E. Ramapo Cent. Sch. Dist. v. N.Y. Schs. Ins. Reciprocal

2021 NY Slip Op 06341

East Ramapo Central School District, appellant, v. New York Schools Insurance Reciprocal, Respondent.

No. 2018-02590

Index No. 600963/13

Supreme Court of New York, Second Department

November 17, 2021

Argued - September 23, 2021

D67438 Q/afa

Morgan, Lewis & Bockius LLP, New York, NY (David J Butler, Randall M. Levine, and Stephanie Schuster of counsel), for appellant.

Miranda Sambursky Slone Sklarin Verveniotis LLP, Mineola, NY (Steven Verveniotis of counsel), for respondent.

REINALDO E. RIVERA, J.P. LEONARD B. AUSTIN FRANCESCA E CONNOLLY WILLIAM G. FORD, JJ.

DECISION & ORDER

In an action to recover damages for breach of an insurance policy and breach of the implied covenant of good faith and fair dealing, and for a judgment declaring, inter alia, that the defendant is obligated to defend and indemnify the plaintiff in an action entitled Montesa v Schwartz, commenced in the United States District Court for the Southern District of New York under Docket No. 12-cv-06057, the plaintiff appeals from a judgment of the Supreme Court, Nassau County (Stephen A. Bucaria, J.), dated February 12, 2018. The judgment, insofar as appealed from, upon an order of the same court dated August 3, 2017, granting the defendant's motion pursuant to CPLR 3211(a)(7) to dismiss the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing, and an order of the same court dated December 12, 2017, granting the plaintiff's motion for summary judgment on the issue of damages on the cause of action to recover damages for breach of an insurance policy only to the extent of awarding the plaintiff $500, 000 in attorneys' fees plus interest thereon from September 12, 2016, and disbursements of $83, 194.61, and denying the plaintiff's separate motion to strike an expert affidavit and report, is in favor of the plaintiff and against the defendant on the cause of action to recover damages for breach of an insurance policy in the principal sum of only $647, 057.62, and in favor of the defendant and against the plaintiff dismissing the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing.

ORDERED that the judgment is reversed insofar as appealed from, on the law and the facts, with costs, the defendant's motion pursuant to CPLR 3211(a)(7) to dismiss the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing is denied, that cause of action is reinstated, the determination awarding the plaintiff $500, 000 in attorneys' fees plus interest thereon from September 12, 2016, and disbursements of $83, 194.61 as damages with respect to the cause of action to recover damages for breach of an insurance policy is vacated, the orders dated August 3, 2017, and December 12, 2017, are modified accordingly, and the matter is remitted to the Supreme Court, Nassau County, for further proceedings consistent herewith.

This appeal arises out of an insurance coverage dispute between the plaintiff and its insurer, the defendant, in connection with a School Board Legal Liability Policy for the period of July 1, 2012, through July 1, 2013 (hereinafter the policy). While the policy was in effect, a putative class action entitled Montesa v Schwartz (hereinafter the underlying action) was commenced in 2012 in the United States District Court for the Southern District of New York against, among others, the plaintiff and its current and former school board members, alleging various constitutional violations, school segregation, breach of fiduciary duty, and fraud. In July 2012, the plaintiff timely submitted a notice of claim to the defendant regarding the underlying action and requested coverage under the policy, and the defendant denied coverage to the plaintiff and its board members.

The plaintiff commenced this action to recover damages for breach of the policy and breach of the implied covenant of good faith and fair dealing, and for a judgment declaring, inter alia, that, pursuant to the policy, the defendant was obligated to defend and indemnify it in the underlying action. In May 2017, in connection with prior motion practice and a previous appeal, this Court determined that the plaintiff was entitled to a declaration that the defendant was obligated to defend the plaintiff in the underlying action through September 30, 2013 (see East Ramapo Cent. Sch. Dist. v New York Schs. Ins. Reciprocal, 150 A.D.3d 683). In June 2017, the defendant moved pursuant to CPLR 3211(a)(7) to dismiss the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing, and in an order dated August 3, 2017 (hereinafter the August 2017 Order), the Supreme Court granted that motion.

Thereafter, by notice of motion dated October 10, 2017, the plaintiff moved for summary judgment on the issue of damages on the cause of action to recover damages for breach of the policy, seeking $1, 710, 118.27 in damages arising from the defendant's refusal to provide insurance coverage and to defend the plaintiff in the underlying action. The defendant opposed the motion, and included with its opposition the affidavit of its expert, James G. Ryan (hereinafter the Ryan affidavit) and Ryan's related expert report (hereinafter the Ryan report), which together addressed and challenged the reasonableness of the attorneys' fees sought by the plaintiff as damages. The plaintiff then moved to strike the Ryan affidavit and the Ryan report. In order dated December 12, 2017 (hereinafter the December 2017 Order), the Supreme Court granted the plaintiff's motion for summary judgment but only to the extent of awarding the plaintiff $500, 000 in attorneys' fees plus interest thereon from September 12, 2016, and disbursements of only $83, 194.61. The court denied the plaintiff's motion to strike the Ryan affidavit and the Ryan report.

In a judgment dated February 12, 2018, the Supreme Court, inter alia, awarded the plaintiff the sum of $583, 194.61, with interest from September 12, 2016, in the amount of $63, 683.01, for a total award of $647, 057.62 as damages with respect to the cause of action alleging breach of the policy. The court also dismissed the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing. The plaintiff appeals.

"Implicit in every contract is an implied covenant of good faith and fair dealing" (25 Bay Terrace Assoc., L.P. v Public Serv. Mut. Ins. Co., 194 A.D.3d 668, 671-672 [internal quotation marks omitted]; see Celauro v 4C Foods Corp., 187 A.D.3d 836, 838). "'The implied covenant of good faith and fair dealing is a pledge that neither party to the contract shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruit of the contract, even if the terms of the contract do not explicitly prohibit such conduct'" (25 Bay Terrace Assoc., L.P. v Public Serv. Mut. Ins. Co., 194 A.D.3d at 672, quoting Gutierrez v Government Empls. Ins. Co., 136 A.D.3d 975, 976; see Moran v Erk, 11 N.Y.3d 452, 456). "No obligation may be implied that would be inconsistent with other terms of the contractual relationship" (Celauro v 4C Foods Corp., 187 A.D.3d at 838; see 1357 Tarrytown Rd. Auto, LLC v Granite Props., LLC, 142 A.D.3d 976, 977). In the context of an insurance-related dispute, the implied covenant of good faith and fair dealing means that the insurer must investigate claims for coverage in good faith, must not manufacture factually incorrect reasons to deny insurance coverage, must not deviate from its own practices or from industry practices, and must not act with "'gross disregard' of the insured's interests" (Smith v General Accident Ins. Co., 91 N.Y.2d 648, 653, quoting Pavia v State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 453; see McBride v New York Prop. Ins. Underwriting Assn., 152 A.D.3d 505, 506; 25 Bay Terrace Assoc., L.P. v Public Serv. Mut. Ins. Co., 144 A.D.3d 665, 667). Because claims arising from an insurer's bad-faith denial of coverage are "generally proven by evidence largely circumstantial in nature" (Reifenstein v Allstate Ins. Co., 92 A.D.2d 715, 716 [internal quotation marks omitted]), courts are "reluctant to dismiss complaints alleging bad faith at the pretrial stage" (id. at 716; see Roldan v Allstate Ins. Co., 149 A.D.2d 20, 37-38).

"In considering a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), the court must accept the facts as alleged in the complaint as true, accord the plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory" (JDI Display Am., Inc. v Jaco Elecs., Inc., 188 A.D.3d 844, 845; see Leon v Martinez, 84 N.Y.2d 83, 88; Palero Food Corp. v Zucker, 186 A.D.3d 493, 495).

Here the Supreme Court, in the August 2017 order, erred in grating the defendant's motion pursuant to CPLR 3211(a)(7) to dismiss the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing. The plain language of the complaint reflects the plaintiff's allegation that the defendant breached the implied covenant of good faith and fair dealing. The complaint alleged, inter alia, that the defendant failed to investigate in good faith the claims in the underlying action, denied coverage to the plaintiff based upon a manufactured and/or "nonexistent" assertion, deviated from industry practices by denying coverage to the plaintiff where "[n]o reasonable insurer would have denied [such] coverage," and "[disclaimed] coverage with gross disregard for the facts and applicable law" (see Smith v General Accident Ins. Co., 91 N.Y.2d 654-655; Pavia v State Farm Mut. Auto. Ins. Co., 82...