February 20, 2008

New York Court of Appeals Allows Potential End-Run Around Limitations on Punitive Damages in Contract Cases

The New York Law Journal discusses an opinion by the New York Court of Appeals involving the allowance of consequential damages in breach of contract actions involving insurance policies. According to the article, "The Court of Appeals' determination Tuesday that commercial property owners can assert a claim for consequential damages against insurers that breached their policies prompted a sharp disagreement among the judges. Five agreed in a ruling by Judge Eugene F. Pigott Jr. that commercial insurance consumers should be entitled to recover damages more than the stated value of their policies if those damages are the 'natural and probable consequence' of a breach of contract. But Judges Robert S. Smith and Susan Phillips Read, in a dissent written by Smith, accused their colleagues of legitimizing hitherto prohibited punitive damages in breach-of-contract claims by renaming them 'consequential' damages. The dissenters predicted on Tuesday that the 'bad policy choice' will come at 'too great a cost' to the insurance system in New York. 'Insurers will fear that juries will view even legitimate claim denials unsympathetically, and that insurers will thus be exposed to damages without any predictable limit,' Smith wrote. 'This fear will inevitably lead insurers to increase their premiums -- and so will inflect a burden on every New Yorker who buys insurance.'"