Bad Faith - Southern District of New York Grants Motion to Dismiss Insured's Claims for Breach of Covenant of Good Faith and Fair Dealing, Bad Faith, and Punitive Damages for Failure to State a Claim Under New York Law
Last Friday, in D.C. USA Operating Company, LLC v. Indian Harbor Insurance Company and XL America, Inc., No. 07-CV-0116 (S.D.N.Y. March 23, 2007), the U.S. District Court for the Southern District of New York dismissed the
insured’s claims for breach of the covenant of good faith and fair dealing, bad faith and punitive damages. The defendant insurance companies, Indian Harbor and XL, which were represented by Ross, Dixon & Bell, LLP, filed
a motion to dismiss arguing that these allegations did not state a claim under New York law.
In D.C. USA, the insured, DC USA, pled causes of action for breach of contract, breach of the covenant of good faith and fair dealing and bad faith based on the insurers’ denial of coverage as to DC USA’s claim
for remediation expenses it incurred removing petroleum hydrocarbon contaminated soil at an urban development site. In addition, DC USA sought punitive damages from the defendant insurers. Indian Harbor and XL filed a motion to dismiss
all of DC USA’s claims.
The court denied the motion to dismiss the breach of contract claim, holding that the allegations of DC USA’s complaint created an ambiguity in the relevant exclusion. On the other hand, the court dismissed DC USA’s
claims for breach of the covenant of good faith and fair dealing, bad faith and punitive damages.
DC USA’s complaint based these claims on allegations that the insurers denied its claim without a reasonable basis and failed to conduct a sufficient investigation. DC USA also alleged that the insurers acted in bad faith because
they had general practices of (1) denying claims over a certain amount, (2) denying claims after orally promising to provide coverage during policy negotiations, and (3) withholding payments to force insureds to settle valid claims
for smaller amounts than the claims were worth. Citing New York case law, the court held that a “claim for alleged breach of the implied covenant of good faith and fair dealing is duplicative of a claim for breach of contract
and should be dismissed.” Moreover, the court held, “New York does not recognize the tort of bad faith denial of insurance coverage.” Finally, the court held that punitive damages were not available under New York
law “[b]ecause [DC USA] does not allege a tort independent from its contractual claim – and the torts it does allege have been dismissed – it cannot obtain punitive damages against defendants.”