When New York’s highest Court comments on what might amount to fraud-related issues, it is always a time to pay attention here. The Court’s latest commentary is contained in Hobish v AXA Equit. Life Ins. Co., 2025 NY Slip Op 00183 (Jan. 14, 2025).
In Hobish, the New York Court of Appeals held, among other things, that (a) the breach of contract claim, albeit enmeshed with allegations of deceptive conduct, did not, as a matter of law, justify imposing punitive damages; and (b) New York’s consumer fraud statute, General Business Law Section 349 (GBL 349), does not allow for punitive-type damages beyond the statutory “amount not to exceed three times the actual damages up to one thousand dollars, if the court finds the defendant willfully or knowingly violated this section.”
Hobish Facts
In Hobish, the terms and application of a universal life insurance policy were at issue. The plaintiff trust purchased the policy to insure the life of a then 82-year-old woman. The policy provided for an intricate methodology for paying the premiums and various ways the death benefit (there $2 million) would be paid or if the policy were terminated, surrender values disbursed. While the policy did indicate that the premiums (known as “COI charges” for cost of insurance), could be increased, it further stated “that any such increase must be ‘equitable to all policyholders of a given class.’” The dispute at issue was the meaning of the word “class” insofar as there were two possible interpretations of the language: “first, that ‘given class’ refers to the ‘rating class,’ delineated in all capitalized letters, which would tether rate increases to Ms. Hobish’s particular rating class of ‘standard non-smoker’; or second, that use of two different phrases, ‘given class’ and ‘rating class,’ implies that the terms are not equivalent, and that a ‘given class’ therefore simply refers to any actuarially reasonable grouping of policies.”
After the policy was purchased, the defendant insurance company increased the COI charges. Plaintiff ultimately elected to terminate the policy and obtained the contractual surrender benefit. Plaintiff then sued to recover the entire death benefit (less the surrender payment received), contending that defendant breached the contract (the policy) by increasing the COI charges the way it did, and deceptively induced the plaintiff to purchase the policy when defendant allegedly knew it was going to raise the COI charges beforehand and never so advised the plaintiff.
Interestingly, plaintiff only asserted two claims: (1) breach of contract based on defendant’s increasing the COI charges in violation of the express contractual limitations; and (2) violation of GBL 349. The word “fraud” did not appear at all in the complaint, even though it did assert that defendant engaged in deceptive conduct to mislead elderly consumers such as the 82-year-old insured into thinking the COI charges would not be imposed as alleged. (By the way, this scenario led to a separate class action against the defendant, resulting in a substantial monetary settlement for the class.)
The Commercial Division (Masley, J.) denied both sides’ motions for summary judgment on liability. “On the contract claim, the court concluded that the contractual term in question—‘a given class’—was ambiguous within the four corners of the contract, and that the parties had submitted relevant, competing extrinsic evidence that raised a triable issue of fact. As for the section 349 claim, the court held plaintiffs had sufficiently alleged they were affected by a deceptive business practice.” The Commercial Division also rejected plaintiff’s theory of damages under both claims, including the request for punitive damages. The Appellate Division, First Department, affirmed.
Punitive Damages on Contract Claim
After agreeing with the courts below that the contract was sufficiently ambiguous to deny summary judgment for either side and that plaintiff did not actually substantiate the damages alleged based upon any breach of the policy, the Court of Appeals addressed the request for punitive damages.
On the contract claim, the Court reiterated the standard for allowing punitive damages for a claim of breach of contract:
The bar for subjecting a defendant to punitive damages on a contract claim is high. Such damages are available only where “the fraud, aimed at the public generally, is gross and involves high moral culpability,” or when it “evince[s] a high degree of moral turpitude and demonstrate[s] such wanton dishonesty as to imply a criminal indifference to civil obligations” (Walker v Sheldon, 10 NY2d 401, 405 [1961]). Although “damages arising from the breach of a contract will ordinarily be limited to the contract damages necessary to redress the private wrong, . . . punitive damages may be recoverable if necessary to vindicate a public right” (New York Univ. v Continental Ins. Co., 87 NY2d 308, 315 [1995]; see Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603, 613 [1994]). To state a claim for punitive damages in this context, a plaintiff must allege that “(1) [the] defendant’s conduct [is] actionable as an independent tort; (2) the tortious conduct [is] of the egregious nature set forth in Walker. . . ; (3) the egregious conduct [is] directed to [the] plaintiff; and (4) it [is] of a pattern directed at the public generally” (New York Univ., 87 NY2d at 316).
The Court had little trouble finding that the allegations and factual record did not satisfy the above standard. As I noted above, while the complaint actually never even used the word “fraud” once, the Court of Appeals commented: “[Plaintiffs] claim that defendant fraudulently induced the Trust to purchase the policy by instructing its sales representative to make false representations about the likelihood of a future COI charge increase when in fact defendant had already decided to alter the COI Rate Scale.” But, as the Court correctly noted, the policy itself allowed for certain increases in the COI charges, and the courts all found there was still a triable question as to the precise meaning of the contractual terms, and the extrinsic evidence was conflicting.
So, it was easy enough to find that defendant’s conduct did not “evince a high degree of moral turpitude and demonstrate such wanton dishonesty as to imply a criminal indifference to civil obligations.” Nor was there any “independent tort” alleged at all—such as common law fraud. Indeed, an independent tort such as fraud could give rise to punitive damages in itself. See Fraud Allegations Support Punitive Damages for Breach of Contract Claim; Fairfield Fin. Mortgage Grp., Inc. v. Luca, 584 F. Supp. 2d 479, 484 (E.D.N.Y. 2008); Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 415 n.14 (S.D.N.Y. 2010).
GBL 349 – No Punitive Damages
The Court of Appeals then resolved a question that lower courts had disagreed upon—whether GBL349 allows for punitive damages above and beyond what the statute explicitly states. The Court observed that a private cause of action was added to GBL 349 in 1980, as follows:
“In addition to the right of action granted to the attorney general pursuant to this section, any person who has been injured by reason of any violation of this section may bring an action in his own name to enjoin such unlawful act or practice, an action to recover his actual damages or fifty dollars, whichever is greater, or both such actions. The court may, in its discretion, increase the award of damages to an amount not to exceed three times the actual damages up to one thousand dollars, if the court finds the defendant willfully or knowingly violated this section. The court may award reasonable attorney’s fees to a prevailing plaintiff” (L 1980, ch 346, § 1).
The Court then distinguished GBL 349 from common law fraud, thereby excluding what might amount to standards for awarding punitive damages for fraud:
It is well settled that, while the statute may “cover conduct ‘akin’ to common-law fraud” (Gaidon v Guardian Life Ins. Co. of Am., 96 NY2d 201, 209 [2001]), claims under this provision of General Business Law § 349 are “creature[s] of statute based on broad consumer-protection concerns” (Gaidon v Guardian Life Ins. Co. of Am., 94 NY2d 330, 343 [1999]; see Matter of Motor Veh. Acc. Indem. Corp. v Aetna Cas. & Sur. Co., 89 NY2d 214, 220-221 [1996] [distinguishing between claims with a common-law source codified by statute and claims that “would not exist but for the statute”]; Oswego Laborers’ Local 214 Pension Fund v Marine Midland Bank, 85 NY2d 20, 24-25 [1995]). Accordingly, in determining whether punitive damages are available to a private plaintiff bringing a General Business Law § 349 claim, “we look to the statute—not to whether the nature of the wrong alleged would permit recovery under traditional concepts of punitive damages in tort law” (Thoreson v Penthouse Intl., 80 NY2d 490, 496 [1992]).
The Court then concluded that the precise language of the statute did not authorize the type of punitive damages afforded to common law torts:
Treble damages under section 349(h) are more easily proved than traditional punitive damages but are restricted in value. On the one hand, the statute provides a standard for treble damages—”willful and knowing”—that is substantially less onerous than the general standard for punitive damages (see e.g. Prozeralik v Capital Cities Communications, 82 NY2d 466, 479 [1993] [“Punitive damages are awarded in tort actions ‘(w)here the defendant’s wrongdoing has been intentional and deliberate, and has the character of outrage frequently associated with crime,’ ” quoting Prosser & Keeton, Torts § 2 at 9 [5th ed 1984]). At the same time, the provision limits those damages to a hard cap of $1,000 and gives the court discretion in awarding them even if the lower standard is met.
Commentary
Punitive damages are available for both breach of contract claims and common law torts, such as fraud. The standards are different. The normal egregious conduct is required in both instances, but for contract claims, there must be proof that the wrongful conduct was part of a pattern directed at the public. As observed by the Court of Appeals in Hobish, the factual scenario there did not come close to meeting the standard in any respect. And, as the Court found, GBL 349 does not allow for the type of punitive damages that may be appropriate and awardable for common law torts such as fraud.