Beyond Policy Limits: Recovering Loss of Rent for an Insurance Carrier’s Breach of Contract

With the Blue Ridge Mountains to the west and the Atlantic Ocean to the east, North Carolina is home to many short-term rental properties, particularly those for vacationers. It is not uncommon, especially during hurricane season, for a property to suffer damage and be taken off the short-term market while the insurance company and property owner work together to repair or replace the property. What happens, though, when the insurance company wrongfully denies or unnecessarily delays paying the claim and keeps the property off the short-term market for longer than necessary? While this specific scenario has not been addressed by North Carolina’s appellate courts, general principles of contract law—together with the case law from other jurisdictions—strongly suggest that a property owner may recover lost rental income as consequential damages where the insurer breaches the insurance policy—even beyond the policy limits.

We begin with the fundamental principle that, in a breach of contract action, “the injured party is entitled as compensation therefor to be placed, insofar as this can be done by money, in the same position he would have occupied if the contract had been performed.” Pleasant Valley Promenade v. Lechmere, Inc., 120 N.C. App. 650, 665 (1995) (quoting First Union Nat’l Bank v. Naylor, 102 N.C. App. 719, 725 (1991). This compensation includes the injured party’s “expectation interest”—or the amount expected under the plain terms of the contract—together with “any other loss, including incidental or consequential loss, caused by the breach [of contract].” Consequential damages include “any loss resulting from the plaintiff’s circumstances of which the defendant knew or should have known at the time the parties entered the contract and which the plaintiff could not reasonably have prevented.” N.C.P.I. Civil 503.73. Indeed, “the right to consequential damages applies in almost every breach of contract setting where an adverse impact arising from the breach should have been anticipated.” Id., at n.1.

Insurance companies frequently take the position that the policy limits are the only source of recovery an aggrieved property owner is entitled to when the insurance company fails to perform its duties under the policy. This, however, is not the case and is perfectly illustrated in the case of Red Cedars, Inc. v. Westchester Fire Ins. Co. 686 F. Supp. 614 (1988). In Red Cedars, a Michigan restaurant owner sued his insurance company when the restaurant burned, and the insurance company baselessly concluded that the fire was started by arson. The plaintiff-insured claimed his lost business income as consequential damages of the insurance company’s failure to timely pay under the policy, while the defendant-insurer argued that the plaintiff’s damages must be limited by the policy limits on losses. Citing authority from the Sixth Circuit Court of Appeals, the Michigan Court adopted the view that “the policy limits restrict the amount the insurer may have to pay in the performance of the contract, not the damages that are recoverable for its breach.” Id. at *5. That is, the policy limits are tied to the plaintiff’s expectation of damages—as the plaintiff reasonably expects that some (or all) of the coverage bargained for will be applied to the property in the event of a covered loss. Meanwhile, consequential damages may be applied in addition to the policy limits for foreseeable damages incurred when the insurance company fails to perform its duties under the policy.

Pankey v. S. Pioneer Prop. & Casualty Insurance Co., 2014 U.S. Dist. LEXIS 187512, is another case illustrating that the policy limits and consequential damages are “separate buckets” of recovery a Plaintiff-Insured may recover from when a Defendant-Insurer breaches an insurance contract. In Pankey, the insured sued the insurance company for wrongfully failing to provide coverage when the insured property was burned in a fire. Defendant-Insurer argued that the Plaintiff’s recovery was limited to the applicable policy limits. The court disagreed and took care to delineate the policy limits from other damages the plaintiff suffered, finding that the policy limits “bear on the [Plaintiff’s] claim to enforce the insurance contract, but [the policy limits] do not restrict the damages recoverable for breach of the contract.” The court ultimately determined that “to restrict [Plaintiff’s] recovery to the policy limits would be to fail to achieve the purpose of assessing damages in the event of a breach of contract, namely, to place the injured party in the same position it would have been in had the contract been fully performed.” Id. at *5. The court then noted that courts in other jurisdictions have “categorically determined that insurance policy limits do not restrict damages allowable for breach of the insurance contract.”¹

With these cases in mind, the weight of authority shows that the insurance company’s payment from the bargained-for policy limits in the event of a loss is merely what’s expected under the insurance contract–not the be-all-end-all of what is owed to the insured in the event of a breach. It is well established that insureds are also entitled to reasonably foreseeable damage suffered as a result of the insurance company’s failure to perform. Where, at the time of issuing the policy, the insurance company knew or should have known that the insured property was being used as a short-term rental property and that the insured receives rental income from said property, the insurance company’s failure to perform under the policy creates a reasonably foreseeable loss of rental income that is compensable under the doctrine of consequential damages.

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¹ See Salamey v. Aetna Cas. & Sur. Co., 741 F.2d 874, 877 (6th Cir. 1984) (applying Michigan law)(explaining that the plaintiff-insured’s claim for lost profits based on refusal to pay insurance proceeds was to be treated separately from the claim to recover those proceeds and stating that the policy limits were irrelevant to the measure of damages for breach of contract); . . .  Lawton v. Great Sw. Fire Ins. Co., 118 N.H. 607 (N.H. 1978) (Defendant’s argument that the insurance contract itself restricts the damages that are recoverable for breach of the contract to the policy limits is . . . unpersuasive.  The policy limits restrict the amount the insurer may have to pay in the performance of the contract, not the damages that are recoverable for its breach); Bi-Econ Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (N.Y. 2008) (treating insurance contract just like other contracts and holding that when a policyholder “suffers additional damages as a result of an insurer’s excessive delay or improper denial, the insurance company should stand liable for these damages . . . [in order] to give the insured its bargained-for benefit.”).