Introduction

In 2024, New York continued to serve as a go-to venue for high-stakes insurance coverage disputes. New York state and federal courts heard a number of important coverage cases last year, arising from a wide range of headline-grabbing matters, such as the COVID-19 pandemic, claims of sexual abuse against religious and academic institutions, and alleged environmental contamination by the oil industry. The key New York insurance litigation trends we have been watching in 2024 include the following.

• State and federal decisions providing guidance as to when insureds may assert extracontractual claims (such as a common law claim for breach of the implied covenant of good faith and fair dealing or statutory claims for deceptive business practices) based on an insurer’s bad faith claims handling.
• A decision from the New York Court of Appeals rejecting business interruption insurance claims for losses based on the alleged presence of the SARS-CoV-2 virus. In the aftermath of that decision, new legislation authorising insurers to issue standalone business interruption insurance covering losses that are not necessarily caused by a “physical loss” was issued.
• A Second Circuit decision considering whether a claimant’s demand letter constituted a covered “claim” as defined by the insured’s professional liability insurance policy.
• An instructive state appellate decision on choice of law rules for liability insurance policies covering multi-state environmental losses.
• An ongoing split of authority in the New York courts on an insurer’s right to recoup defence costs for non-covered claims.

Extracontractual Claims Relating to Claims Handling Are Not to Be Dismissed Where They Seek Damages Independent of Those Sought for Breach of Contract

The last year saw New York courts provide additional guidance on the issue of when insureds may assert extracontractual claims based on insurers’ alleged bad faith claims handling, such as a claim for breach of the implied covenant of good faith and fair dealing or a claim for deceptive business practices. These courts’ decisions confirmed that an insured may sustain such an extracontractual claim so long as the insured has alleged damages arising from the claim that do not duplicate the damages claimed with respect to the insured’s cause of action for breach of contract.

In Rockefeller University v Aetna Casualty & Surety Co., 217 N.Y.S.3d 562 (N.Y. App. Div. 1st Dep’t 2024), a coverage dispute relating to numerous claims brought against the insured university under the 2019 Child Victims Act, the Appellate Division for the First Department, held that the insured had properly stated causes of action for breach of the implied covenant of good faith and fair dealing and Section 349(a) of New York’s General Business Law, which prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in the state”.

With respect to the implied covenant claim, the Appellate Division held that the allegations regarding the insurers’ wrongful conduct did not duplicate the contract claims, as the former claim was grounded in allegations that the insurers failed to promptly resolve claims, failed to issue coverage decisions, refused to investigate the underlying claims, refused to fund any settlements, and pressured the insured to discontinue the coverage action.

The Appellate Division explained that the damages sought regarding the implied covenant claim did not duplicate those sought for the breach of contract claim, noting that:

• the consequential damages arising from the former claim could be higher than those available for the latter claim given the policies’ limits; and
• the insured had alleged that the insurers’ delay had placed great financial strain on the insured by forcing it to self-fund settlements and defence costs, lose investment opportunities and endowment income, and incur attorneys’ fees in connection with its attempt to enforce its insurance rights.

The Appellate Division further held that the insured had sufficiently alleged facts demonstrating the insurers’ gross disregard of its interests.

In terms of the Section 349 claim, the Appellate Division concluded that the insured had sufficiently pleaded an independent injury by alleging that the “insurers violated the statute by engaging in a deceptive wait-and-see strategy that has damaged plaintiff and potentially other policyholders, sexual abuse survivors, and the insurers’ investors”. The court rejected the insurers’ argument that the insured had failed to allege “consumer-oriented” impact, noting that the complaint alleged “a standard form policy provide to multiple consumers”.

Similarly, the district court in PAR Technology Corp. v Travelers Property Casualty Co. of America, 2024 WL 2747823 (N.D.N.Y. May 29, 2024), heard a coverage dispute concerning claims against the insureds for violations of the Illinois Biometric Privacy Act, and refused to dismiss the insureds’ claims for breach of the implied covenant of good faith and fair dealing and their Section 349 claim as it duplicated their breach of contract claim. In terms of the implied covenant claim, the court held that “even if plaintiffs’ breach of contract and bad faith claims share the same facts, the claims are not duplicative because they seek different damages”.

Specifically, the court noted that the breach of contract claim sought reimbursement of the insureds’ defence costs and the amount paid to settle the underlying litigation, whereas the implied covenant claim sought extracontractual and consequential damages. With respect to the Section 349 claim, the court rejected the insurers’ arguments that the complaint failed to plead consumer-oriented conduct and failed to plead “materially deceptive conduct” on the part of the insurers, holding that the insureds “properly pleaded consumer-oriented conduct because they allege that defendants’ policies are ‘standard policies available to and marketed to consumers located in New York State’ and that defendants have ‘regularly and repeatedly’ improperly denied consumers coverage by engaging in a pattern of delay and failure to rely upon the applicable policy provisions”.

On the other hand, New York courts have continued to dismiss insureds’ bad faith claims which duplicate breach of contract claims where the two causes of action rely on the same facts and/or seek the same damages. For example, in Conmed Corp. v Federal Insurance Co., 2024 WL 297604 (N.D.N.Y. 2024), a coverage dispute concerning the defence and settlement of a bodily injury claim against the insured, the court dismissed the insured’s implied covenant claim as duplicating its breach of contract claim. Although the court noted that the insured’s complaint “raises different allegations” for its two claims, it found them duplicated because they “stem from the same facts”. The court further noted that the insured “seeks the same type of damages in its two claims”.

Likewise, in Tiffany and Co. v Lloyd’s of London Syndicates 33, 510, 609, 780, 1084, 1225, 1414, 1686, 1861, 1969, 2001, 2012, 2232, 2488, 2987, 3000, 3623, 4444, 4472, & 4711, 83 Misc 3d 1211[A] (N.Y. Sup. Ct. N.Y. Co. May 3, 2024), a coverage dispute concerning the alleged loss of the insureds’ property while in the possession of a third-party vendor, the court dismissed the insureds’ claim for breach of the implied covenant of good faith and fair dealing as duplicated.

The court concluded that even though the insureds’ allegations relating to their implied covenant claim cited “sufficiently different conduct by defendants and are based on different facts from their breach of contract claim”, the claims were nonetheless duplicated because the insureds sought “the same categories of damages” for both claims, ie, “compensatory damages, consequential damages, prejudgment interest, attorneys’ fees and costs”. However, the court noted that even though their implied covenant claim had been dismissed, the insureds could “still on their first cause of action for breach of contract seek consequential damages resulting from defendants’ failure to provide coverage if such damages (‘risks’) were foreseen or should have been foreseen when the contract was made’”.

No Coverage for Business Interruption Losses Based on the Alleged Presence of COVID-19

In Consolidated Restaurant Operations, Inc. v Westport Insurance Corp., 41 N.Y.3d 415 (2024), the New York Court of Appeals placed New York alongside the majority of jurisdictions holding that where a policy requires “direct physical loss or damage”, an insured may not sustain a claim for property damage or business interruption based on the alleged presence of COVID-19 in a property.

That action was brought by an owner and operator of restaurants that had been issued a commercial property policy covering “all risks of direct physical loss or damage to insured property” and business interruption losses “directly resulting from direct physical loss or damage” to insured property”. The insured alleged that the presence in its restaurants of SARS-Co-V2, the virus that causes COVID-19, resulted in the cessation of in-person dining and related business interruption losses.

Upholding the decision of the Appellate Division for the First Department, the Court of Appeals held that the phrase “direct physical loss or damage” requires a “material alteration or a complete and persistent dispossession of insured property”, which the insured had not sufficiently alleged. In reaching its decision, the Court of Appeals first rejected the insured’s argument that the Appellate Division erred in interpreting “direct physical loss or damage” to require “tangible, ascertainable damage, change or alteration to the property” because that formulation does not give independent meaning to the phrase “physical loss”.

The Court of Appeals disagreed with the insured that the phrase “direct physical loss” encompassed impaired functionality and a partial or complete loss of use for a limited period of time, stating that it found this reading untenable “because it would collapse coverage for ‘direct physical loss’ into coverage for ‘loss of use’”. Holding that the insured had “alleged neither persistent contamination nor total uninhabitability of its restaurants” because it did not allege a complete shutdown or that the restaurants were closed due to contamination rather than the loss of “foot-traffic”, the court did not reach the question of “whether such allegations could fairly be equated with actual material dispossession, and therefore “direct physical loss”.

The court also rejected the insured’s alternative argument that even if it was required to plead a physical alteration of property, it had sufficiently alleged such alteration. The court held that the complaint alleged “nothing specific about how the presence of the coronavirus might affect the physical integrity of structures or property” and did not “allege there was any need to repair or replace insured property”.

New Law Authorising the Issuance of Standalone Business Interruption Insurance

In May 2024, following the Court of Appeals’ decision in Consolidated Restaurant Operations, Inc. v Westport Insurance Corporation, and in response to the numerous uncompensated losses suffered by businesses as a result of the COVID-19 pandemic, New York legislators introduced a bill authorising the issuance of standalone insurance coverage for business interruption losses not necessarily caused by physical damage. The bill was signed by Governor Kathy Hochul on 27 September 2024 and the law, codified at Section 1113(a)(34) of the New York Insurance Law, came into effect on 27 October.

Under the new law, “business interruption insurance” is defined to include “insurance against loss of use and occupancy, rents, and profits resulting from a business closure due to: (A) loss or damage to insured or neighboring property; (B) an act or threatened act of violence while the perpetrator is on the business premises; or (C) a government order”.

The new statute also amends Section 4101(a) of the New York Insurance Law to make business interruption coverage a “basic kind of insurance” available to insureds.

At this stage, it is too early to tell how many insurers will offer standalone business interruption policies and, if they do, what they will charge for the coverage.

Second Circuit Holds That Law Firm’s Letter Advising Insured of Potential Claims Was a “Claim” Under Professional Liability Insurance Policy

In Pine Management, Inc. v Colony Insurance Co., 2024 WL 1266244 (2d Cir. Mar. 26, 2024), the Second Circuit considered whether a letter sent to the insured (Pine) by a law firm representing a potential claimant, Schneider, Holland & Knight (Schneider), two weeks before the inception of the relevant policy period constituted a “claim” made prior to the policy period, meaning that the insurer owed no coverage obligations to Pine concerning an action brought by Schneider during the policy period.

Under the professional liability insurance policy at issue, the insurer agreed to provide coverage to Pine, a manager of residential properties, only for a “loss resulting from a claim first made and reported in writing during the policy period”. The policy defined “claim” to mean “a written demand received by Pine for monetary, non-monetary, or injunctive relief” arising from a “wrongful act”, which in turn was defined as “any actual or alleged act, error, omission or breach of duty by Pine in the rendering of or failure to render Real Estate Development Services”.

Pine’s argument that the letter did not constitute a claim because it did not contain a sufficiently clear demand for relief and failed to put Pine on proper notice of a demand, and that it therefore did not receive a claim until being sued during the policy period, was rejected by the district court, which dismissed Pine’s claim. On appeal, the Second Circuit affirmed the district court’s dismissal.

The Second Circuit pointed out that the letter asserted that Pine had engaged in mismanagement of certain buildings owned by Schneider, identified several specific theories of liability, stated that the purpose of the letter was to advise Pine of “claims” by Schneider against Pine, demanded the production of documents, alleged that Pine had made unauthorised payments to itself, and concluded by suggesting that the parties meet to resolve the concerns outlined in the letter and stating that “a mutually satisfactory resolution of the issues is preferable to a costly and unnecessary litigation”.

The Second Circuit noted that the allegation of unauthorised payments “indicat[ed] that the letter was demanding repayment of such funds” and therefore put Pine on notice that Schneider was seeking relief to remedy Pine’s alleged wrongdoing. In terms of the letter’s reference to scheduling a meeting to avoid litigation, the Second Circuit rejected Pine’s argument that Schneider “was not making a Claim but simply wanted to discuss its concerns”, stating that the letter’s “final line – explicitly referencing future litigation – underscored the legal consequences that would likely result from noncompliance” with the letter’s demands.

In conclusion, the Second Circuit held that because the letter “set out specific legal claims, including facts, legal theories of liability, and sufficiently clear demands for relief” and therefore constituted a “claim” within the meaning of the policy, and because that “claim” was made before the policy period, the insurer had no obligation to defend or indemnify Pine in the lawsuit brought by Schneider.

Liability Policy Covering Multi-State Risks Governed by Law of the State Where the Insured Has its Principal Place of Business

Insurance law is generally a matter of state law. Determining the applicable state law can determine the outcome in a coverage dispute, as different states have different rules concerning the interpretation and enforcement of policy provisions, what type of claims the insured can bring, and other issues. Insurance policies frequently have no choice of law provisions, so the applicable law must be determined under a conflicts of law analysis. In insurance cases, the New York courts typically apply the law of the state that the parties understood to be “the principal location of the insured risk”. But what is the “principal location of the insured risk” where the insured is a corporation with operations across the country? The Second Department addressed this question in St. Paul Fire & Marine Insurance Co. v Getty Properties Corp., 228 A.D.3d 975 (N.Y. App. Div. 2d Dep’t 2024).

In this case, the oil company Getty sought liability insurance coverage for lawsuits brought against it by the States of New Jersey, Pennsylvania and Maryland seeking to hold Getty liable for contaminating groundwater with MTBE, a gasoline additive. Because Getty operates across the country, its insurance policies covered multi-state risks arising from those operations. The insurers raised, among other defences, a late notice defence that is subject to different rules in New York and the states where the underlying lawsuits are venued. Under a New York common law rule – repealed by statute (N.Y. Ins. Law Section 3420(a)(5)) for policies issued on or after 17 January 2009 – insurers could deny an insured’s claim for late notice without any showing of prejudice. New Jersey, Pennsylvania and Maryland, by contrast, require a showing of prejudice. There was therefore an actual conflict of law on a potentially dispositive issue.

The Second Department affirmed the trial court’s determination that New York was the “principal location of the insured risk”, applying a default rule that “where covered risks are spread over multiple states, the state of the insured’s domicile should be regarded as a proxy for the principal location of the insured risk” (Getty Props., 228 A.D.3d at 977). A corporate insured is domiciled, for this purpose, in the state of its principal place of business. Getty’s principal place of business is New York. The court recognised that, “in a proper case, a foreign State’s sufficiently compelling public policy could preclude an application of New York law otherwise indicated” by the default choice of law rules, “particularly where New York’s policy is weak or uncertain”.

However, the Second Department rejected Getty’s argument that the other states had stronger interests than New York in issues relating to insurance coverage for environmental contamination in those states. Although several of the insurance policies had “state-specific endorsements”, the court found that this “did not raise a triable issue of fact as to whether the parties expected that multiple states’ laws would be applied to a future coverage dispute”. Finally, the court observed that “the application of New York law to the entirety of this coverage dispute favors the goals of certainty, predictability and uniformity of result and makes easier the application of the law to be applied”.

Ongoing Split of Authority on Insurers’ Right to Recoup Defence Costs for Non-Covered Claims

In 2024, state and federal trial courts continued to confront an issue that we covered last year: whether an insurer has the right to recoup defence costs for non-covered claims where there is not an express policy provision permitting the recoupment.

In Harleysville Preferred Ins. Co. v Hudson Ins. Co., 2024 WL 2135742 (N.Y. Sup. Ct. N.Y. Cty. May 10, 2024), a trial judge in Manhattan faced with an insurer’s claim to recoup defence costs, acknowledged that “[a]n apparent split exists between the First and Second Appellate Division Departments on this issue. The Second Department holds that such recoupment requires an express provision allowing same in the policy itself, even where the right to recover costs is reserved in a reservation of rights. The First Department, though, has allowed insurers to recoup costs after a finding of no coverage based solely on a reservation of the right to do so”. Although Manhattan is within the jurisdiction of the First Department, the court in Harleysville held that the insurer’s recoupment claim would fail “under the approach of either Department” because the insurer failed to submit “evidence of a reservation of the right to recoup its defense costs in the event of a finding of no coverage”.

A decision by a federal magistrate judge in the Southern District of New York suggests that not all judges and practitioners are aware of the divergent authorities on this issue. Without acknowledging the Second Department’s contrary rule, the court in Burlington Insurance Company v PCGNY Corp., 2024 WL 4451303, at *14 (S.D.N.Y. Feb. 24, 2024), held that “New York Courts have consistently determined that insurers are entitled to reimbursement of defense costs upon a determination of non-coverage so long as the reservation was communicated to the insured, who did not expressly refuse to consent to the reservation”. In PCGNY, the court denied the insurer’s motion, without prejudice, finding a lack of evidence in the record as to the insurer’s reservation of a right to recoup or the insured’s response.

We expect that the Court of Appeals will take up this issue and will adopt the Second Department’s holding in Am. W. Home Ins. Co. v Gjonaj Realty & Mgmt. Co. 192 A.D.3d 28, 33 (N.Y. App. Div. 2d Dep’t 2020). The Restatement of the Law of Liability Insurance has recognised a national trend in favour of the view that “[u]nless otherwise stated in the insurance policy or otherwise agreed to by the insured, an insurer may not obtain recoupment of defense costs from the insured” (Section 21 of the Restatement of the Law of Liability Insurance). This rule preserves the distinction between the duty to defend and the duty to indemnify. Under the First Department’s approach, the insurer is ultimately only required to defend claims for which it must indemnify the insured, effectively collapsing the two duties.