New York Law Review

Tag: duty of good faith

  • Kenford Co., Inc. v. County of Erie, 67 N.Y.2d 905 (1986): Enforceability of Agreement to Cooperate in Contract Law

    Kenford Co., Inc. v. County of Erie, 67 N.Y.2d 905 (1986)

    A party can be held liable for breach of contract if it fails to act in good faith and cooperate with the other party to fulfill the contract’s objectives, even if ultimate approval rests with a third party or the contract allows for termination.

    Summary

    Kenford Co. sued Erie County for breach of contract, alleging the county failed to cooperate in developing a Land Disposition Agreement (LDA) as designated. The county moved to dismiss for failure to state a cause of action. The Court of Appeals held that Kenford sufficiently pleaded causes of action for breach of contract. Even though the Board of Estimate had final approval and the county could terminate the agreement, the county had a contractual obligation to cooperate in good faith. The court found the allegation of bad faith ‘dedesignation’ sufficient to state a claim.

    Facts

    Erie County, through its Department of Housing Preservation and Development (HPD), selected Kenford Co. to negotiate a Land Disposition Agreement (LDA) for the sale and development of urban renewal areas. This selection was formalized through designation agreements. Kenford was to prepare the LDA for submission and approval, and the County agreed to cooperate in the process. Kenford alleges it fulfilled its obligations and incurred substantial expenses in preparing the LDA. However, the County, acting in bad faith and without good cause, “dedesignated” Kenford, thus breaching the agreement.

    Procedural History

    Kenford sued Erie County for breach of contract. The County moved to dismiss the complaint under CPLR 3211 (a) (7) for failure to state a cause of action. The trial court denied the motion. The Appellate Division affirmed the trial court’s decision. The County appealed to the New York Court of Appeals, which affirmed the Appellate Division’s order.

    Issue(s)

    Whether the plaintiff sufficiently pleaded a cause of action for breach of contract based on the defendant’s alleged failure to cooperate in good faith, despite the fact that final approval of the Land Disposition Agreement rested with a third party (the Board of Estimate) and the defendant had the right to terminate the agreement.

    Holding

    Yes, because the County undertook a contractual obligation to cooperate with Kenford in preparing the LDA for submission and approval, and the allegation that the County acted in bad faith by “dedesignating” Kenford without cause was sufficient to state a claim for breach of contract.

    Court’s Reasoning

    The Court of Appeals reasoned that the claims rested upon an alleged breach of the obligation undertaken by Erie County, acting through HPD, to cooperate with Kenford in preparing the necessary LDA for approval. The court stated that the fact that the city might have refused to continue negotiations, that only the Board of Estimate was authorized to finally approve the LDA, or that HPD could “dedesignate” Kenford before the LDA was approved were immaterial on a motion addressed to the face of the pleadings. “The allegation is that defendant acted without cause and for improper motives in ‘dedesignating’ plaintiff in violation of its good-faith contractual obligation to cooperate.”

    The court acknowledged that Kenford might not be able to recover damages resulting from the County’s failure to sell the sites or approve the LDA because no agency with the authority to act on behalf of the city was bound by the designation agreement. However, the court emphasized that the County, through HPD, did undertake to cooperate with Kenford in the preparations and negotiations leading to the LDA submission and approval. The court stated that Kenford did not assume the risk of bad faith by the County or of its unexcused breach of its contractual obligation. The court stated that “Similarly immaterial on a motion addressed to the sufficiency of the pleading is defendant’s claim that plaintiff cannot recover all of the items of damage claimed.”

  • Hartford Accident and Indemnity Co. v. Michigan Mutual Insurance Co., 59 N.Y.2d 569 (1983): Insurer’s Duty of Good Faith to Excess Carrier

    Hartford Accident and Indemnity Co. v. Michigan Mutual Insurance Co., 59 N.Y.2d 569 (1983)

    A primary insurer owes a duty of good faith to an excess insurer, similar to the duty owed to its own insured, when handling a claim that could trigger excess coverage.

    Summary

    This case addresses the duty of a primary insurer to an excess insurer when both companies insure the same entities. Michigan Mutual, the primary insurer for three affiliated companies, also provided worker’s compensation insurance. When an employee of one company sued the other two, Hartford, the excess insurer, demanded the employer be impleaded. Michigan Mutual refused, and the case settled, triggering Hartford’s excess coverage. Hartford then sued Michigan Mutual for bad faith. The New York Court of Appeals held that Michigan Mutual owed Hartford a duty of good faith and that factual questions existed regarding breach of that duty, precluding summary judgment.

    Facts

    DeFoe Corporation and its subsidiaries, L.A.D. Associates, Inc., and D.A.L. Construction Corporation, were insured by Michigan Mutual under a general liability policy ($1,000,000 coverage) and a worker’s compensation policy. Hartford provided excess coverage ($5,000,000) to the same companies. Davor Gobin, an employee of D.A.L., was injured on the job. Because worker’s compensation law prevented him from suing his employer, he sued DeFoe and L.A.D. Hartford, the excess carrier, demanded that Michigan Mutual implead D.A.L. in the lawsuit. Michigan Mutual refused. The Gobin action settled for $1,400,000, with Hartford paying $400,000 while reserving its rights against Michigan Mutual.

    Procedural History

    Hartford sued Michigan Mutual and its law firm for inducing breach of contract and bad faith. Michigan Mutual moved for summary judgment, which Special Term partially granted. The Appellate Division modified, reinstating Hartford’s individual claims, finding triable issues of fact. The Appellate Division granted Michigan Mutual leave to appeal to the Court of Appeals, certifying the question of whether its order was properly made.

    Issue(s)

    1. Whether the cooperation clause in Hartford’s policy obligated DeFoe and L.A.D. to implead D.A.L.?

    2. Whether Michigan Mutual, as primary insurer, owed a duty of good faith to Hartford, as excess insurer?

    3. Whether Hartford’s payment toward the settlement was voluntary, precluding recovery?

    Holding

    1. Yes, because Hartford’s policy obligated its insured to “enforce any right of contribution or indemnity against any person or organization who may be liable to the insured”.

    2. Yes, because Michigan Mutual, as the primary liability insurer, owed Hartford, as the excess carrier, the same duty to act in good faith that it owed to its own insureds.

    3. This issue is to be determined at trial.

    Court’s Reasoning

    The court distinguished American Sur. Co. v Diamond, noting that Hartford’s policy contained an explicit obligation to enforce rights of contribution or indemnity. The court rejected Michigan Mutual’s argument that an insurer cannot maintain a subrogation action against its own insured, because Michigan Mutual provided two separate policies: a general liability policy and a worker’s compensation policy. The worker’s compensation policy created a separate obligation to defend and indemnify D.A.L. if impleaded. The court emphasized the duty of good faith owed by a primary insurer to an excess insurer, stating, “Michigan Mutual as the primary liability insurer owed to Hartford as the excess carrier the same duty to act in good faith which Michigan owed to its own insureds”. The court reasoned that whether Michigan Mutual acted in good faith to protect its insureds or in its own self-interest to trigger Hartford’s excess liability without sharing in the costs was a question of fact for trial. The court also noted that the voluntary payment issue was a factual question best resolved through trial. The court affirmed the Appellate Division’s order, finding triable issues of fact existed and answering the certified question in the affirmative.