In 2008, the New York Court of Appeals decided the companion cases of Bi-Economy Market, Inc. v. Harleysville Ins. Co., 10 N.Y. 3d 187) (2008) and Panasia Estates, Inc. v. Hudson Insurance Co., 10 N.Y. 3d 200 (2008), which held that “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.”  (emphasis added) The Panasia court similarly quoted the lower court’s holding with approval: “[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.” (emphasis added).  As such, the Panasia and Bi-Economy decisions refer to a bad faith standard for consequential damages to be recoverable.   

Since Bi-Economy and Panasia, policy holders have attempted to assert claims for attorney fees as “consequential damages,” claiming that if there is a breach, it is within the contemplation of the parties that attorney fees would be incurred.  This position is directly contrary to the well-settled common law “American Rule,” which provides that a successful litigant cannot recover its attorney fees unless authorized by agreement, statute or court rule.  See, e.g., Mighty Midgets v. Centennial Ins. Co., 47 N.Y. 2d 12 (1979).  Nonetheless, New York state and federal courts have been inconsistent in applying the American Rule in the insurance context in the wake of Bi-Economy and Panasia.  

On November 7, 2012, in Stein, LLC v. Lawyers Tit. Ins. Corp., 2012 N.Y. App. Div. LEXIS 7230 (N.Y. App. Div. 2d Dep’t Nov. 7, 2012) the Appellate Division, Second Department held that attorney fees are not recoverable as consequential damages in an insurance coverage dispute:

nothing in Bi-Economy or Panasia alters the common-law rule that, absent a contractual or policy provision permitting the recovery of an attorney’s fee, “an insured may not recover the expenses incurred in bringing an affirmative action against an insurer to settle its rights under the policy

 at * 2-3 (citing New York Univ. v Continental Ins. Co., 87 NY2d 308, 324 and O’Keefe v Allstate Ins. Co., 90 AD3d 725, 726).

Given that New York courts have been inconsistent in their approach to whether claims for attorney fees are subject to motions to dismiss after Bi-Economy and Panasia, it is possible that the issue will come before the Court of Appeals.