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New York rejects Bad Faith cases when breach of contract is invoked



Richard Converse and Stephanie Converse claimed that State Farm had breached an agreement between the parties to insure rental properties owned by the plaintiffs in Watertown, New York. That property burned down on December 8, 2019 and the plaintiffs claim that State Farm has refused to pay their valid claim for the income from their insurance.

IN Richard Converse and Stephanie Converse v. State Farm Fire And Casualty Company, Nr. 5: 21-CV-457 (TJM / ATB), United States District Court, ND New York (March 31, 2022), USDC applied New York law and rejected the reasons for bad faith.

BACKGROUND

The plaintiffs brought an action on 22 March 2021 and raised three grounds for action; Count One alleged breach of contract. Count Two requested a declaratory judgment; Count three alleged a breach of the union of good faith and fair settlement. The plaintiffs sought compensatory and punitive damages, along with attorneys’ fees.

State Farm filed a motion for dismissal, seeking the dismissal of counts two and three, as well as any claims for damages or attorneys’ fees.

ANALYSIS

Declaring judgment and attorney’s fees

The plaintiffs admitted that they could not uphold a claim for a declaratory judgment when they had an appropriate remedy in a breach of contract claim. The court upheld the claim on that ground.

As a general matter, federal courts refuse to award fees to the ruling party unless “unusual circumstances” exist. Faraci v. Hickey-Freeman Co., 607 F.2d 1025, 1028 (2d Cir. 1979). Since the plaintiffs did not raise any objection to that part of the claim and thus appear to have abandoned that claim, and since the general rule is not to award such fees, the Court will uphold the claim in that regard as well.

Good faith and fair handling

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

New York law does not recognize a separate action for violation of the implied union of good faith and fair treatment when a breach of contract claim, based on the same facts, is also invoked. When a complaint is made regarding both a breach of contract and a breach of the implied union of good faith and fair settlement based on the same facts, the latter claim should be dismissed as superfluous.

The plaintiffs claimed that they filed an insurance claim on December 11, 2019, three days after the fire in question. They claimed that they assisted in the defendant’s investigation, among other things by sitting in on an interview with an agent and participating in an investigation under oath. The plaintiffs produced documents and followed all aspects of the investigation. Police and fire reports about the incident that gave rise to them found that no “intent occurred to ignite the fire.”

Fire is alleged to have been caused by a cigarette in the trash

The Watertown Fire Department concluded that the source of the fire was “accidental”, caused by someone “accidentally” throwing a cigarette in the trash. The defendant disputed the plaintiffs’ claim in its entirety and found that the plaintiff had violated the terms of the policy in three ways.

CONTRACT REQUIREMENTS

With regard to their contract claims, the plaintiffs claim that State Farm has violated the terms of the contract (the insurance police) with the plaintiffs by refusing to cover the losses incurred by the plaintiff as a result of the fire on 8 December 2019.

The plaintiffs claimed that they cooperated fully with the defendant in their investigation of the claims, the forms of proof of loss, the investigation under oath and all other inquiries made by the defendant to the plaintiff. They also claimed that the reasons for the denial were false and were not supported by any evidence. The plaintiffs claim that their claim in good faith and fair handling relates to the defendant’s conduct in the handling of the plaintiff [Stephanie Converse’s] claims under the insurance. They address a separate requirement in good faith and fair handling ”for [Defendant’s] handling of the plaintiffs filed and conducting this [sic] allegations showing a deliberate disregard of the plaintiff [sic] rights. “

The plaintiffs claimed that “as with all others insured on an insurance contract”, “they relied on the defendant’s commitments to process and handle claims fairly and unintentionally”, and that the defendant breached this promise. They further claimed that the plaintiffs understood that there was no private action under NY Ins. Lag ¶ 2601 (a). However, the plaintiff[s]and all others insured under an insurance contract, were assured that the defendant would not process claims in violation of the law and stated public order in the state of New York.

ANALYSIS

The court found that the claim for breach of contract and the claim for good faith and fair handling are based on the same facts. In their contract claim, the plaintiff claims that they suffered a loss covered by the insurance contract, they made a claim and that the defendant denied this claim without reason. Their claim of good faith and fair business also alleges that the defendant denied a valid statement. That allegation also adds facts about how long it took the defendant to deny the allegation and the erroneous grounds for the refusal. It is a complaint about the claim process and the decision to reject the claim. Both statements are based on the same set of facts.

PENALTY DAMAGES

Finally, the defendant seeks to dismiss the plaintiffs’ claim for damages. The only requirement left here is a contract claim. In New York, damages can not be recovered for a common breach of contract because the purpose is not to remedy private defects but to uphold public rights. A party may receive punitive damages if the conduct that constitutes, accompanies or is associated with the breach of contract can first be challenged as an independent damages for which compensatory damages are usually available, and is serious enough to justify further performance of exemplary damages.

The plaintiffs have here claimed that the defendant has breached the agreement. They have also claimed that the defendant waited almost ten months to reject his claim, did so for inappropriate reasons, and may have told a government agency some of the facts which the defendant alleged led to his claim being rejected. None of this conduct is the kind of gross conduct directed at the public that would allow for damages for a contract claim.

For the reasons set out above, the defendant’s request for inadmissibility was granted.

Cigarettes are often claimed to be the cause of a fire when the investigator can not find any other cause. Several years ago, an investigator from the fire and I tried to set fire to a lit cigarette. We put tissue and napkins in a trash can and threw lighted cigarettes in the jar. Nothing happened even though we used almost twenty cigarettes. At best, some tissue paper turned brown when the cigarette burned down. In most situations, cigarettes only cause fire when used as a fuse when placed in a match book. The court’s decision was not relevant to the facts, but I assume that State Farm also has a defense against the contract claim.


(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, insurance claims management, non-insurance and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry. He is available at http://www.zalma.com and zalma@zalma.com.

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