An issue which periodically arises in the insurance context is whether an insurer can be liable for prejudgment interest above the policy limit even in the absence of bad faith.
At the outset, it is important to distinguish between two distinct types of prejudgment interest under the governing statute, CPLR 5001.
Prejudgment interest that forms part of the “loss” covered by the policy accrues from the time the underlying claim arose and will ordinarily be subject to the policy’s limits of liability. Insurers in New York are not bound as a matter of law to pay such prejudgment interest in excess of policy limits. Rather, the insurer’s obligation is assessed on a case-by-case basis in light of the relevant policy language. Carlson v. American Int’l Group, 199 A.D.3d 1363 (4th Dep’t 2021); Government Employees Insurance Co. v. Saco, 2017 WL 1214433 (E.D.N.Y. 2017); Alejandro v. Liberty Mutual Insurance Co., 84 A.D.3d 1132 (2d Dep’t 2011); Ashkenazy v. National Union Fire Insurance Co., 245 A.D.2d 326 (2d Dep’t 1997) (citing Cleghorn v. Ocean Accident & Guarantee, 244 N.Y.166 (1926)).
The second type of prejudgment interest accrues on an insured’s breach of contract claim against its insurer, dating from the time the insurer becomes obligated to—but does not—make payment. Varda v. Ins. Co. of North America, 45 F.3d 634, 640 (2d Cir. 1995); Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., 2020 WL 7028906 (S.D.N.Y. Nov. 30, 2020); Aetna Cas. and Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1353-54 (S.D.N.Y 1995); see also J.P. Morgan Securities v. Vigilant Ins. Co., 2017 WL 3448370, *2 (Sup. Ct. N.Y. Co. Aug. 7, 2017), rev’d on other grounds, 166 A.D.3d 1 (1st Dep’t 2018), rev’d and remanded on other grounds, 37 N.Y.3d 552 (2021). Under New York law, pre-judgment interest on breach of contract claims—“including breach of third-party insurance policies”—is non-discretionary. Turner Const. Co. v. American Mfrs. Mut. Ins. Co., 485 F. Supp. 2d 480, 490 (S.D.N.Y 2007), aff’d, 341 Fed. Appx. 684 (2d Cir. 2009).
This rule applies even in the absence of a valid claim of bad faith on the part of the insurer, and includes interest in excess of policy limits. Samovar of Russia Jewelry Antique v. Generali, 102 A.D.2d 279, 281 (1st Dep’t 1984) (“Generally, an insurer’s liability is limited to the face amount of the policy, plus appropriate interest”); accord Pope v. New York Property Insurance Underwriting Assoc., 112 A.D.2d 984, 985 (2d Dep’t), aff’d, 66 N.Y.2d 857 (1985); Harriman v. Norfolk & Dedham Mutual Fire Insurance Co., 172 A.D.2d 585, 586 (2d Dep’t 1991); In re Liquidation of Union Indemnity Insurance Co. of New York, 92 N.Y.2d 107 (1998).
The decision in Olin v. OneBeacon America Insurance Co., 864 F.3d 130 (2d Cir. 2017), is particularly instructive. OneBeacon issued three umbrella excess policies providing combined policy limits of $20,000,000 in excess of $300,000 per occurrence. Olin incurred remediation costs far in excess of the policy limits. After many years of litigation, while dismissing Olin’s bad faith claim, the district court granted judgment against OneBeacon for $87,187,173.63, including more than $46,000,000 in prejudgment interest. On appeal, the Second Circuit vacated the lower court’s computation of damages and remanded for the entry of recalculated damages, but otherwise affirmed. The court expressly affirmed the district court’s award of prejudgment interest (although remanding for recomputation based on the recalculation of damages).
The same result was reached in ExxonMobil Oil v. TIG Insurance Co., 2020 WL 2539063 (S.D.N.Y. May 18, 2020), which is now on appeal to the Second Circuit. The court granted Mobil’s motion to award more than $6,000,000 in prejudgment interest in addition to policy limits of $25,000,000 (as in Olin, the policy was an excess policy), rejecting an arbitration tribunal’s refusal to grant prejudgment interest on the ground that an award in excess of the policy limits could not be granted in arbitration proceedings. Bad faith was not an issue. Both courts—in Olin and ExxonMobil—reasoned that an insurer could not benefit from its own delay in paying amounts due an insured by avoiding liability for prejudgment interest. Such a result would be contrary to New York’s prejudgment interest statute, CPLR 5001.
In sum, the type of prejudgment interest involved (and the terms of the policy, if interest is part of the underlying claim) will determine whether the insurer is liable for such interest in excess of the policy limits even in the absence of bad faith.
This article is also on Law.com: Insurer’s Potential Liability for Prejudgment Interest in Excess of Policy Limit