ALL FACTORS FAVORED SEVERANCE AND STAY OF BAD FAITH CLAIM UNDER FEDERAL RULE 21 (New Jersey Federal)

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In this first party coverage and bad faith case, the court granted the insurer’s motion to sever and stay the bad faith claim.

The insured brought three claims: (1) declaratory judgment for coverage, (2) breach of contract for damages, and (3) punitive damages based on the insurer’s bad faith. Per Federal Rule 21, the insurer moved to sever and stay the bad faith claim until the coverage claim was resolved, including a stay of discovery on the bad faith claim.

The court observed that “with requests to sever bad faith claims from first-party coverage claims, ‘this Court has refused to adopt a blanket rule that a plaintiff’s bad faith claim should be severed in every coverage case.[…] Every case is different and must be decided on its own facts.’” The court has broad discretion in rendering such decisions.

  1. The court found that the contract/coverage issues were different from the bad faith issues. On the bad faith claim, the insured alleged the carrier made misrepresentations about the policy, failed to act reasonably and promptly concerning the insurance claim, “failed to conduct a meaningful and timely investigation, failed to advise of available coverage, and compelled plaintiff to start this lawsuit to obtain coverage under the Policy.” The court held “[t]hese alleged wrongdoing acts, however, are not relevant to whether there is coverage under the Policy.”

  2. The court next found the bad faith and contract counts require two different sets of evidence, with different witnesses and different documents necessary to prove each claim. Thus, the court found that “[d]iscovery relating to claims personnel, claims handling procedures and guidelines, and best practices is not directly relevant to the contract claims….”

  3. The court further ruled that bad faith discovery “’distracts from, and will undoubtedly delay, the resolution of the primary focus of the case, i.e., whether plaintiff’s . . . claim should be paid.’” The court cited earlier case law for the proposition that “’it just makes good common sense to resolve the declaratory judgment claims first because . . . [these] are the only claims that are susceptible to judicial resolution as a matter of law and with little or no discovery necessary.’”

  4. The court also found the insured would not be prejudiced by severance. “Plaintiff argues it would be prejudiced because a stay would prolong resolution of the case. This may be true. But the bad faith claim will be moot if defendant defeats plaintiff’s breach of contract claim. Thus, the bad faith claim should necessarily abide the resolution of the insurance coverage claim.”

  5. Finally, the court found the insurer would be prejudiced. “Defendant, on the other hand, will be prejudiced if it is required to litigate the bad faith claim before plaintiff’s insurance coverage claim is resolved. Judicial economy and efficiency will be promoted by avoiding potentially expensive and time-consuming discovery on the bad faith claim. Plaintiff’s coverage claim should be the focus of the case at this time. If the coverage claim is resolved in plaintiff’s favor, then the parties can promptly turn to plaintiff’s bad faith claim.”

Thus, all factors favored severance and a stay of the bad faith claim.

Date of Decision: April 27, 2020

Bayshore Recycling Corp. v. Ace American Insurance Co., U.S. District Court for the District of New Jersey Case No. 19-cv-21618-MCA-ESK, 2020 U.S. Dist. LEXIS 73168 (D.N.J. April 27, 2020) (Kiel, M.J.)

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