AUGUST 2016 BAD FAITH CASES: PLAINTIFF GIVEN CHANCE TO AMEND BAD FAITH CLAIM, IF COUNSEL CAN DO SO WHILE MEETING RULE 11 STANDARDS (New Jersey Federal)

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In Product Source International, LLC v. Foremost Signature Insurance Co., the insured sought defense and indemnification for personal and advertising injury from a trademark infringement suit, and brought a bad faith claim. The insurer moved to dismiss. The court refused to dismiss the insured’s coverage claims, but did dismiss the bad faith claim without prejudice.

The court observed that a New Jersey bad faith plaintiff must show (1) absence of a reasonable basis to deny benefits; and (2) knowing or reckless disregard of its lack of a reasonable basis to deny that benefit. If there is a reasonable basis to deny benefits, or where coverage is “fairly debatable”, there cannot be bad faith. “Under this ‘fairly debatable’ standard, a plaintiff can only succeed on a bad faith claim against his insurer if he can establish that he would be entitled to summary judgment on the underlying claim —- that there are no factual issues over whether the plaintiff is entitled to insurance coverage under his policy.”

In its complaint, the plaintiff pleaded that there was no reasonable basis to deny defense and indemnification, referencing specific policy provisions covering trademark infringement claims. However, the court found that the plaintiff did “not adequately set forth the second element required … Defendants’ knowledge or reckless disregard for the fact that they had no reasonable basis for their denial of insurance benefits.” An allegation that the claim process was delayed with knowledge or reckless disregard that there was no valid basis is a legal conclusion, not a factual allegation under Twombly/Iqbal. Thus, the bad faith claim was dismissed without prejudice, leaving plaintiff an opportunity to re-plead; but in so ordering the court allowed the plaintiff time to cure while stating “if Plaintiff is able to do so consistent with counsel’s obligations under Rule 11….”

The plaintiff did amend, and was successful in defeating a subsequent motion to dismiss the amended bad faith claim.

Date of Decision: July 6, 2016

Prod. Source Int’l, LLC v. Foremost Signature Ins. Co., No. 15-8704, 2016 U.S. Dist. LEXIS 87030 (D.N.J. July 6, 2016) (Simandle, J.)

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