about the facts but I surmise that State Farm also has a defense to the contract claim.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

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