By JODI SOKOLOWSKI
Buffalo Law Journal

A recent New York Court of Appeals decision allowing insured parties to seek additional damages when a contract has been breached permits two Rochester business owners to return to state Supreme Court to seek recovery payments from their insurance company.

The Feb. 19 decision in Bi-Economy Market Inc. v. Harleysville Insurance Co. of New York reverses an earlier decision from the Appellate Division, 4th Department, and signifies a change in New York common law.

John Lipsitz of Lipsitz & Ponterio LLC, the firm that represented the appellants, explained that policy holders can now seek "consequential" damages when they suffer foreseeable harm beyond what they are entitled to in the limits of an insurance policy.

Harleysville's attorney, Michael F. Chelus of Chelus Herdzik Speyer & Monte PC, declined to comment on the Court of Appeals decision, saying "it would not be proper for me to comment on an ongoing case."

Even though meat market co-owners Joseph Inclema and Tom Caracci purchased "business interruption insurance" - and properly notified their insurer of property, equipment and income losses through an adjusting company following a 2002 fire - they claimed that they had to close their business because they did not receive adequate and timely reimbursement.

"Insurance gives you some piece of mind, knowing you can withstand a loss (by receiving) some cash payments to allow the business to stay afloat while rebuilding it," Lipsitz said.

Kathleen Burr, also of Lipsitz Ponterio, argued that the insurance company did not act in good faith and breached the contract when it disputed Bi-Economy's claim for actual damages.

Even though the insurer's initial disbursement of $163,162 was increased to $407,181, after alternative dispute resolution a year later, she said, the delay in funds caused the market to close its doors.

Harleysville "improperly delayed payment and failed to timely pay the full amount of its lost business income claim," the court wrote in its decision.

"The purpose of the contract was not just to receive money, but to receive it promptly so that in the aftermath of a calamitous event, the business could avoid collapse and get back on its feet as soon as possible," the court wrote.

The decision may prompt insurance companies to increase premiums, therefore "inflict(ing) burden on every New Yorker who buys insurance," Hon. Robert Smith wrote in a dissent.

Goldberg Segalla LLP partner Daniel Gerber, who is vice chair of the New York State Bar Association's Torts Insurance and Compensation Law Section, said the "decision may have a chilling effect on carriers being willing to conduct (business) in New York because they can't foresee what their potential losses may be."

Lipsitz said there has been no proof that other states have seen inflated premiums due to similar first-party bad-faith recovery rulings.

"The sky didn't fall in in those jurisdictions," he said.

The insurance industry, he added, would like to see liability capped at the amount of the coverage purchased because its profit margins increase when not paying out claims to their full value.

"They negotiate less and put the insureds in a vulnerable position, and induce them to accept less than the policy" allows, Lipsitz said.

Ron Papa, president of National Fire Adjustment Co., which estimated Bi-Economy's claims to Harleysville, said insurance companies should be held responsible for additional costs that are incurred by its procrastination.

"This landmark decision now opens up the door for policy holders to seek additional damages that the insured sustained," he said. "There's more that needs to be done to level the playing field between the insured and the insurance company, but this is one giant step in the right direction."

The Court of Appeals decision remands the case back to state Supreme Court in Monroe County. Burr said she will seek to obtain unresolved payment for the business interruption claim and possibly sue the insurance carrier for deceptive acts and practices.