A New York appellate court recently held that renewable bio-diesel fuel manufacturer BioEnergy Development Group LLC may pursue tens of millions of dollars in damages from its insurers under two all-risk insurance policies, including amounts in excess of the policy limits, where the insurers refused to pay claims in a timely manner.
BioEnergy purchased two all-risk property policies from Lloyd’s to provide coverage for its manufacturing plant in Memphis, Tennessee. A fire destroyed the Memphis plant in March 2016, eliminating BioEnergy’s production capacity and sole source of revenue. BioEnergy made claims under the policies and sought to rebuild its plant. The insurers acknowledged coverage and eventually made approximately $8 million in interim payments, but the parties disagreed over the value of the total property damage claim, which BioEnergy contended was in excess of $24 million. The disputed claim was submitted to appraisal, which resulted in the insurers agreeing to pay the full business interruption limit of $15.1 million.
The insurers filed a declaratory judgment lawsuit, however, seeking to limit BioEnergy’s recovery to the policy limits of $15.1 million. BioEnergy alleged that the insurers failed to make interim payments in a timely manner after the fire and, as a result, the company suffered increased losses because it could not rebuild without the insurance proceeds. BioEnergy sought actual and consequential damages, plus attorneys’ fees, arising from the delayed payments, including payment of its business interruption losses in excess of the policy limits.
The trial court granted the insurers’ motion to dismiss [Trial Court Decision] BioEnergy’s counterclaims, finding that BioEnergy had failed to plead a sufficient claim for breach of the covenant of good faith and fair dealing entitling it to recovery of consequential damages and attorneys’ fees. The trial court concluded that BioEnergy failed to allege “any non-conclusory facts that the insurers failed to investigate its claims honestly and pay promptly” and, therefore, did not plausibly claim that the insurers’ conduct created losses other than those that would be remedied by full payment of its losses under the policies.
The appellate court reversed, finding that BioEnergy plausibly asserted [Appellate Court Decision] a breach of implied duty of good faith counterclaim based on allegations that the insurers (i) refused to advance nearly $7 million in business interruption losses until the appraisal panel awarded more than double that amount, and (ii) continued to refuse to pay the full amount of the property damage claim, even after the award was issued. The court further found that BioEnergy’s counterclaim sought consequential damages for delayed reconstruction of the manufacturing plant and attorneys’ fees required to remedy the insurers’ delayed interim payments and eventual denial of full payment.
BioEnergy may proceed, the court reasoned, because “it was foreseeable that excessive delay would cause [BioEnergy] to incur . . . tens of millions of dollars in uncovered business interruption losses and attorneys’ fees necessary to recover” such losses. The court also reversed the trial court’s dismissal of BioEnergy’s counterclaim for breach of the insurance policies’ escalation clauses and breach of the implied duty of good faith and fair dealing because the insurers did not move to dismiss the contract claims, which were not duplicative.
The BioEnergy case shows that insurers need to not only investigate and acknowledge coverage promptly but also issue all payments for covered claims in a timely manner. This is especially true under all-risk insurance policies, like BioEnergy’s, which automatically cover all risks or perils not explicitly omitted in the policy. In many instances, interim insurance payments following a fire or flood are made for the sole purpose of funding the policyholder’s rebuilding efforts to get the business back to pre-loss operations and revenues. As such, it is reasonably foreseeable that the insurers’ failure to make such payments would exacerbate the policyholder’s business interruption losses by preventing the rebuild from happening in a timely manner. Under the rationale of this ruling, an insurer’s untimely investigation or payment of claims would result in policyholders pursuing consequential damages, even where those losses may be in excess of the policy limits.