author: Chief Judge Kaye.

text:
    [ 884 NE2d 1040, 855 NYS2d 41]
    In the Matter of the Accounting by Fleet Bank, as Trustee of the Trust for the Benefit of Barbara W. Piel, Now Deceased, under Indenture with Florence S. Woodward, Dated December 28, 1926, Appellant. Elizabeth McNabb, Intervenor-Respondent; Lila Piel-Ollmann et al., Appellants. (And Another Proceeding.)
    Argued February 6, 2008;
    decided March 13, 2008

      POINTS OF COUNSEL

      Harris Beach PLLC, Pittsford (A. Vincent Buzard, Edward D. Bloom and Gregory J. McDonald of counsel), Wakelin, Hallock & O’Donovan, LLP, Portland, Maine (David S. Wakelin of counsel), and Eugene P. LaBue, Rochester, for appellants.
    I. The Appellate Division erroneously overruled this Court’s decision in Matter of Best (66 NY2d 151 [1985]) by rejecting the single, universal rule of construction that this Court established regarding the rights of adopted-out children to share in class gifts under wills and trusts of biological ancestors. (Matter of Cook, 187 NY 253.) II. Section 117 of the Domestic Relations Law, which the Appellate Division relied upon, was determined by this Court in Matter of Best (66 NY2d 151 [1985]) to be irrelevant. (Matter of Cook, 187 NY 253; Matter of Murphy, 6 NY3d 36; Matter of Adler, 202 Misc 1100; Matter of Landers, 100 Misc 635; Matter of Gourlay, 173 Misc 930; Matter of Monroe, 132 Misc 279; Matter of Gardiner, 69 NY2d 66.) III. The Appellate Division’s treatment oí Matter of Best (66 NY2d 151 [1985]) as to instruments in effect prior to March 1, 1964 has broad negative policy implications for adoptions and the administration of trusts in New York.

      Boylan Law Office, LLP, LeRoy (Paul S. Boylan and Laurence C. Boylan of counsel), for intervenor-respondent.
    I. The Appellate Division distinguished, but did not overrule, Matter of Best (66 NY2d 151 [1985]), correctly concluding that respondent is entitled to share in the trusts created by her grandmother. (Matter of Landers, 100 Misc 635; Matter of Monroe, 132 Misc 279; Matter of Gourlay, 173 Misc 930; Matter of Adler, 202 Misc 1100; Matter of Cook, 187 NY 253; Matter of Robert Paul P., 63 NY2d 233; Matter of Underhill, 176 Misc 737; Matter of Mulligan v
      Murphy, 14 NY2d 223; Moore v Littel, 41 NY 66.) II. The marital status of Elizabeth McNabb’s mother does not adversely affect her right to participate in the two trusts created by her grandmother in 1926 and 1963. (Levy v Louisiana, 391 US 68; Trimble v Gordon, 430 US 762; Shelley v Kraemer, 334 US 1; Matter of Hoffman, 53 AD2d 55; Matter of Gans, 134 Misc 2d 426; Reed v Campbell, 476 US 852.)
   OPINION OF THE COURT

Chief Judge Kaye.

In Matter of Best (66 NY2d 151 [1985]), this Court relied on strong policy considerations to conclude that a child adopted out of the family by strangers does not presumptively share in a class gift to the biological parent’s issue established in the biological grandmother’s 1973 testamentary trust. This appeal presents the same scenario, but with class gifts created by 1926 and 1963 irrevocable trusts. Despite the time difference, we conclude that the policy considerations that were determinative in Best equally determine the case before us, and that the adopted-out child does not share in the trust proceeds.

Background

Florence Woodward created two irrevocable trusts, one in 1926 and a second in 1963, for the lifetime benefit of her daughter, Barbara W Piel, and upon her death the trusts directed the trustee (successor-in-interest Fleet Bank) to distribute the principal to Barbara’s descendants. Specifically, the 1926 trust net income was to be paid “to her descendants, if any, in equal shares, per stirpes.” The 1963 trust principal was to be divided equally for “each then living child of hers.” Barbara Piel died in July 2003, and in October 2004 Fleet Bank instituted two proceedings for judicial settlement of the final account for each trust. This appeal concerns the distribution of approximately $9.7 million in trust principal.

Barbara Piel gave birth to three daughters. Her first daughter, intervenor-respondent Elizabeth McNabb, was born out of wedlock on August 15, 1955 in Portland, Oregon. Within days, Barbara signed a consent to adoption, relinquishing her parental rights and agreeing to Elizabeth’s adoption by strangers. An Oregon court finalized the adoption in November 1955 and Elizabeth lived her life in Oregon as a member of the Jones family. There is no indication that Florence Woodward knew of Elizabeth’s birth or adoption. Barbara’s other two daughters, Stobie Piel, born in 1959, and Lila Piel-Ollman, born in 1961, are the children of her marriage to Michael Piel.

Fleet Bank cited Stobie and Lila in the October 2004 proceedings, but failed to include Elizabeth or her children as interested persons. In November 2004 Elizabeth moved for permission to intervene and file objections to the accounts, later joined by her two children. Elizabeth objected to each account because it failed to provide her with a one-third distribution of the principal and income of each trust. The parties cross-moved for summary judgment.

Surrogate’s Court denied Elizabeth’s motions for summary judgment and granted petitioner’s motions seeking dismissal of Elizabeth’s objections. The Surrogate relied on this Court’s holding in Matter of Best that class gifts to the issue of a beneficiary do not presumptively include adopted-out children. The Appellate Division reversed, finding inapplicable the reasoning and policy considerations in Best because the Woodward trusts were executed prior to 1963 and 1966 amendments in the Domestic Relations Law that had been effective in Best. We now reverse and reinstate the Surrogate’s decrees.

Analysis

We begin with the fundamental premise that a court must first look within the four corners of a trust instrument to determine the grantor’s intent (see generally Mercury Bay Boating Club v San Diego Yacht Club, 76 NY2d 256 [1990]; Matter of Cord, 58 NY2d 539 [1983]). Only if the terms are ambiguous may a court consider extrinsic evidence. Where, as here, there is no evidence of the grantor’s intent to include or exclude a person from the class gift, a court may craft general, yet rebuttable, rules of construction based on statutory interpretation and public policy.

We did just that in Best, concluding that a nonmarital child adopted at birth by strangers was not entitled to share in a class gift devised by his biological grandmother to her daughter’s issue. The testamentary trust in Best, executed in 1973, directed the trustee, upon the biological mother’s death, to distribute the trust principal equally among her issue. The mother had two sons—David, born out of wedlock in 1952 and immediately adopted by strangers, and Anthony, born in 1963. The question in Best, as here, was whether the adopted-out child was an intended beneficiary of the class gift.

There being no evidence of the grantor’s intent, the Court considered the effect of David’s status as his biological mother’s nonmarital, adopted-out child. Although there was a rebuttable presumption that nonmarital children could share in class gifts to their parent’s issue, David’s status as a nonmarital child became irrelevant to the class disposition because of his status as an adopted-out child. In holding that adopted-out children should be excluded from general class gifts to the biological parent’s issue, the Court held that Domestic Relations Law § 117 did not require inclusion of adopted-out children, and that three “[p]owerful policy considerations” militate against inclusion in the class (Best, 66 NY2d at 155). We reach those same conclusions here.

Before addressing the policy considerations relied upon in Best, we outline the significant change in the Domestic Relations Law that distinguishes the present facts, but not the result.

From 1896 through 1963, an adopted child’s right “of inheritance and succession” from the biological family “remain[ed] unaffected” by the order of adoption (Domestic Relations Law § 64, as codified by L 1896, ch 272). Clearly, between 1896 and 1963, New York law permitted an adopted-out child to inherit in intestacy from biological parents (see Matter of Landers, 100 Misc 635 [Sur Ct, Oneida County 1917]; Matter of Foster, 108 Misc 604 [Sur Ct, Wayne County 1919]; Matter of Gourlay, 173 Misc 930 [Sur Ct, Kings County 1940]; see also Mem of Commn on Law of Estates, 1963 McKinney’s Session Laws of NY, at 1962). Unclear, however, is whether an adopted-out child was presumptively included in a class gift to a biological parent’s issue, descendants or children.

In 1963 the Legislature amended Domestic Relations Law § 117 by terminating—for the first time since 1896—an adopted child’s rights to inheritance and succession from the biological family (L 1963, ch 406). Effective March 1, 1964, the amendments included a savings clause for wills and irrevocable instruments executed prior to that date.

In 1985, when Best was decided, Domestic Relations Law § 117 (1) provided that the “rights of an adoptive child to inheritance and succession from and through his natural parents shall terminate upon the making of the order of adoption . . . .” (As amended by L 1970, ch 570, § 10.) Subdivision (2) clarified that the termination of rights applied “only to the intestate descent and distribution of real and personal property and shall not affect the right of any child to distribution of property under the will... or under any inter vivos instrument . . . executed by such natural parent or his or her kindred” (as amended by L 1966, ch 14 [emphasis added]). Significantly, the Court determined that this statutory provision “does not mandate that [an adopted-out] child receive a gift by implication,” but only protects an adopted-out child’s right to inherit when specifically identified in the instrument (Best, 66 NY2d at 156). Thus, section 117 (2) merely preserved rights of inheritance expressly intended by the grantor; it did not create additional rights.

As in Best, the Domestic Relations Law in effect at the time Florence Woodward executed the trusts does not create rights for an adopted-out child to share in a class gift by implication. Best determined that question, concluding that similar statutory language did not create such a right. Nothing in the pre1964 legislative history or case law, moreover, indicates that an adopted-out child would share in a class gift to a biological parent’s issue, descendants or children.

Having determined that the statutory law effective prior to March 1, 1964 does not require a different result, we turn to the strong policy considerations supporting adherence to Best.

In excluding adopted-out children from class gifts to the biological parent’s issue, the Court highlighted the legislative objective of fully assimilating the adopted child into the adoptive family and, relatedly, the importance of keeping adoption records confidential. From the very inception of the adoption law the Legislature has sought to promote assimilation of the adopted child by providing the new family with the “legal relation of parent and child” (Domestic Relations Law § 64, as codified by L 1896, ch 272; see also Matter of Cook, 187 NY 253, 260-261 [1907]). Additionally, by 1924 the Legislature had explicitly recognized the importance of confidentiality in adoption records, and in 1938 it mandated the sealing of those records (see Matter of Linda F. M., 52 NY2d 236, 238 n 1 [1981]). These policy considerations predate the execution of both Woodward trusts.

The facts of this case also compellingly demonstrate the importance of the third policy concern identified in Best. As the Court noted, the finality of judicial decrees would be compromised if adopted-out children were included in such class gifts “because there would always lurk the possibility, no matter how remote, that a secret out-of-wedlock child had been adopted out of the family by a biological parent or ancestor of a class of beneficiaries” (66 NY2d at 156). That lurking possibility materialized here. In this case the adopted-out child intervened and relieved the trustee of the duty to identify and cite her. In other cases, neither the family nor the child may be aware of a birth or adoption, thereby placing on a trustee seeking closure the onerous burden of searching out unknown potential beneficiaries.

This case raises additional policy concerns: here we address classes of beneficiaries created in irrevocable instruments prior to 1964. The chances of unearthing adoption decrees potentially dating back to the late 1800s, or of identifying witnesses to recall the details of an adoption, dwindle as time passes. Permitting adopted-out children to participate in a class created by a pre-1964 instrument would pose greater practical problems to the procedural administration of a gift, and—without any legal basis for doing so—would create two classes of beneficiaries, those receiving a gift in an instrument executed before 1964 and those after. The policy interests of finality in court decrees and stability in property titles weigh heavily in favor of consistency with Best.

Therefore, we conclude that the Best rule of construction also applies to irrevocable trusts executed prior to March 1, 1964. Where, as here, the grantor’s intent is indiscernible and the statutory intent at best ambiguous, we conclude that the policy considerations disfavoring inclusion of adopted-out children in such a class determine this case.

Accordingly, the order of the Appellate Division should be reversed, with costs payable out of the trusts to all parties appearing separately and filing separate briefs, and the decrees of Surrogate’s Court reinstated.

Judges Ciparick, Graffeo, Read, Smith, Pigott and Jones concur.

Order reversed, etc.

       Similarly, in the present case Elizabeth’s status as a nonmarital child has no impact on this Court’s decision; her status as a child adopted out of the biological family controls the result we reach. Accordingly, there is no denial of equal protection, as she claims.


source: Caselaw Access Project

author: Graffeo, J.

license: Public Domain

text:
    [ 884 NE2d 1044, 855 NYS2d 45]
    Vigilant Insurance Company et al., Appellants, v The Bear Stearns Companies, Inc., Respondent.
    Argued February 6, 2008;
    decided March 13, 2008

      POINTS OF COUNSEL

      DLA Piper US LLP, New York City (Joseph G. Finnerty III, Arthur F. Fergenson and Howard S. Schrader of counsel), and Bondas, Skarzynski, Walsh & Black, LLC (James A. Skarzynski, Evan Shapiro and Eleftherios Stefas of counsel) for appellants.
    I. The First Department violated the Supremacy Clause of the United States Constitution by nullifying a federal court final judgment. (Frew v Hawkins, 540 US 431; Hunt v Mobil Oil Corp., 557 F Supp 368; Washington v Washington State Commercial Passenger Fishing Vessel Assn., 443 US 658; Delaware Val. Citizens’ Council for Clean Air v Commonwealth of Pa., 755 F2d 38; Central Nat. Bank v Stevens, 169 US 432; Riggs v Johnson County, 6 Wall [73 US] 166; Stoll v Gottlieb, 305 US 165; Deposit Bank v Frankfort, 191 US 499; Matter of New York State Commr. of Correction v Gulotta, 194 AD2d 540; Jamaica Hosp. v Blum, 68 AD2d 1.) II. The First Department misapplied basic principles of contract interpretation to the insurance policies’ “investment banking” exclusion. (Mount Vernon Fire Ins. Co. v Creative Hous., 88 NY2d 347; Silva v Utica First Ins. Co., 303 AD2d 487; Matter of Manhattan Pizza Hut v New York State Human Rights Appeal Bd., 51 NY2d 506; People v Shapiro, 50 NY2d 747; Bailey v AGR Realty Co., 260 AD2d 322; State of New York v Home Indem. Co., 66 NY2d 669; Newin Corp. v Hartford Acc. & Indem. Co., 62 NY2d 916; Hartford Acc. & Indem. Co. v Wesolowski, 33 NY2d 169; Matter of Ideal Mut. Ins. Co. [Superintendent of Ins. of State of N.Y.—Harbour Assur. Co. of Bermuda], 231 AD2d 59; Tierra Props. v Lloyd’s Ins. Co., 206 AD2d 288.) III. The court below erred in not holding that Bear Stearns’ failure to obtain the insurers’ consent prior to its settlement with the regulators voided coverage under the policies. (Argo Corp. v Greater N.Y. Mut. Ins. Co., 4 NY3d 332; Royal Zenith Corp. v New York Mar. Mgrs., 192 AD2d 390; AIU Ins. Co. v Valley Forge Ins. Co., 303 AD2d 325; Travelers Indent. Co. v Eitapence, 924 F2d 48; Valentino v State of New York, 48 AD2d 15; Silverman v Member Brokerage Servs., 298 AD2d 381; Winston v Mediafare Entertainment Corp., 777 F2d 78; Flores v Lower E. Side Serv. Ctr., Inc., 4 NY3d 363; Brown Bros. Elec. Contrs. v Beam Constr. Corp., 41 NY2d 397; Matter of Express Indus. & Term. Corp. v New York State Dept. of Transp., 93 NY2d 584.) IV The trial court and the First Department erred in not ruling that Bear Stearns’ future payments for “independent research” and “investor education” programs are not “loss” covered by the policies. (Loblaw, Inc. v Employers’ Liab. Assur. Corp., 57 NY2d 872; Breed v Insurance Co. of N. Am., 46 NY2d 351; Roundabout Theatre Co. v Continental Cas. Co., 302 AD2d 1; Continental Ins. Cos. v Northeastern Pharm. & Chem. Co., Inc., 842 F2d 977; Mazzola v County of Suffolk, 143 AD2d 734; 2619 Realty v Fidelity & Guar. Ins. Co., 303 AD2d 299; Avondale Indus., Inc. v Travelers Indem. Co., 887 F2d 1200; Ellett Bros., Inc. v United States Fid. & Guar. Co., 275 F3d 384; Maryland Cas. Co. v Armco, Inc., 822 F2d 1348.)

      Proskauer Rose LLP, New York City (John H. Gross, Seth B. Schafler, Francis D. Landrey, Matthew J. Morris and Sarah Reisman of counsel), for respondent.
    I. The insurers’ Supremacy Clause argument was not preserved and is without merit. (Bingham v New York City Tr. Auth., 99 NY2d 355; Motor Veh. Mfrs. Assn. of U.S. v State of New York, 75 NY2d 175; Lichtman v Grossbard, 73 NY2d 792; Matter of Barbara C., 64 NY2d 866; Balbuena v IDR Realty LLC, 6 NY3d 338; Capitol Records, Inc. v Naxos of Am., Inc., 4 NY3d 540; Department of Treasury v Fabe, 508 US 491; SEC v National Securities, Inc., 393 US 453; Munich Am. Reins. Co. v Crawford, 141 F3d 585; Washington v Washington State Commercial Passenger Fishing Vessel Assn., 443 US 658.) II. There are triable issues of fact as to whether the payment labeled as disgorgement is a loss as that term is defined in the policy. (Zuckerman v City of New York, 49 NY2d 557; Winegrad v New York Univ. Med. Ctr., 64 NY2d 851; Lipsky v Commonwealth United Corp., 551 F2d 887; Cambridge Fund, Inc. v Abella, 501 F Supp 598; Singleton Mgt. v Compere, 243 AD2d 213; Matter of Halyalkar v Board of Regents of State of N.Y., 72 NY2d 261; Matter of Becker v DeBuono, 239 AD2d 664; Allstate Ins. Co. v Zuk, 78 NY2d 41; Public Serv. Mut. Ins. Co. v

      Goldfarb, 53 NY2d 392; Messersmith v American Fid. Co., 232 NY 161.) III. The Appellate Division correctly granted summary judgment to Bear Stearns on the investment banking issue. (Belt Painting Corp. v TIG Ins. Co., 100 NY2d 377; RJC Realty Holding Corp. v Republic Franklin Ins. Co., 2 NY3d 158; 242-44 E. 77th St., LLC v Greater N.Y. Mut. Ins. Co., 31 AD3d 100; Uribe v Merchants Bank of N.Y., 91 NY2d 336; Metropolitan Life Ins. Co. v Noble Lowndes Intl., 84 NY2d 430; State of New York v Home Indem. Co., 66 NY2d 669; Newin Corp. v Hartford Acc. & Indem. Co., 62 NY2d 916; Hartford Acc. & Indem. Co. v Wesolowski, 33 NY2d 169; Ender v National Fire Ins. Co. of Hartford, 169 AD2d 420; Mount Vernon Fire Ins. Co. v Creative Hous., 88 NY2d 347.) IV The Appellate Division correctly granted summary judgment to Bear Stearns on whether the policy covers payments for investor education and independent research. (Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470; Westview Assoc. v Guaranty Natl. Ins. Co., 95 NY2d 334; Mazzuoccolo v Cinelli, 245 AD2d 245; S.E.C. v Lorin, 869 F Supp 1117; ZKZ Assoc. v CNA Ins. Co., 89 NY2d 990; Woodson v American Tr. Ins. Co., 281 AD2d 282; Yoi-Lee Realty Corp. v 177th St. Realty Assoc., 208 AD2d 185; Maryland Cas. Co. v Armco, Inc., 822 F2d 1348; Ellett Bros., Inc. v United States Fid. & Guar. Co., 275 F3d 384; Gerrish Corp. v Universal Underwriters Ins. Co., 947 F2d 1023.) V There are triable issues of fact concerning the settlement issue. (Isadore Rosen & Sons v Security Mut. Ins. Co. of N.Y., 31 NY2d 342; Prudential Lines v Firemen’s Ins. Co. of Newark, N.J., 91 AD2d 1; Texaco A/S [Denmark] v Commercial Ins. Co. of Newark, N.J., 160 F3d 124; Luria Bros. & Co., Inc. v Alliance Assur. Co., Ltd., 780 F2d 1082; Silverman v Member Brokerage Servs., 298 AD2d 381; Hover v National Grange Ins. Co., 20 AD2d 178; Winston v Mediafare Entertainment Corp., 777 F2d 78; Joseph Martin, Jr., Delicatessen v Schumacher, 52 NY2d 105; Schlegel Mfg. Co. v Cooper’s Glue Factory, 231 NY 459; Souveran Fabrics Corp. v Virginia Fibre Corp., 37 AD2d 925.)

      Jacob H. Stillman, Washington, D.C., and Mark Pennington for Securities and Exchange Commission, amicus curiae.
    I. The U.S. Securities and Exchange Commission’s complaint alleged that Bear Stearns failed to guard against conflicts of interest that threatened the independence of its securities analysts and sought disgorgement of the ill-gotten gains arising from this misconduct. II. Bear Stearns agreed to pay disgorgement, and the District Court entered a judgment ordering it to do so. III. Despite the plain language of the complaint of the consent to judgment and of the final judgment, Bear Stearns urged in the Appellate Division that it did not pay disgorgement, and that the US Securities and Exchange Commission used a “legal fiction” to obtain compensatory damages.
   OPINION OF THE COURT

Graffeo, J.

In this insurance dispute, we conclude that the insured breached a policy provision obligating it to obtain the consent of its liability carriers before settling claims in excess of $5 million. We therefore reverse the order of the Appellate Division denying the insurers’ motion for summary judgment.

Defendant Bear Stearns Companies, Inc., a financial services firm, was issued a primary professional liability insurance policy by plaintiff Vigilant Insurance Company that provided coverage for losses resulting from claims made against the insured for its wrongful acts. The Vigilant policy afforded $10 million in coverage after Bear Stearns exhausted its $10 million self-insured retention. Plaintiffs Federal Insurance Company and Gulf Insurance Company further provided Bear Stearns an additional $40 million in coverage under follow-form excess liability policies. Pursuant to the terms of these insurance contracts, Bear Stearns agreed not to settle any claim in excess of $5 million without first obtaining the consent of its insurers. In addition, the policies excluded coverage for claims arising from investment banking work undertaken by Bear Stearns.

In early 2002, the U.S. Securities and Exchange Commission (SEC), National Association of Securities Dealers (NASD) and New York Stock Exchange (NYSE), along with state attorneys general, initiated a joint investigation into the practices of research analysts working at financial services firms and the potential conflicts that could arise from the relationship between research functions and investment banking objectives. The investigation focused on allegations that research analysts employed at 10 major financial institutions, including Bear Stearns, were improperly influenced by investment banking concerns. Toward the end of 2002, the regulators met separately with each of the investigated firms to discuss a global settlement.

On December 20, 2002, Bear Stearns signed a settlement-in-principle document, acknowledging that each regulator would commence an action or administrative proceeding against it and that Bear Stearns would subsequently “consent to the action and the relief sought without admitting or denying the allegations.” Bear Stearns further agreed to pay $50 million in retrospective relief, plus $25 million to fund independent research and $5 million for investor education. The document indicated that the terms of the settlement were subject to approval by the SEC and other regulators. Also taking place on December 20, 2002, the regulators issued a press release announcing they had achieved an industry-wide settlement with the 10 financial institutions that would result in payments of more than $1.4 billion in penalties, restitution and education funds.

A few months later, Bear Stearns executed a consent agreement in which it acceded to the entry of a final judgment in the SEC’s federal lawsuit against Bear Stearns in the United States District Court for the Southern District of New York. Under the terms of the “Consent of Defendant Bear, Stearns & Co. Inc.,” dated April 21, 2003, Bear Stearns consented to be permanently enjoined from violating a number of NASD and NYSE rules and agreed to pay a total amount of $80 million allocated as follows: $25 million as a penalty, $25 million in disgorgement, $25 million for independent research and $5 million for investor education. Of the $50 million in retrospective relief, $25 million was designated to resolve the SEC action and related proceedings instituted by the NASD and NYSE, while the remaining $25 million covered the settlement of proceedings with various state regulators. Bear Stearns explicitly agreed not to seek insurance coverage for the $25 million penalty. The agreement also allowed the SEC to present a final judgment to the federal court “for signature and entry without further notice” to Bear Stearns.

Three days after executing the settlement agreement, Bear Stearns sent letters to its insurers requesting their consent to the settlement. The insurers disclaimed coverage and commenced this declaratory judgment action seeking a declaration that the $45 million sought by Bear Stearns (after depletion of the $10 million self-insured retention) was not covered by the policies.

In October 2003 the federal District Court found the Bear Stearns settlement to be “fair, adequate, and in the public interest,” and entered a final judgment ordering Bear Stearns to pay the agreed-upon sum of $80 million. Shortly thereafter, the insurers moved for summary judgment in this declaratory judgment action. In support of their motion, the insurers argued that they were not liable for all or part of the $45 million sought by Bear Stearns for four reasons. First, they asserted that Bear Stearns could not recover any of the settlement because it had breached the policy provision obligating it to obtain the insurers’ consent before settling the case. Second, they claimed that the investment banking exclusion precluded recovery of the settlement proceeds. Third, the insurers contended that the $25 million disgorgement payment was uncollectible either as a matter of public policy or under contract interpretive principles. Finally, they posited that neither the $25 million payment for independent research nor the $5 million payment for investor education was covered because those liabilities were not “losses” within the meaning of the policies.

Supreme Court found that triable issues of fact existed as to whether Bear Stearns breached the policy clause prohibiting it from settling without the insurers’ consent and whether the investment banking exclusion applied. Siding with the insurers on the disgorgement issue, the court held that the $25 million disgorgement payment did not constitute damages under the terms of the policies and that Bear Stearns was not entitled to look behind the settlement to ascertain whether the entire $25 million truly represented ill-gotten gains. The court also rejected the insurers’ position that the $25 million payment for independent research and $5 million payment for investor education were not losses under the policies. Bear Stearns and the insurers appealed.

The Appellate Division modified, by granting Bear Stearns summary judgment on the investment banking exclusion and independent research/investor education issues and denying the insurers summary judgment on the disgorgement issue, and otherwise affirmed. The court concurred with Supreme Court in finding an issue of fact as to whether Bear Stearns breached the provision obligating it to obtain the consent of the insurers, but determined that the investment banking exclusion was not applicable. Despite the agreement by Bear Stearns to pay $25 million as disgorgement, the court found “an issue of fact as to whether the portion of the settlement attributed to disgorgement actually represented ill-gotten gains or improperly acquired funds” (34 AD3d 300, 302 [2006]). Finally, the court rejected the insurers’ contention that the combined $30 million payment for independent research and investor education were not covered losses.

The Appellate Division granted the insurers leave to appeal and certified the following question to this Court: “Was the order of the Supreme Court, as modified by this Court, properly made?” We conclude that it was not.

The insurers raise a number of objections to the Appellate Division order, but we find it necessary to address only one of them. The insurers contend that the Bear Stearns settlement is not recoverable because Bear Stearns breached the policy provision obligating it to obtain their consent prior to settling the regulator lawsuits. Specifically, the insurers claim that Bear Stearns resolved and finalized the settlement of the case when it executed the settlement-in-principle in December 2002 or, at the latest, when it signed the consent agreement in April 2003 without advising the insurers. Bear Stearns counters that the courts below properly found a triable issue of fact as to whether its execution of these two documents constituted a breach of the policy provision.

The primary insurance policy, whose terms and conditions are incorporated into the follow-form excess policies, provides in relevant part:

“The Insured agrees not to settle any Claim, incur any Defense Costs or otherwise assume any contractual obligation or admit any liability with respect to any Claim in excess of a settlement authority threshold of $5,000,000 without the Insurer’s consent, which shall not be unreasonably withheld . . . The insurer shall not be liable for any settlement, Defense Costs, assumed obligation or admission to which it has not consented.”

As with the construction of contracts generally, “unambiguous provisions of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such provisions is a question of law for the court” (White v Continental Cas. Co., 9 NY3d 264, 267 [2007] [citation omitted]).

We conclude that Bear Stearns breached this provision when it executed the April 2003 consent agreement before notifying the insurers or obtaining their approval. As contemplated by the earlier settlement-in-principle, Bear Stearns signed the April 2003 agreement acquiescing to the relief sought in the SEC federal action. Under this agreement, Bear Stearns agreed to pay $80 million, covering four payment categories, in order to resolve the various federal and state regulatory actions and proceedings pending against it. Bear Stearns further accepted injunctive relief that prevented it from violating certain NASD and NYSE rules. And it acknowledged that the SEC could present a final judgment to the federal court for signature and entry without further notice. In short, Bear Stearns did everything within its ability to settle the matter and no further action was required on its part.

We are unpersuaded by the contention that a triable issue of fact exists because the federal court did not approve the settlement until it entered a final judgment in October 2003. Parties are free to enter into a valid settlement agreement that is made subject to court approval. Notably absent from the agreement, however, was any provision similarly subjecting it to the insurers’ approval. Having signed the consent agreement, Bear Stearns was not free to walk away from it before entry of a final judgment (see TLC Beatrice Intl. Holdings, Inc. v CIGNA Ins. Co., 2000 WL 282967, *7, 2000 US Dist LEXIS 2917, *20-21 [SD NY 2000] [“Although the Court, whose approval was sought by the parties, could accept or reject the Settlement, subject to that approval the parties themselves were bound by the Settlement’s terms” (citation omitted)], affd sub nom. Lewis v Cigna Ins. Co., 234 F3d 1262 [2d Cir 2000] [table; text at 2000 WL 1654530, 2000 US App LEXIS 27848 (2000)]). In executing the April 2003 agreement, Bear Stearns settled a claim within the meaning of the insurance policy provision.

As a sophisticated business entity, Bear Stearns expressly agreed that the insurers would “not be liable” for any settlement in excess of $5 million entered into without their consent. Aware of this contingency in the policies, Bear Stearns nevertheless elected to finalize all outstanding settlement issues and executed a consent agreement before informing its carriers of the terms of the settlement. Bear Stearns therefore may not recover the settlement proceeds from the insurers.

Accordingly, the order of the Appellate Division should be reversed, with costs, plaintiffs’ motion for summary judgment granted, judgment granted declaring in accordance with this opinion and the certified question answered in the negative.

Judges Ciparick, Read, Smith, Pigott and Jones concur; Chief Judge Kaye taking no part.

Order reversed, etc.

       The Travelers Indemnity Company is the successor-in-interest by merger to Gulf Insurance Company. Bear Stearns was also covered by additional excess policies not relevant to this appeal.


author: Read, J.

text:
    [ 884 NE2d 1048, 855 NYS2d 49]
    Watral & Sons, Inc., Appellant, v OC Riverhead 58, LLC, Respondent, et al., Defendants.
    Argued February 7, 2008;
    decided March 18, 2008

      POINTS OF COUNSEL

      Eric Schneider, Kingston, for appellant.
    I. The Appellate Division applied the incorrect standard of strict liability in holding plaintiff-appellant responsible for the cutting of the cable and the cave-in and consequent loss of power of a third party at the excavation site. (Lawyers’ Fund for Client Protection of State of N.Y. v Bank Leumi Trust Co. of N.Y., 94 NY2d 398; Matter of Columbus Park Corp. v Department of Hous. Preserv. & Dev. of City of N.Y., 80 NY2d 19.) II. The Appellate Division incorrectly failed to read the contract-based indemnity provision in pari materia with the negligence-based indemnity provision. (Gillmore v Duke/Fluor Daniel, 221 AD2d 938; Kader v City of N.Y., Hous. Preserv. & Dev., 16 AD3d 461; Hooper Assoc. v AGS Computers, 74 NY2d 487; Tonking v Port Auth. of N.Y. & N.J., 3 NY3d 486.) III. The Appellate Division erroneously imposed upon plaintiff-appellant an obligation to indemnify a third-party claim. (New York Tel. Co. v Harrison & Burrowes Bridge Contrs., 3 AD3d 606; N. A. Orlando Contr. Corp. v Consolidated Edison Co., 131 AD2d 827; Lizza Indus. v Long Is. Light. Co., 44 AD2d 681; Buckeye Pipeline Co. v Congel-Hazard, Inc., 41 AD2d 590; 532 Madison Ave. Gourmet Foods v Finlandia Ctr., 96 NY2d 280.) IV The Appellate Division erroneously found that plaintiff-appellant violated provisions of the Industrial Code. (Schmidt v Merchants Despatch Transp. Co., 270 NY 287; Martin v Herzog, 228 NY 164; Duncan v Kelly, 249 AD2d 802.) V The Appellate Division incorrectly held plaintiff-appellant responsible for damage to an electrical cable and subsequently a cave-in at the work site, when, in fact, the record educed at the trial court is absent of such proof.

      Siller Wilk LLP, New York City (M. William Scherer of counsel), for respondent.
    I. Article 10 of the contract is not dependent upon proof of Watral & Sons, Inc.’s negligence. (Vermont

      Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470; Bailey v Fish & Neave, 8 NY3d 523; South Rd. Assoc., LLC v International Bus. Machs. Corp., 4 NY3d 272; Lawyers’ Fund for Client Protection of State of N.Y. v Bank Leumi Trust Co. of N.Y., 94 NY2d 398; Brown v Two Exch. Plaza Partners, 146 AD2d 129, 76 NY2d 172; Warnett v A.J. Pegno Constr. Corp., 1 AD3d 207.) II. The Appellate Division’s majority correctly concluded that Watral & Sons, Inc. had been negligent. (Dermatossian v New York City Tr. Auth., 67 NY2d 219.) III. Any reasonable businessperson would expect the excavator to be fully responsible for what happened here. (BP A.C. Corp. v One Beacon Ins. Group, 8 NY3d 708; Album Realty Corp. v American Home Assur. Co., 80 NY2d 1008.) TV Watral & Sons, Inc. is bound by the stipulation as to the amount of damages paid to the adjacent property owner.
   OPINION OF THE COURT

Read, J.

This appeal calls upon us to interpret provisions in a construction contract (AIA Document A201/CM [1980]) to determine if Watral & Sons must indemnify landowner OC Riverhead 58 for damages allegedly sustained by a neighboring landowner, Ad-chem Corporation, during Watral’s performance of excavation work on OC’s property. For the reasons that follow, we conclude that OC was not entitled to contractual indemnification, and therefore reverse.

I.

On December 6, 1999, OC entered into a contract with Watral for the excavation, drainage, and sanitary work necessary to build an Applebee’s restaurant on property that OC owned in Riverhead, New York, across from the Tánger Outlet Center. The contract price, as ultimately adjusted with additions and credits, was $167,401.

On August 3, 2000, a Watral employee was excavating on OC’s property for the sewer line when his backhoe struck and damaged an underground power cable supplying electricity to Adchem’s adjacent property. Before beginning this work, a project superintendent employed by Síndrome Construction, Inc., the construction manager and the owner’s representative on the site, had notified “New York One Call” to ask for the electric line servicing Adchem to be marked. Although this was done, an unidentified electrician at some point relocated the cable.

The excavator was working 10 to 15 feet from the flags put in place to mark the cable when he struck it. Further, after the accident it was discovered that “excess cable, in the form of a loop had been buried, at the time of the original cable installation.” Watral agreed to pay for the materials necessary to repair the cable, and the electrician agreed to supply his labor. At the same time, the excess loop was removed.

On August 17, 2000, the project superintendent was supervising a Watral employee, who was excavating in the same area in order to adjust the sewer’s height. The ground gave way, dragging the cable toward the excavation site. The cable did not come into contact with the excavator’s backhoe, but was damaged at the place where it had previously been repaired, apparently again disrupting electric service to Adchem’s property. Watral once more seems to have paid for the materials necessary to fix the damage to the cable.

During the spring and summer of 2000, OC paid Watral $85,000 of the contract price, but withheld the $82,401 balance due, ostensibly because OC was involved in a dispute with Ad-chem over damages allegedly caused by the accidents on August 3 and August 17, 2000. OC subsequently resolved this dispute by paying Adchem $69,639.

On January 30, 2001, Watral filed a notice of mechanic’s lien against the property, and on May 11, 2001, Watral commenced an action in Supreme Court to foreclose upon the lien. In its answer dated July 31, 2001, OC counterclaimed that “[i]n response to threats by Adchem to commence litigation and in order to resolve the dispute that [Watral] failed and refused to resolve, [OC] was forced to make a payment to Adchem . . . resulting in damage to [OC] in an amount at least equal to the amount [Watral] demands herein.”

After the parties submitted the matter upon a stipulated statement of facts, Supreme Court found in Watral’s favor, based on its interpretation of subparagraphs 4.18.1 and 10.2.5 of the contract. Construing these two provisions together, the trial court concluded that Watral was required to indemnify OC only for its own negligent acts, and that the stipulated facts did not establish that the damage to the cable was Watral’s fault. Accordingly, Supreme Court entered judgment for the balance due Watral under the contract, with interest to be computed from November 30, 2000.

The Appellate Division, with two Justices dissenting, subsequently modified Supreme Court’s order, ruling that Watral was obligated to indemnify OC under subparagraph 10.2.5, which “was intended to impose a broader duty of indemnification upon [Watral] than subparagraph 4.18.1,” which concededly required negligence (34 AD3d 560, 564 [2d Dept 2006]). Moreover, the majority disagreed with Supreme Court’s findings of fact: “Although the Supreme Court found no evidence that [Watral] was at fault for either of the incidents in which the cable was damaged, the stipulated facts point to a contrary conclusion” (id. at 566). Accordingly, the majority concluded that OC was also entitled to indemnification under subparagraph 4.18.1 and common-law indemnification principles. Watral appeals to us as of right, pursuant to CPLR 5601 (a), and we now reverse.

II.

Article 4 of the AIA form contract at issue on this appeal is entitled “CONTRACTOR,” and paragraph 4.18 is entitled “INDEMNIFICATION.” Subparagraph 4.18.1 states that

“[t]o the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, the Architect, the Construction Manager, and their agents and employees from and against all claims, damages, losses and expenses, including, but not limited to, attorneys’ fees arising out of or resulting from the performance of the Work, provided that any such claim, damage, loss or expense (1) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including the loss of use resulting therefrom, and (2) is caused in whole or in part by any negligent act or omission of the Contractor . . . regardless of whether or not it is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge or otherwise reduce any other right or obligation of indemnity which would otherwise exist as to any party or person described in this Paragraph 4.18.”

Article 10 of the form contract is entitled “PROTECTION OF PERSONS AND PROPERTY,” and paragraph 10.2 is entitled “SAFETY OF PERSONS AND PROPERTY.” As relevant to this appeal, clause 10.2.1.3 provides that

“[t]he Contractor shall take all reasonable precautions for the safety of, and shall provide all reasonable protection to prevent damage, injury or loss to: . . .
“property at the site or adjacent thereto, including trees, shrubs, lawns, walks, pavements, roadways, structures and utilities not designated for removal, relocation or replacement in the course of construction.”

Finally, subparagraph 10.2.5 specifies that

“[t]he Contractor shall promptly remedy all damage or loss ... to any property referred to in Clause[ ] . . . 10.2.1.3 caused in whole or in part by the Contractor . . . and for which the Contractor is responsible under Clause[ ] . . . 10.2.1.3, except damage or loss attributable to the acts or omissions of the Owner, the Architect, the Construction Manager or anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable, and not attributable to the fault or negligence of the Contractor. The foregoing obligations of the Contractor are in addition to the Contractor’s obligations under Paragraph 4.18.”

First, we agree with Supreme Court and the dissenters that there is insufficient proof on the hare-bones record in this case to support indemnification under subparagraph 4.18.1. As for the first accident, the dissenters pointed out that “the parties stipulated that the electrical cable servicing the Adchem property was not where it was supposed to be, but ‘had been relocated by others’ ” before Watral began work (34 AD3d at 571-572 [Fisher, J., dissenting] [emphasis added]). As a result, there was no proof of Watral’s negligence, and “because the record [did] not disclose the identity of the electrician responsible for the relocation,” it was not possible to figure out “whether that person was someone for whose acts Watral [might] be liable, so as to trigger indemnity” under subparagraph 4.18.1 {id. at 572). With respect to the second incident,

“the agreed-upon facts reveal only that the same electrical cable was damaged when the ground adjacent to Watral’s excavation gave way, dragging the cable towards the excavation site. An employee of the construction manager was present and supervising Watral’s work at the time. There was no contact between the excavation equipment and the cable, and the only damage to the cable was at the site of the previous repair” (id.).

As for subparagraph 10.2.5, its reach is limited in this case to “damage or loss ... to any property referred to in Clause[ ] . . . 10.2.1.3”; namely, “property at the site or adjacent thereto, including trees, shrubs, lawns, walks, pavements, roadways, structures and utilities not designated for removal, relocation or replacement in the course of construction.” As the dissenters noted, the only “property” damaged on August 3 and August 17, 2000 would appear to have been the cable, and “[t]here is no evidence ... as to whether Ad-chem actually suffered any damage to its own property as a result of the damage to the cable, or, instead, sustained purely economic injury” which subparagraph 10.2.5 does not cover (id. at 574). In light of our disposition of this appeal, we need not reach and express no opinion as to whether subparagraph 10.2.5 imposes a negligence or fault-type liability standard.

Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed, with costs, and Supreme Court’s judgment should be reinstated.

Chief Judge Kaye and Judges Ciparick, Graffeo, Smith, Pigott and Jones concur.

Order, insofar as appealed from, reversed, etc.

      . The American Institute of Architects’ most recent version of this form contract would appear to be AIA Document A201/CMa (1992).

      . In AIA Document A201/CMa (1992), a substantially identical indemnification provision is found at subparagraph 3.18.1.

      . The language in clause 10.2.1.3 in AIA Document A201/CMa (1992) is substantially identical.

      . The language in subparagraph 10.2.5 in AIA Document A201/CMa (1992) is substantially identical.


author: Pigott, J. Smith, J. (dissenting in this case and in Panasia Estates, Inc. v Hudson Ins. Co. [10 NY3d 200 (2008)]).

text:
    [ 886 NE2d 127, 856 NYS2d 505]
    Bi-Economy Market, Inc., Appellant, v Harleysville Insurance Company of New York et al., Respondents.
    Argued January 9, 2008;
    decided February 19, 2008

      POINTS OF COUNSEL

      Lipsitz & Ponterio, LLC, Buffalo (Kathleen A. Burr and John Ned Lipsitz of counsel), for appellant.
    I. A consequential “loss” exclusion in an insurance policy does not preclude recovery of consequential “damages” caused by an insurance company’s breach. (Korona v State Wide Ins. Co., 122 AD2d 120; O’Dell v New York Prop. Ins. Underwriting Assn., 145 AD2d 791; Davis v Mutual of Omaha Ins. Co., 167 AD2d 714; Manolis v International Life Ins. Co. of Buffalo, 83 AD2d 784; Metropolitan Life Ins. Co. v Noble Lowndes Intl., 84 NY2d 430; United States Trust Co. of N.Y. v O’Brien, 143 NY 284; Kenford Co. v County of Erie, 73 NY2d 312; Ashland Mgt. v Janien, 82 NY2d 395; Lava Trading Inc. v Hartford Fire Ins. Co., 326 F Supp 2d 434; Panasia Estates, Inc. v Hudson Ins. Co., 39 AD3d 343.) II. New York law recognizes Bi-Economy Market, Inc.’s claim for consequential damages for the death of its business as a remedy for the Harleysville defendants’ breach. (Kenford Co. v County of Erie, 73 NY2d 312; Sabbeth Indus. v Pennsylvania Lumbermens Mut. Ins. Co., 238 AD2d 767; Hold Bros., Inc. v Hartford Cas. Ins. Co., 357 F Supp 2d 651; J.R. Adirondack Enters. v Hartford Cas. Ins. Co., 292 AD2d 771; Royal Coll. Shop, Inc. v Northern Ins. Co. of N.Y., 895 F2d 670; Kosierowski v Madison Life Ins. Co., 31 AD2d 930, 25 NY2d 737; Great Canal Realty Corp. v Seneca Ins. Co., Inc., 13 AD3d 227, 5 NY3d 742; Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603; New York Univ. v Continental Ins. Co., 87 NY2d 308; American List Corp. v U.S. News & World Report, 75 NY2d 38.)

      Chelus, Herdzik, Speyer & Monte, P.C., Buffalo (Michael F. Chelus and Christopher R. Poole of counsel), for respondents.
    I. In a breach of contract action, a nonbreaching party may only recover damages that were within the contemplation of the par-

      ties at the time of contracting. (Kenford Co. v County of Erie, 73 NY2d 312; Kenford Co. v County of Erie, 67 NY2d 257; Globe Refining Co. v Landa Cotton Oil Co., 190 US 540; Martin v Metropolitan Prop. & Cas. Ins. Co., 238 AD2d 389; Crawford Furniture Mfg. Corp. v Pennsylvania Lumbermens Mut. Ins. Co., 244 AD2d 881; Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603; New York Univ. v Continental Ins. Co., 87 NY2d 308; LTS Contrs. v Hartford Ins. Co., 99 AD2d 644; Brody Truck Rental v Country Wide Ins. Co., 277 AD2d 125; J.R. Adirondack Enters. v Hartford Cas. Ins. Co., 292 AD2d 771.) II. Appellant improperly relies upon case law outside of the Fourth Department that is unchallenged, speculative or inapplicable. (Acquista v New York Life Ins. Co., 285 AD2d 73; Panasia Estates, Inc. v Hudson Ins. Co., 39 AD3d 343; Sabbeth Indus. v Pennsylvania Lumbermens Mut. Ins. Co., 238 AD2d 767; USAlliance Fed. Credit Union v CUMIS Ins. Socy., Inc., 346 F Supp 2d 468; Crawford Furniture Mfg. Corp. v Pennsylvania Lumbermens Mut. Ins. Co., 244 AD2d 881; J.R. Adirondack Enters. v Hartford Cas. Ins. Co., 292 AD2d 771; Lava Trading Inc. v Hartford Fire Ins. Co., 326 F Supp 2d 434; Hold Bros., Inc. v Hartford Cas. Ins. Co., 357 F Supp 2d 651.) III. Bi-Economy Market, Inc. improperly seeks expansion of unrelated issues pertaining to rights and remedies of insured. IV The New York Public Adjusters Association represents the interests of insureds and attempts to influence the Court of Appeals as such. (Acquista v New York Life Ins. Co., 285 AD2d 73; Batas v Prudential Ins. Co. of Am., 281 AD2d 260.)

      Wilkofsky, Friedman, Karel & Cummins, New York City (Mark L. Friedman of counsel), for New York Public Adjusters Association, amicus curiae.
    I. The damages suffered by Bi-Economy Market, Inc. constitute general damages which are the natural and probable consequences of the Harleysville defendants’ breach of contract. (Archer Daniels Midland Co. v Hartford Fire Ins. Co., 243 F3d 369; American List Corp. v U.S. News & World Report, 75 NY2d 38; Kenford Co. v County of Erie, 73 NY2d 312; Massi’s Greenhouses v Farm Family Mut. Ins. Co., 233 AD2d 844.) II. Consequential damages have always been a permitted remedy in a breach of contract cause of action. (Acquista v New York Life Ins. Co., 285 AD2d 73; Sabbeth Indus. v Pennsylvania Lumbermens Mut. Ins. Co., 238 AD2d 767; Mortimer v Otto, 206 NY 89; Globe Refining Co. v Landa Cotton Oil Co., 190 US 540; Kenford Co. v County of Erie, 67 NY2d 257; Fleming v Allstate Ins. Co., 106 AD2d 426; Korona v State Wide Ins. Co., 122 AD2d 120; Batas v Prudential Ins. Co. of Am., 281 AD2d 260; New

      York Univ. v Continental Ins. Co., 87 NY2d 308; Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603.) III. “Consequential loss” is not synonymous with “consequential damages.”

      Anderson Kill & Olick, P.C., New York City (Eugene R. Anderson and Richard P. Lewis of counsel), and Amy Bach, Mill Valley, California, for United Policyholders, amicus curiae.
    I. Whether the insurance companies acted in bad faith is irrelevant to Bi-Economy Market, Inc.’s recovery of consequential damages. (Sabbeth Indus. v Pennsylvania Lumbermens Mut. Ins. Co., 238 AD2d 767; Kenford Co. v County of Erie, 73 NY2d 312; Hold Bros., Inc. v Hartford Cas. Ins. Co., 357 F Supp 2d 651; Lava Trading Inc. v Hartford Fire Ins. Co., 326 F Supp 2d 434; Carney v Memorial Hosp. & Nursing Home of Greene County, 101 AD2d 990; New York Univ. v Continental Ins. Co., 87 NY2d 308.) II. Exclusion of consequential loss under an insurance policy does not bar recovery of consequential damages. (Lava Trading Inc. v Hartford Fire Ins. Co., 326 F Supp 2d 434; Panasia Estates, Inc. v Hudson Ins. Co., 39 AD3d 343; Hold Bros., Inc. v Hartford Cas. Ins. Co., 357 F Supp 2d 651; Royal Coll. Shop, Inc. v Northern Ins. Co. of N.Y., 895 F2d 670.)

      Rivkin Radler LLP, Uniondale (Evan H. Krinick, Michael A. Troisi and Michael P. Versichelli of counsel), for New York Insurance Association and others, amici curiae.
    Public policy militates against exposing carriers to liability beyond the bargained-for policy limits. (Lava Trading Inc. v Hartford Fire Ins. Co., 326 F Supp 2d 434; DiBlasi v Aetna Life & Cas. Ins. Co., 147 AD2d 93; Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445; St. Paul Fire & Mar. Ins. Co. v United States Fid. & Guar. Co., 43 NY2d 977; Asahi Glass Co., Ltd. v Pentech Pharms., Inc., 289 F Supp 2d 986.)
   OPINION OF THE COURT

Pigott, J.

In this action brought by an insured against an insurer for breach of a commercial property insurance contract, the principal issue presented is whether the insured can assert a claim for consequential damages. Under the circumstances of this case, we hold that it can.

I.

Bi-Economy Market, a family-owned wholesale and retail meat market located in Rochester, New York, suffered a major fire in October 2002, resulting in the complete loss of food inventory and heavy structural damage to the building and business-related equipment. At the time of the fire, Bi-Economy was insured by defendant Harleysville Insurance Company under a “Deluxe Business Owners” policy that provided replacement cost coverage on the building as well as business property or “contents” loss coverage.

The policy also provided coverage for lost business income, what is commonly referred to as “business interruption insurance,” for up to one year from the date of the fire. Specifically, the contract stated that Harleysville would “pay for the actual loss of Business Income . . . sustained] due to . . . the necessary suspension of [Bi-Economy’s] ‘operations’ during the ‘period of restoration.’ ” Business income is defined as the “(1) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and (2) Continuing normal operating expenses incurred, including payroll.” “Period of restoration” is defined as the period of time that “[b]egins with the date of direct physical loss or damage” and “[e]nds on the date when the property . . . should be repaired, rebuilt or replaced with reasonable speed and similar quality.”

Following the fire, Bi-Economy submitted a claim to Harleysville pursuant to the terms of the contract. Harleysville disputed Bi-Economy’s claim for actual damages, and advanced only the sum of $163,161.92. More than a year later, following submission of their dispute to alternative dispute resolution, Bi-Economy was awarded the additional sum of $244,019.88. During all this time, Harleysville offered to pay only seven months of Bi-Economy’s claim for lost business income, despite the fact that the policy provided for a full 12 months. Bi-Economy never resumed business operations.

In October 2004, Bi-Economy commenced this action against Harleysville, asserting causes of action for bad faith claims handling, tortious interference with business relations and breach of contract, seeking consequential damages for “the complete demise of its business operation in an amount to be proved at trial.” Bi-Economy alleged that Harleysville improperly delayed payment for its building and contents damage and failed to timely pay the full amount of its lost business income claim. Bi-Economy further alleged that, as a result of Harleysville’s breach of contract, its business collapsed, and that liability for such consequential damages was reasonably foreseeable and contemplated by the parties at the time of contracting.

Harleysville answered, and subsequently moved for leave to amend its answer to raise the defense that the contract excluded consequential damages and for partial summary judgment dismissing Bi-Economy’s breach of contract cause of action. In support of its motion, Harleysville cited several contractual provisions excluding coverage for “consequential loss.”

Supreme Court granted the motion and the Appellate Division affirmed, holding that “the insurance policy expressly exclude[d] coverage for consequential losses, and thus it cannot be said that [consequential] damages were contemplated by the parties when the contract was formed” (37 AD3d 1184, 1185 [2007] [internal quotation marks and citations omitted]). The Appellate Division granted Bi-Economy leave to appeal and certified the following question: “Was the order of this Court, entered February 2, 2007, properly made?” We conclude that it was not.

II.

Bi-Economy contends that the courts below erred in dismissing its breach of contract claim seeking consequential damages for the collapse of its business resulting from Harleysville’s failure to fulfill its obligations under the contract of insurance. We agree and therefore reverse the order of the Appellate Division and reinstate that cause of action.

It is well settled that in breach of contract actions “the non-breaching party may recover general damages which are the natural and probable consequence of the breach” (Kenford Co. v County of Erie, 73 NY2d 312, 319 [1989]). Special, or consequential damages, which “do not so directly flow from the breach,” are also recoverable in limited circumstances (American List Corp. v U.S. News & World Report, 75 NY2d 38, 43 [1989]). In Kenford, we stated that

“[i]n order to impose on the defaulting party a further liability than for damages [which] naturally and directly [flow from the breach], i.e., in the ordinary course of things, arising from a breach of contract, such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting” (73 NY2d at 319 [internal quotation marks and citations omitted]).

We later explained that “[t]he party breaching the contract is liable for those risks foreseen or which should have been foreseen at the time the contract was made” (Ashland Mgt. v Janien, 82 NY2d 395, 403 [1993]). It is not necessary for the breaching party to have foreseen the breach itself or the particular way the loss occurred, rather, “[i]t is only necessary that loss from a breach is foreseeable and probable” (id., citing Restatement [Second] of Contracts § 351; 3 Farnsworth, Contracts § 12.14 [2d ed 1990]).

To determine whether consequential damages were reasonably contemplated by the parties, courts must look to “the nature, purpose and particular circumstances of the contract known by the parties ... as well as ‘what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made’ ” (Kenford, 73 NY2d at 319, quoting Globe Refining Co. v Landa Cotton Oil Co., 190 US 540, 544 [1903]). Of course, proof of consequential damages cannot be speculative or conjectural (see Ashland Mgt., 82 NY2d at 403 [damages for the loss of future profits must be proven with reasonable certainty and “be capable of measurement based upon known reliable factors without undue speculation”]; see also Kenford Co. v County of Erie, 67 NY2d 257, 261 [1986]).

The dissent seeks to distinguish this case from the Kenford line of reasoning by grouping it with that separate class of contract actions involving pure “agreements to pay”—contracts for money only—where the only recoverable damage for breach is interest. This distinction is without basis. With agreements to pay money—for example, an agreement to pay sales commissions or a contract to pay a lender $12 tomorrow for $10 given today, the sole purpose of the contract is to pay for something given in exchange. In such cases, what the payee plans to do with the money is external and irrelevant to the contract itself. In the present case, however, the purpose of the agreement— what the insured planned to do with its payment—was at the very core of the contract itself.

The dissent also blurs the significant distinction between consequential and punitive damages. The two types of damages serve different purposes and are evidenced by different facts. Consequential damages, designed to compensate a party for reasonably foreseeable damages, “must be proximately caused by the breach” and must be proven by the party seeking them (24 Lord, Williston on Contracts § 64:12, at 125 [4th ed]). Punitive damages, by contrast, “are not measured by the pecuniary loss or injury of the plaintiff as a compensation” but are “assessed by way of punishment to the wrongdoer and example to others” (11 Perillo, Corbin on Contracts § 59.2, at 550 [rev ed]). Unlike consequential damages, which are quantifiable, “[t]here is no rigid formula by which the amount of punitive damages is fixed, although they should bear some reasonable relation to the harm done and the flagrancy of the conduct causing it” (I. H. P. Corp. v 210 Cent. Park S. Corp., 16 AD2d 461, 467 [1st Dept 1962], affd 12 NY2d 329 [1963]).

As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that “a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims” (New York Univ. v Continental Ins. Co., 87 NY2d 308, 318 [1995]). An insured may also bargain for the peace of mind, or comfort, of knowing that it will be protected in the event of a catastrophe (see e.g. Beck v Farmers Ins. Exch., 701 P2d 795, 802 [Utah 1985] [“(I)t is axiomatic that insurance frequently is purchased not only , to provide funds in case of loss, but to provide peace of mind for the insured or his beneficiaries”]; Best Place, Inc. v Penn Am. Ins. Co., 82 Haw 120, 128, 920 P2d 334, 342 [1996], quoting Noble v National Am. Life Ins. Co., 128 Ariz 188, 189, 624 P2d 866, 867 [1981] [“An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity”]; Andrew Jackson Life Ins. Co. v Williams, 566 So 2d 1172, 1179 n 9 [Miss 1990] [“(A)n insured bargains for more than mere eventual monetary proceeds of a policy; insureds bargain for such intangibles as risk aversion, peace of mind, and certain and prompt payment of the policy proceeds upon submission of a valid claim”]; Ainsworth v Combined Ins. Co. of Am., 104 Nev 587, 592, 763 P2d 673, 676 [1988] [“A consumer buys insurance for security, protection, and peace of mind”]).

III.

The purpose served by business interruption coverage cannot be clearer—to ensure that Bi-Economy had the financial support necessary to sustain its business operation in the event disaster occurred (see Howard Stores Corp. v Foremost Ins. Co., 82 AD2d 398, 400 [1st Dept 1981] [“The purpose of business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation and functions due to the damage sustained as a result of the hazard insured against”], affd 56 NY2d 991 [1982]; 3-36 Bender’s New York Insurance Law § 36.06). Certainly, many business policyholders, such as Bi-Economy, lack the resources to continue business operations without insurance proceeds. Accordingly, limiting an insured’s damages to the amount of the policy, i.e., money which should have been paid by the insurer in the first place, plus interest, does not place the insured in the position it would have been in had the contract been performed (see generally Brushton-Moira Cent. School Dist. v Thomas Assoc., 91 NY2d 256, 261 [1998] [“Damages are intended to return the parties to the point at which the breach arose and to place the nonbreaching party in as good a position as it would have been had the contract been performed”]; Goodstein Constr. Corp. v City of New York, 80 NY2d 366, 373 [1992], citing Restatement [Second] of Contracts § 347, Comment o; § 344 [“Contract damages are ordinarily intended to give the injured party the benefit of the bargain by awarding a sum of money that will, to the extent possible, put that party in as good a position as it would have been in had the contract been performed”]).

Thus, the very purpose of business interruption coverage would have made Harleysville aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to Bi-Economy for the loss of its business as a result of the breach (see Sabbeth Indus. v Pennsylvania Lumbermens Mut. Ins. Co., 238 AD2d 767, 769 [3d Dept 1997]).

Furthermore, contrary to the dissent’s view, 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, as Bi-Economy experienced here, the business could avoid collapse and get back on its feet as soon as possible. Thus, this insurance contract included an additional performance-based component: the insurer agreed to evaluate a claim, and to do so honestly, adequately, and—most importantly—promptly. The insurer certainly knew that failure to perform would (a) undercut the very purpose of the agreement and (b) cause additional damages that the policy was purchased to protect against in the first place. Here, the claim is that Harleysville failed to promptly adjust and pay the loss, resulting in the collapse of the business. When an insured in such a situation suffers additional damages as a result of an insurer’s excessive delay or improper denial, the insurance company should stand liable for these damages. This is not to punish the insurer, but to give the insured its bargained-for benefit.

Nor do we read the contractual exclusions for certain consequential “losses” as demonstrating that the parties contemplated, and rejected, the recoverability of consequential “damages” in the event of a contract breach. The consequential “losses” clearly refer to delay caused by third-party actors or by the “[suspension, lapse or cancellation of any license, lease or contract.” Consequential “damages,” on the other hand, are in addition to the losses caused by a calamitous event (i.e., fire or rain), and include those additional damages caused by a carrier’s injurious conduct—in this case, the insurer’s failure to timely investigate, adjust and pay the claim.

Therefore, in light of the nature and purpose of the insurance contract at issue, as well as Bi-Economy’s allegations that Harleysville breached its duty to act in good faith, we hold that Bi-Economy’s claim for consequential damages including the demise of its business, was reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.

Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed, with costs, defendants’ motion for leave to amend their answer to raise the defense of contractual exclusion for consequential damages and partial summary judgment dismissing the plaintiffs second cause of action denied, and the certified question answered in the negative.

Smith, J. (dissenting in this case and in Panasia Estates, Inc. v Hudson Ins. Co. [10 NY3d 200 (2008)]).

In Rocanova v Equitable Life Assur. Socy. of U.S. (83 NY2d 603 [1994]) and New York Univ. v Continental Ins. Co. (87 NY2d 308 [1995] [NYU]), we rejected the argument that a bad faith failure by an insurer to pay a claim could, without more, justify a punitive damages award. We held that punitive damages are not available for breach of an insurance contract unless the plaintiff shows both “egregious tortious conduct” directed at the insured claimant and “a pattern of similar conduct directed at the public generally” (Rocanova, 83 NY2d at 613; see NYU, 87 NY2d at 316). Today, the majority abandons this rule, without discussing it and without acknowledging that it has done so. The majority achieves this simply by changing labels: Punitive damages are now called “consequential” damages, and a bad faith failure to pay a claim is called a breach of the “covenant of good faith and fair dealing.”

I think that Rocanova and NYU were correctly decided, and that the majority makes a mistake in largely nullifying their holdings.

Underlying our refusal in Rocanova and NYU to open the door to awards of punitive damages was a recognition of the serious harm such awards can do. Punitive damages will sometimes serve to deter insurer wrongdoing and thus protect insureds from injustice, but they will do so at too great a cost. 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. This fear will inevitably lead insurers to increase their premiums—and so will inflict a burden on every New Yorker who buys insurance.

This policy judgment was implicit in Rocanova and NYU. Not everyone agreed with it. The Appellate Division majority in Acquista v New York Life Ins. Co. (285 AD2d 73, 78 [1st Dept 2001]) hardly concealed its disagreement: “It is correct that, to date, this State has maintained the traditional view . . . [citing Rocanova and NYU], Yet, for some time, courts and commentators around the country have increasingly acknowledged that a fundamental injustice may result . . . .” The Acquista court found a way to avoid what it thought an injustice: award “consequential,” not punitive damages. Acquista adopted the rule of some sister-state decisions, notably Beck v Farmers Ins. Exch. (701 P2d 795 [Utah 1985]), that an insurer that denies a claim in bad faith becomes liable for consequential damages beyond the policy limits (285 AD2d at 80-81). With less frankness than the Acquista court—indeed, without even citing Rocanova or discussing Acquista—the majority here reaches the same result.

The “consequential” damages authorized by the majority, though remedial in form, are obviously punitive in fact. They are not triggered, as true consequential damages are, simply by a breach of contract, but only by a breach committed in bad faith. The majority never explains why this should be true, but the explanation is self-evident: the purpose of the damages the majority authorizes can only be to punish wrongdoers and deter future wrongdoing. They have nothing to do with consequential damages, or with the covenant of good faith and fair dealing, as those terms are ordinarily understood.

The whole idea of “consequential damages” is out of place in a suit against an insurer that has failed to pay a claim—or, indeed, in any case where the obligation breached is merely one to pay money. Consequential damages are a means of measuring the harm done when a party fails in some nonmonetary performance—say, the transportation of a broken mill shaft (Hadley v Baxendale, 9 Exch 341 [1854]) or the construction of a football stadium (Kenford Co. v County of Erie, 73 NY2d 312 [1989]). In such cases, where there is no agreement on what money will be paid in the event of a breach, a court must try to decide what damages the parties contemplated—what damages they would have agreed to had they considered the question when the contract was signed (Kenford, 73 NY2d at 320). But in insurance contracts or other contracts for the payment of money, the parties have already told us what damages they contemplated; in the case of insurance, it is payment equal to the losses covered by the policy, up to the policy limits. There is no occasion for a Kenford analysis.

Nor could such an analysis, done in the way Kenford requires, support the results the majority reaches in these two cases. Under Kenford, the premise of consequential damages awards is that they effectuate the parties’ presumed intentions at the time of contracting: “the commonsense rule to apply is to consider what the parties would have concluded had they considered the subject” (Kenford, 73 NY2d at 320). Can anyone seriously believe that the parties in these cases would, if they had “considered the subject,” have contracted for the results reached here? Imagine the dialogue. Applicant for insurance: “Suppose you refuse, in bad faith, to pay a claim. Will you agree to be liable for the consequences, including lost business, without regard to the policy limits?” Insurance company: “Oh, sure. Sorry, we forgot to put that in the policy.”

The majority also departs from the established understanding of the “covenant of good faith and fair dealing”—thus obscuring the fact that the predicate for “consequential” damages here is exactly the same conduct, bad faith failure to pay claims, that we refused to make a predicate for punitive damages in Rocanova and NYU. Ordinarily, the covenant of good faith and fair dealing is breached where a party has complied with the literal terms of the contract, but has done so in a way that undermines the purpose of the contract and deprives the other party of the benefit of the bargain (e.g. 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144 [2002]). Here, plaintiffs allege that defendants breached, in bad faith, the express terms of the policies, by refusing to pay for the losses the policies covered. There is no need for resort to the implied covenant of good faith, and this is the first time, as far as I know, that we have relied on that implied covenant to condemn the bad faith breach of an express promise.

These two conceptual errors—the misuse of the terms “consequential damages” and “covenant of good faith”—are not the only ones in the majority opinions. The Bi-Economy opinion seems fundamentally to misunderstand the purpose of business interruption insurance—which is to compensate the insured for a business interruption that has already occurred, not to prevent one from occurring (see majority op at 194-195). If the insured’s business is never interrupted, there can be no claim under a business interruption policy. This error seems unimportant, however, for the majority’s discussion of business interruption insurance is apparently extraneous to its holding. The Panasia case involves no business interruption coverage— yet the majority upholds the legal sufficiency of Panasia’s claim for consequential damages on the basis of a simple citation to Bi-Economy (Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203 [2008]).

The majority’s bad policy choice is more important than the flaws in its reasoning. This attempt to punish unscrupulous insurers will undoubtedly lead to the punishment of many honest ones. Under today’s opinions, juries will decide whether claims should have been paid more promptly, or in larger amounts; whether an insurer who failed to pay a claim did so to put pressure on the insured, or from legitimate motives, or from simple inefficiency; and whether, and to what extent, the insurer’s slowness and stinginess had consequences harmful to the insured. All these very difficult, often nearly unanswerable, questions will be put to jurors who will usually know little of the realities of either the insured’s or the insurer’s business. The jurors will no doubt do their best, but it is not hard to predict where their sympathies will lie.

The result of the uncertainty and error that the majority’s opinions will generate can only be an increase in insurance premiums. That is the real “consequential damage” flowing from today’s holdings.

Chief Judge Kaye and Judges Cipakick, Graffeo and Jones concur with Judge Pigott; Judge Smith dissents in a separate opinion in which Judge Read concurs.

Order, insofar as appealed from, reversed, etc.

       This being an appeal from the grant of partial summary judgment to the insurer, we view the facts in the light most favorable to the insured.


author: Pigott, J. Smith, J. (dissenting [For the dissenting opinion of Judge Smith, see Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y. (10 NY3d 187, 196 [2008]).]).

text:
    [ 886 NE2d 135, 856 NYS2d 513]
    Panasia Estates, Inc., Respondent, v Hudson Insurance Company, Appellant.
    Argued January 9, 2008;
    decided February 19, 2008

      POINTS OF COUNSEL

      White Fleischner & Fino, LLP, New York City (Janet P. Ford and Nancy Davis Lyness of counsel), for appellant.
    I. Consequential/extracontractual damages based upon an insurer’s alleged bad faith breach of its contractual obligations under a policy of insurance are not recoverable by an insured. (Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603; New York Univ. v Continental Ins. Co., 87 NY2d 308; Brody Truck Rental v Country Wide Ins. Co., 277 AD2d 125; High Fashions Hair Cutters v Commercial Union Ins. Co., 145 AD2d 465; Sweazey v Merchants Mut. Ins. Co., 169 AD2d 43; Martin v Metropolitan Prop. & Cas. Ins. Co., 238 AD2d 389; Acquista v New York Life Ins. Co., 285 AD2d 73; Polidoro v Chubb Corp., 354 F Supp 2d 349; USAlliance Fed. Credit Union v CUMIS Ins. Socy., Inc., 346 F Supp 2d 468.) II. Acquista v New York Life Ins. Co. (285 AD2d 73 [2001]) is critically distinguishable from the instant matter in that the Hudson Insurance Company policy contains an explicit exclusion for consequential losses. (J.R. Adirondack Enters. v Hartford Cas. Ins. Co., 292 AD2d 771; Crawford Furniture Mfg. Corp. v Pennsylvania Lumbermens Mut. Ins. Co., 244 AD2d 881; Bretton v Mutual of Omaha Ins. Co., 110 AD2d 46, 66 NY2d 1020; Adorable Coat Co. v Connecticut Indem. Co., 157 AD2d 366; Pergament Distribs. v Old Republic Ins. Co., 128 AD2d 760, 70 NY2d 607; CBS, Inc. v Continental Cas. Co., 753 F Supp 525; Harris v Provident Life & Acc. Ins. Co., 310 F3d 73; Kenford Co. v County of Erie, 73 NY2d 312; Martin v Metropolitan Prop. & Cas. Ins. Co., 238 AD2d 389.) III. The First Department erroneously concluded that the terms “consequential damages” and “consequential losses” are not synonymous. (J.R. Adirondack Enters. v Hartford Cas. Ins. Co., 292 AD2d 771; Crawford Furniture Mfg. Corp. v Pennsylvania Lumbermens Mut. Ins. Co., 244 AD2d 881; Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 37 AD3d 1184.)

      Peckar & Abramson, P.C., New York City (Michael S. Zicherman of counsel), for respondent.
    I. Panasia Estates, Inc. is entitled to assert a claim for consequential damages against Hudson Insurance Company arising out of Hudson’s breach of the insurance contract. (Hold Bros., Inc. v Hartford Cas. Ins.

      Co., 357 F Supp 2d 651; Lava Trading Inc. v Hartford Fire Ins. Co., 326 F Supp 2d 434; 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144; Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445; Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603; Acquista v New York Life Ins. Co., 285 AD2d 73; Koloski v Metropolitan Life Ins. Co., 5 Misc 3d 1028[A], 2004 NY Slip Op 51596[U]; Weisel v Provident Life & Cas. Ins. Co., 11 Misc 3d 1062[A], 2006 NY Slip Op 50360[U]; Fleming v Allstate Ins. Co., 106 AD2d 426, 66 NY2d 838, 475 US 1096; Korona v State Wide Ins. Co., 122 AD2d 120.) II. Public policy-considerations favor an insured’s right to claim consequential damages. (Hold Bros., Inc. v Hartford Cas. Ins. Co., 357 F Supp 2d 651.) III. The insurance policy issued to Panasia Estates, Inc. does not exclude consequential damages that arise from Hudson Insurance Company’s breach of contract. (Hold Bros., Inc. v Hartford Cas. Ins. Co., 357 F Supp 2d 651; Lava Trading Inc. v Hartford Fire Ins. Co., 326 F Supp 2d 434.)
   OPINION OF THE COURT

Pigott, J.

Panasia Estates is the owner of commercial rental property located at 33 West 19th Street in Manhattan. Panasia had a commercial property insurance policy with Hudson Insurance Company, which included “Builders’ Risk Coverage,” covering damage to its property while undergoing renovation. During the policy period, the roof of its building was opened in order to perform construction work. Inclement weather caused rain to enter the building through the roof opening, resulting in extensive damage to the property.

Shortly after the occurrence, Panasia claimed it promptly notified Hudson of the loss. According to Panasia, however, Hudson failed to investigate or adjust the claim until several weeks later. Hudson then denied the claim three months after that, stating that Panasia’s loss was the result of repeated water infiltration over time and wear and tear rather than from a risk covered under the builders risk policy provision.

Panasia commenced this action against Hudson, alleging that it breached the insurance contract by failing to properly investigate the loss and denying the loss as not covered under the policy. Panasia sought both direct and consequential damages that it claimed stemmed from Hudson’s breach.

Hudson moved for partial summary judgment “dismissing all of [Panasia’s] bad faith allegations and all prayers for consequential, extra-contractual, or incidental damages or attorneys [sic] fees.” Hudson argued, among other things, that a contractual exclusion for “[a]ny other consequential loss” precluded Panasia’s request for consequential damages.

As pertinent here, Supreme Court denied that part of Hudson’s motion to dismiss Panasia’s claims for consequential damages. The Appellate Division affirmed, stating that “[a]n insured may recover foreseeable damages, beyond the limits of its policy, for breach of a duty to investigate, bargain for and settle claims in good faith” (39 AD3d 343 [2007], citing Acquista v New York Life Ins. Co., 285 AD2d 73 [1st Dept 2001]). In addition, the court concluded that Hudson failed to show that the contractual exclusion for “ ‘consequential loss’ ” applied to Panasia’s claim, rejecting Hudson’s argument that “consequential loss” and “consequential damages” were synonymous (id.).

The Appellate Division granted Hudson leave to appeal to this Court, certifying the question: “Was the order of the Supreme Court, as affirmed by this Court, properly made?” We conclude that it was.

The courts below properly rejected Hudson’s contention that it was entitled to judgment as a matter of law because consequential damages are not recoverable in a claim for breach of an insurance contract. As we explained in Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y. (10 NY3d 187 [2008] [decided today]), consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were “ ‘within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting’ ” (at 192, quoting Kenford Co. v County of Erie, 73 NY2d 312, 319 [1989]). Here, the courts below failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of Hudson’s breach. Because the record before us is not fully developed on that issue, such claim must be considered by Supreme Court.

Lastly, as the Appellate Division correctly concluded, the contractual exclusion for consequential loss does not bar the recovery of consequential damages (see Bi-Economy at 196).

Accordingly, the order of the Appellate Division should be affirmed, with costs, and certified question answered in the affirmative.

Smith, J. (dissenting [For the dissenting opinion of Judge Smith, see Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y. (10 NY3d 187, 196 [2008]).]).

Chief Judge Kaye and Judges Ciparick, Graffeo and Jones concur with Judge Pigott; Judge Smith dissents in a separate opinion in which Judge Read concurs.

Order affirmed, etc.

       As this is an appeal from a summary judgment motion, we view the facts in the light most favorable to Panasia, the nonmoving party.