Archive for the 'NJ – Agents and Administrators' Category

SANCTIONS AGAINST INSURED REVERSED WHERE INSURER DID NOT SHOW INSURED’S BAD FAITH IN BRINGING FAILED LITIGATION AGAINST INSURER (New Jersey Appellate Division) (Unpublished)

Print Friendly, PDF & Email

In this case, New Jersey’s Appellate Division affirmed the dismissal and grant of summary judgment to the insurer on all claims, but reversed the trial court’s award of frivolous litigation sanctions against the insured because there was no finding the insured acted in bad faith in bringing the claims.

Factual Background

The insurer provided the eighth layer of excess insurance in this Superstorm Sandy case. The primary and lower layers provided $75 Million, and the eighth layer provided another $50 Million above that.

In 2012, the insured hired a contractor to do repair and restoration work. The contractor allocated $950,000 to specific building repair and restoration work. The excess carriers all determined repair and restoration work was not covered. In 2014, the insured reached a global settlement with all insurers for $93.5 Million. The eighth layer insurance contributed $16 Million. The insured executed a release for any and all claims and demands for Superstorm Sandy property damage and business income losses, discharging the eighth layer insurer.

In 2015, however, the insured asked the eighth layer insurer to reconsider paying the contractor’s repair and restoration costs, after another anticipated source for this loss did not pan out. The eighth layer carrier refused. The insured brought suit in 2015.

The Litigation

The insured alleged it relied on the advice of the excess insurers’ adjuster and experts in how the repair and restoration costs were allocated, which resulted in it obtaining no sum to settle that out-of-pocket payment. The insured alleges that it only agreed to the 2014 settlement based on this bad advice, and would otherwise have included these repair and replacement costs in its negotiations and settlement with the insured, beyond the sum actually paid.

The insured brought various claims against the adjusters and experts, and claimed the eighth layer insurance was liable for their acts and omissions on an agency theory. The insured also claimed the eighth layer insurer was liable for breach of contract, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and bad faith in denying the claim for the repair and restoration costs. Defendants moved to dismiss all claims, which the trial court granted in part, including the unjust enrichment claim and some of the agency theory claims. The remaining claims were later dismissed on summary judgment.

The eighth layer insurer filed a motion against the insured for frivolous litigation sanctions. The trial court granted that motion, and ruled the insurer was entitled to the attorney’s fees and costs.

The insured appealed the grant of summary judgment and the sanctions.

The Appellate Division Affirms for the Insurer on the Merits

First, the Appellate Division found no support in the record that the release was only executed as the result of fraud. The insured was well aware it was settling all Superstorm Sandy related claims, that the repair and restoration costs were not part of the settlement, and that the release would bar Superstorm Sandy related claims against all insurers. The insured was also aware that the repair and restoration costs were subject to recovery regarding another entity and its insurers, and that the settling excess insurance companies would not agree to make their settlement contingent on the outcome of that separate matter.

Next, the Appellate Division affirmed the trial court’s findings that there was no common law fraud or negligent misrepresentation by the agent or the insurer. It likewise affirmed judgment on the negligence claim on the basis that no expert testimony was proffered regarding the conduct of the independent insurance adjuster (which plaintiff was trying to bootstrap into a claim against the insurer as well).

The Appellate Division Reverses Sanctions Because there was no Finding of Bad Faith

The Appellate Division addressed the sanction award against the insured for frivolous litigation. [There were no sanctions against counsel.] The insurer’s attorneys had sent the insured’s counsel a letter stating the “complaint was frivolous because the release precluded … asserting any causes of action against [the eighth layer insurer].” The letter “also stated that [the] fraud claims were unsustainable because [the insured’s] representatives had acknowledged the [repair and restoration costs at issue] were not recoverable….” Despite this letter, the insured’s “counsel did not withdraw the complaint.”

A motion for attorneys’ fees and costs ensued. The insured and its counsel both asserted that they believed the claims had merit.

The trial judge found the claims frivolous on the basis that the insured’s claims had no reasonable basis in the law or equity, and there was no good faith argument for the extension, modification or reversal of existing law. Further, the trial judge found the insured knew that the repair and restoration costs would have to come from another source, and that the excess insurers would not make their settlement contingent on recovery of those costs from another source.

The Appellate Division reversed the frivolous litigation sanctions, finding the trial court relied upon the wrong standards. The frivolous litigation statute, N.J.S.A. 2A:15-59.1, which applies only to represented parties, requires a finding of bad faith on the plaintiff’s part. Here, there was no such finding. Thus, the claim failed.

The Appellate Division laid out these bad faith standards:

Where ‘a prevailing defendant’s allegation is based on the absence of a ‘reasonable basis in law or equity’ for the plaintiff’s claim and the plaintiff is represented by an attorney, an award cannot be sustained if the ‘plaintiff did not act in bad faith in asserting’ or pursuing the claim.” …. A finding of bad faith is essential because “clients generally rely on their attorneys ‘to evaluate the basis in law or equity of a claim or defenses,’ and ‘a client who relies in good faith on the advice of counsel cannot be found to have known that his or her claim or defense was baseless.’” …. Furthermore, under the FLS, the party seeking the imposition of sanctions “bears the burden of proving that the non-prevailing party acted in bad faith.” …. We have held that “a grant of a motion for summary judgment in favor of a [prevailing party], without more, does not support a finding that the [non-prevailing party] filed or pursued the claim in bad faith.”

The trial court did reference Rule 1:48, which only applies to attorneys and pro se parties, and thus had no application in this matter.

Date of Decision: October 4, 2019

Fedway Assocs. v. Engle Martin & Assocs., Superior Court of New Jersey Appellate Division DOCKET NO. A-0297-18T4, 2019 N.J. Super. Unpub. LEXIS 2048 (N.J. App. Div. Oct. 4, 2019) (Currier, Hoffman, Yannotti, JJ.) (Unpublished)

NOVEMBER 2018 BAD FAITH CASES: NEW JERSEY CFA CLAIM CAN PROCEED WHERE NO DENIAL OF AN INSURANCE BENEFIT ALLEGED (Third Circuit – New Jersey)

Print Friendly, PDF & Email

In this New Jersey action, the plaintiff alleged that the insurer’s agent deceived and defrauded her into signing a release of claims against the insurer. Specifically, the insured alleged that she was injured in an auto accident, and the insurer’s agent showed up at her home with papers to sign. The agent allegedly represented the documents were necessary to process and advance payments on her claim. However, unknown to her, the documents actually included a broad release of all her claims.

Plaintiff initiated a class action under New Jersey’s Consumer Fraud Act (CFA). The District Court found the CFA inapplicable to this fact scenario, on the basis that the CFA does not address the denial of insurance benefits, and further found the CFA conflicts with the Insurance Trade Practices Act (ITPA) or Unfair Claims Settlement Practices (UCSPA) regulations under these circumstances.

The Third Circuit reversed.

The Third Circuit found that the alleged deceptive and fraudulent conduct against a consumer did not amount to the denial of an insurance benefit. It further found that there was no conflict between allowing a statutory CFA private claim to proceed, even if regulatory relief might also be proper under the ITPA or UCSPA.

Date of Decision: November 15, 2018

Alpizar-Fallas v. Favero, United States Court of Appeal for the Third Circuit, No. 17-3837 (3d Cir. Nov. 15, 2018) (Jordan, Rendell, Vanaskie, JJ.)

JANUARY 2018 BAD FAITH CASES: COURT ALLOWS LIMITED BAD FAITH DISCOVERY ON THIRD PARTY ADMINISTRATOR THAT WAS NOT PARTY TO THE BAD FAITH ACTION (District of New Jersey)

Print Friendly, PDF & Email

In this reinsurance litigation, non-party Resolute Management, Inc. (“Resolute”) filed a motion to quash a FRCP 30(b)(6) deposition served upon it by Defendant/insured J.M. Huber Corporation. Resolute sought a protective order barring the insured from inquiring into certain subjects during the future depositions of two of its employees. Additionally, Plaintiff/insurer Continental Casualty moved for a protective order barring the insured from inquiring into certain subjects during the insurer’s 30(b)(6) deposition. The insured opposed both Resolute’s motion and the insurer’s motion.

BACKGROUND

The factual background is as follows: Between 1969 and 1994, the insurer issued policies to the insured that were subject to “incurred loss retrospective premium plans” whereby the insured’s premiums are calculated according to the total number of payments and reserves on claims submitted under the policies. The retrospective premiums are calculated annually on the 1st of December, and continue year to year until all claims submitted are closed or until the maximum premium is reached. These retrospective premiums are called “Rating Plan Adjustments.”

The insurer sued over multiple unpaid invoices from previous Rating Plan Adjustments. The insurer alleged it was owed $33,629 under a March 2012 invoice, $737,116 under a March 2013 invoice, and $978,222 under a February 2014 Rating Plan Adjustment calculation. As such, the insurer brought claims for breach of contract and unjust enrichment.

The insured then filed its answer and brought counterclaims for breach of contract and breach of the duty of good faith and fair dealing. The insured alleged that, for decades, both parties enjoyed a professional and amicable relationship where any questions the insured would have about the Rating Plan Adjustments would be satisfactorily answered by the insurer and then promptly paid.

According to the insured, this all changed in 2010 when Berkshire Hathaway and its affiliates, Resolute and National Indemnity Company (“NICO”) “entered into an agreement with [the insurer] pursuant to which [the insurer’s] legacy asbestos and environmental pollution liabilities were transferred to NICO.”

It was alleged that once NICO assumed the insurer’s liabilities, Resolute became a third-party administrator of the insured’s asbestos and environmental claims. After having questions about the particular invoices on the Rating Plan Adjustments, the insured contends that neither the insurer nor Resolute satisfactorily addressed its concerns, and the insured was never provided with an adequate explanation as to the basis of the contested premiums.

ARGUMENTS

In filing the motion to quash, Resolute wanted to prevent the insured from exploring particular subjects during depositions concerning Resolute’s and the insurer’s (1) corporate practices, (2) claims handling procedures, and (3) the corporate relationships between the insurer, Resolute, NICO, and Berkshire Hathaway. The motion concerns both the Rule 30(b)(6) depositions and the depositions of particular Resolute employees.

The insurer and Resolute argued that the insured’s 30(b)(6) deposition topics were overbroad, would cause an undue burden, and would seek irrelevant information. They argued that the insured should only seek information relevant to the calculation of the retrospective premiums, and that the insured’s efforts were unreasonably duplicative because the insured seeks very similar, if not identical, information from both Resolute and the insurer.

The insured argued that all of the information was necessary for the claims and relevant. Resolute and the insurer also filed a motion for a protective order, seeking to bar the insured from inquiring into certain topics during the depositions of two particular Resolute employees. The insured took the position these employees are key witnesses.

COURT’S ANALYSIS

Initially, in discussing Federal Rule of Civil Procedure 26, the Court stated that “[it] is required to limit discovery where (i) the discovery sought is unreasonably cumulative or duplicative, or can be obtained from some other source that is more convenient, less burdensome, or less expensive; (ii) the party seeking discovery has had ample opportunity to obtain the information by discovery in the action; or (iii) the proposed discovery is outside the scope permitted by Rule 26(b)(1).”

The Court also addressed FRCP 45 governing subpoenas. The Court stated that four circumstances would warrant it to quash or modify a subpoena: (i) if the subpoena fails to allow a reasonable time to comply; (ii) if it requires a person to comply beyond the geographical limits specified in Rule 45(c); (iii) if it requires disclosure of privileged or other protected matter, if no exception or waiver applies; or (iv) if it subjects a person to an undue burden.

Failure to specify basis for objections and harm from compliance

The Court ruled that Resolute failed to (1) state its objections to the insured’s subpoena with specificity, and (2) it further failed to articulate any specific harm that could arise with its compliance. Thus, the court denied Resolute’s motion to quash. For the same reasons, the Court also denied Resolute’s motion for a protective order.

Discovery limited on some topics

Ruling in Resolute’s favor, the Court found that some of the insured’s deposition topics did exceed the scope of permissible discovery, and specifically limited such topics. These included (1) privileged information between Resolute and the insurer, (2) lawsuits against Resolute involving its administration of claims on behalf of other insurers, (3) particular document demands it found unreasonably cumulative, and (4) the insurer’s losses under other policies and Resolute’s knowledge thereof.

Discovery of corporate relationships, claims handling, and operating protocols relevant within limits

The Court further ruled that “discovery into the corporate relationships between [the insurer, Resolute, NICO, and Berkshire Hathaway], along with Resolute’s claims handling practices and operating protocols, is relevant to [the insured’s] claims and defenses in this matter.”

However, the Court went on to limit the discovery here to only relevant pieces of information, such as Resolute’s corporate structure and its affiliations.

The Court further limited the insured’s inquiries to “communications and correspondence regarding Resolute’s administration of Defendant’s claims; and Resolute’s policies, procedures and practices regarding the administration of claims on behalf of Plaintiffs involving retrospective premiums and its financial goals related to the same.”

The Court looked at a prior case involving Resolute, Pepsi-Cola Metro. Bottling Co. v. Ins. Co. of N. Am., No. CIV 10-MC-222, 2011 U.S. Dist. LEXIS 154369, 2011 WL 239655 (E.D. Pa. Jan. 25, 2011). That case also involved a bad faith claim against insurers, where the insureds “sought discovery from the insurers’ claims handler, non-party Resolute Management, Inc. by way of a 30(b)(6) subpoena. The 30(b)(6) subpoena sought information related to Resolute’s corporate relationships and structure and its operating protocols and business practices.

Resolute moved for a protective order and to quash the 30(b)(6) subpoena claiming that the information sought regarding its corporate relationships and business practices was irrelevant to the plaintiff’s claims against its insurers for bad faith.” Resolute argued “that its operating protocols and business practices were irrelevant to the plaintiff’s allegations….”

The Pepsi Court “noted that [t]o show bad faith, as opposed to mere negligence ‘a review of the policies and procedures of the companies in order to determine whether those policies instructed claims handlers to act in bad faith or provided them with an incentive structure that led to bad faith action is necessary,”

“Accordingly, in light of the plaintiff’s contention that the reinsurance relationship between the plaintiff’s insurers and Resolute and their claims handling practices may have resulted in the bad faith denial of the plaintiff’s claims, the [Pepsi] court found that the plaintiff had provided sufficient evidence of the relevance of the information sought by the subpoena and allowed the plaintiff to obtain discovery regarding Resolute’s corporate relationships and structure and its operating protocols and business practices.”

The present Court followed the Pepsi opinion, and agreed with the insureds’ position in concluding “that Defendant has demonstrated the requisite relevance of the information it seeks to its claims in this matter. In this case, Defendant claims that once Resolute became Plaintiffs’ third-party administrator, Defendant received improper and unexplained retrospective premium notices from Resolute and a letter from Resolute ‘abruptly’ denying coverage for a claim which Plaintiffs had long been providing coverage. …. Because Defendant’s bad faith claims against Plaintiffs result from conduct which arose when Resolute began handling Defendant’s claims, Defendant claims that the corporate relationships between Plaintiffs, Resolute, NICO and Berkshire Hathaway, and the corporate practices of these entities as they relate to Resolute’s claims handling practices is relevant to Defendant’s bad faith claim against Plaintiffs.”

Thus, “discovery into the corporate relationships between Resolute and Plaintiffs and Resolute as its affiliates, along with Resolute’s claims handling practices and operating protocols, is relevant to Defendant’s claims and defenses in this matter.” The Court went to limit that discovery: “However, while the Court will permit discovery into Resolute’s corporate relationships and general practices, Defendant’s requests must be narrowed to seek such information only as relevant to the claims in this matter.”

The Court found that the insurer failed to articulate the specific harm it would suffer if it complied with the insured’s subpoena, so its motion for a protective order was denied. Similarly, the Court also limited the scope of the insured’s discovery against the insurer to relevant information.

Date of Decision: December 19, 2017

Continental Casualty Co. v. J.M. Huber Corp., No. 13-4298 (CCC), 2017 U.S. Dist. LEXIS 208182 (D.N.J. Dec. 19, 2017) (Clark, III, M.J.)

 

NOVEMBER 2017 BAD FAITH CASES: FIRST PARTY BAD FAITH CLAIM POSSIBLE EVEN IF NO CONTRACT OF INSURANCE BETWEEN INSURED AND AN INSURER MERELY SERVICING POLICY, ANALOGIZING TO DUTIES IMPOSED ON AGENTS (New Jersey Federal)

Print Friendly, PDF & Email

The insureds were homeowners who suffered property damage. “They were insured under a Prestige Home Premier Policy, issued by Fireman’s Fund, underwritten by National Surety, and serviced by ACE American.” The insureds alleged they reported the claim promptly, and interacted with representatives of the various insurer defendants for 20 months, but did not receive full payment on their claim. ACE sought to dismiss the breach of contract and bad faith claims on the basis that it did not issue any insurance policy, but rather National Surety was the insurer.

The court would not dismiss the complaint. First, it remained unclear on the face of the pleading if there was some kind of contract with ACE. The more interesting holding was that a potential bad faith claim could exist even if there were no insurance policy issued by ACE, rejecting the argument that “without a contract there can be no claim for bad faith.” The court specifically did not accept the argument that any cause of action can only arise out of the implied contractual duty of good faith and fair dealing.

The court looked to the leading first party bad faith case of Pickett v. Lloyds. The court ruled, “Pickett itself … seems to contemplate a bad faith cause of action against a party other than the primary insurance company. Indeed, it reasoned that because an agent owes a duty to the insured, the insurer must ‘owe[] an equal duty.’” It referenced Picket as “affirming a jury award where the jury found the insurer’s agent liable ‘for a lack of good faith and fair dealing outside of its agency relationship with Lloyd’s [the insurer]’ and stating that ‘[a]gents of an insurance company are obligated to exercise good faith and reasonable skill in advising insureds’”

Thus, the court held that “[e]ven if the [insureds] fail to establish the existence of a contract with ACE American, their bad faith cause of action may still be viable.”

Date of Decision: October 20, 2017

Fischer v. National Surety Corp., Civ. No. 16-8220 (KM) (MAH), 2017 U.S. Dist. LEXIS 174267 (D.N.J. Oct. 20, 2017) (McNulty, J.)

JULY 2017 BAD FAITH CASES: INSURER ONLY OWES FIDUCIARY DUTY IN LIMITED CIRCUMSTANCES, AND ORDINARY CONTRACT DISPUTE CANNOT CREATE THAT DUTY (New Jersey Federal)

Print Friendly, PDF & Email

This case involved a detailed three-year history concerning a dispute over what coverage the insured paid for, wanted or had. There were no claims against the insured or losses involved. The insured brought numerous claims, including a breach of fiduciary duty claim.

In dismissing that claim, the court observed that there are circumstances in which an insurer owes a fiduciary duty, but these circumstances are limited. Thus, “an insurer acting as an agent to the insured when settling claims owes a fiduciary duty,” and “an insurance company owes a duty of good faith to its insured in processing a first-party claim.”

However, “absent ‘special circumstances’ a claim for fiduciary duty cannot survive.” The court cited case law for the proposition that: “[A]bsent a special relationship, parties operating in the normal contractual posture, not as principal and agent, are typically not in a fiduciary relationship.”

In this case, the insured did not “allege anything to suggest the relationship between Plaintiff and Defendants exceeds an ordinary contractual relationship. Plaintiff’s basis for finding a fiduciary relationship is essentially that he was insured by the Defendants.” There was no first party of third party claim. “Therefore, Plaintiff and Defendants never had the occasion to enter into a fiduciary relationship.”

This claim was dismissed without prejudice.

Date of Decision: June 22, 2017

Degennaro v. American Bankers Insurance Company of Florida, No. 3:16-cv-5274-BRM-DEA, 2017 U.S. Dist. LEXIS 96372 (D.N.J. June 22, 2017) (Martinotti, J.)

NOVEMBER 2016 BAD FAITH CASES: NO BAD FAITH WHERE HIGHER UM/UIM LIMITS ALLEGEDLY NOT EXPRESSLY OFFERED AT THE TIME LIABILITY LIMITS WERE INCREASED (Third Circuit, New Jersey)

Print Friendly, PDF & Email

The insured alleged a breached the implied covenant of good faith and fair dealing in this UM/UIM context. There were 4 putative bases pleaded, all of which the Third Circuit rejected in affirming dismissal of this claim: failure to offer the insureds the option of higher available UM/UIM coverage limits when the insureds increased their coverage limits (ii) using unlicensed agents to sell insurance with the increased coverage limits, and so using agents unaware of their obligation to so advise insureds of higher UM/UIM limits (iii) failing to provide CSFs and Buyer’s guides after insureds purchased increased liability limits, and (iv) denying the UM/UIM claims based on the reduced limits.

The insured had to show that the insurer either “act[ed] in bad faith or engage[d] in some other form of inequitable conduct in the performance of a contractual obligation.” The covenant of good faith and fair requires that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” The covenant is “an independent duty and may be breached even where there is no breach of the contract’s express terms”.

The insured failed to allege with sufficient particularity how the insurer “fail[ed] to act in good faith by offering UM/UIM coverage limits up to the increased BIL coverage limits.” The insured also failed to sufficiently allege how insurer engaged in “inequitable conduct in the performance of [their] contractual obligation” to her. Thus, the dismissal was affirmed.

Date of Decision: October 31, 2016

Ensey v. GEICO, No. 15-1933, 2016 U.S. App. LEXIS 19562 (3d Cir. Oct. 31, 2016) (Ambro, McKee, Scirica, JJ.)

MARCH 2016 BAD FAITH CASES: (1) BAD FAITH CLAIM FOR FAILURE TO COMMUNICATE SETTLEMENT DEMANDS WITHIN POLICY LIMITS REQUIRE SAME PROOF UNDER PENNSYLVANIA OR NEW JERSEY LAW; (2) POTENTIAL LOWER STANDARD FOR PUNITIVE DAMAGES IN PENNSYLVANIA NOT A BASIS TO DISMISS CLAIM; (3) ACTIONABLE CLAIM AGAINST AN INSURER’S MANAGING AGENT FOR CONTRIBUTION (New Jersey Federal)

Print Friendly, PDF & Email

In Allegheny Plant Services v. Carolina Casualty Insurance Company, the insured was subject to personal injury tort claims. The carrier provided defense counsel, and the case went to trial.  The jury verdict exceeded policy limits by nearly $700,000.  The insured brought suit against its insurer for failing to settle and/or inform the insured that there was an opportunity to settle within policy limits.  The insurer also sued appointed defense counsel.  Defense counsel joined the insurer’s agent that was allegedly engaged to monitor and manage the defense litigation, on a theory that the agent knew the policy limits and failed to manage the litigation prudently.

Although the case was transferred to New Jersey, the insured brought a Pennsylvania statutory bad faith claim against the insurer. The insurer sought to dismiss that claim on summary judgment. The court denied that motion.  Likewise the court denied the managing agent’s motion to dismiss defense counsel’s claim for contribution.

The court applied a conflict of laws analysis on the bad faith claim. Although New Jersey’s insurance bad faith claim is based in common law (the “fairly debatable” standard), not statute, the basic standards of proof are the same:  the lack of a reasonable basis to deny benefits, and a knowing or reckless disregard of that fact in denying benefits. The court observed that Pennsylvania’s courts had rejected proof of self-interest or ill-will as a third element.

The court then addressed the potential conflict between Pennsylvania’s right to punitive damages under the Bad Faith statute, and New Jersey’s general statute on punitive damages. It found a lack of clarity in the law on when punitive damages may be allowed under Pennsylvania’s Bad Faith statute, i.e., can punitive damages be awarded solely on a finding of statutory bad faith, and is that a different, lower, standard than an award of traditional punitive damages?

The court then stated: “I find it plausible that Pennsylvania would permit, if not require, a punitive damages award based on a bad faith verdict. Such a verdict, however, would have to carry within it the factual basis for a traditional award of punitive damages. Otherwise, punitive damages would be awarded in every bad faith case; if that had been intended, I would have expected a much clearer legislative statement to that effect. At any rate, such a conflict as to punitive damages—even if it existed—would not require me to dismiss Count 3, the relief sought here.”

Without resolving this critique of Pennsylvania law, the court went on to observe that should this issue arise at trial, Pennsylvania and New Jersey law could apply to proving bad faith, as both state’s laws are identical on that issue.  And, if it came down to it at trial, the parties could again move to determine which state’s law applied to punitive damages. Thus, there was still no basis to dismiss the case under either state’s law. Further, were there a true conflict, the court concluded that Pennsylvania law would apply; which would seem to resolve the punitive damages issue, but the court appeared to leave that open up to the time of trial.

As to the managing agent’s motion to dismiss, the court observed that the key to a viable claim for contribution among joint tortfeasors  is “common liability to the plaintiff at the time the cause of action accrued.” The court found that defense counsel’s third party complaint against the alleged agent adequately set forth a claim that that the managing agent contributed to a unitary injury suffered by the insured. Factual issues concerning the ability to control the defense, and the alleged agent’s contractual relations with the insurer, among other things, could not be disposed of at the motion to dismiss stage.

Date of Decision:  March 17, 2016

Allegheny Plant Servs. v. Carolina Cas. Ins. Co., No. 14-4265, 2016 U.S. Dist. LEXIS 35189 (D.N.J. Mar. 17, 2016) (McNulty, J.)

SEPTEMBER 2015 BAD FAITH CASES: COURT (1) FINDS CLAIM FOR BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING SUBSUMED IN COUNT FOR BAD FAITH; AND (2) DISMISSES DEMANDS FOR PUNITIVE DAMAGES AND ATTORNEY’S FEES IN FIRST PARTY BREACH OF CONTRACT/BAD FAITH CASE (New Jersey Federal)

Print Friendly, PDF & Email

In Gilliam v. Liberty Mutual Fire Insurance Company, the insureds brought claims for breach of contract, breach of the covenant of good faith and fair dealing, and bad faith denial of insurance benefits after the insureds’ home suffered damage caused by Hurricane Sandy.

The insureds alleged that the insurer “improperly adjusted the claims” and “wrongfully denied at least a portion of the claim without adequate investigation.” The insureds further claim that they were underpaid for damages caused by Hurricane Sandy, and also alleged that the insurer “failed to affirm or deny coverage for their losses within a reasonable time period.”

The insurer sought to dismiss the breach of the implied covenant of good faith and fair dealing claim “on the ground that the claim is subsumed within [the insureds’] bad faith claim set forth in the third count of the complaint.”

The District Court stated that the New Jersey Supreme Court “has recognized a cause of action for, and established the applicable standard governing, an insurance company’s bad faith refusal to pay a claim pursuant to a policy of insurance.” In a case in which the insured brought an action against its insurance carrier, claiming breach of the implied covenant of good faith and fair dealing for failing to timely pay the insured’s claim, the New Jersey Supreme Court had found that the bad faith cause of action rested upon the implied covenant of good faith and fair dealing, which is “to be implied in every contract.”

Thus, the present District Court decision found that any analysis relevant to the determination of the insureds’ claim for breach of the implied covenant of good faith and fair dealing would be implicitly incorporated into the bad faith cause of action, and it dismissed this claim.

The District Court next addressed whether “punitive damages may be assessed against an insurance carrier for the allegedly wrongful withholding of insurance benefits.” In making this determination, the Court pointed to New Jersey case law for the proposition that punitive damage awards are prohibited in contract actions absent a special relationship between the parties. This “special relationship” exception has been narrowed to the extent that “an insurer’s task of determining whether the insurance policy provided coverage of an accident cannot be deemed to give rise to … a [fiduciary] duty on the part of the insurer.”

Rather, “[t]he parties, in this respect, are merely dealing with one another as they would in a normal contractual situation. They are not acting as principal and agent.”

In the present case, the insureds failed to plead facts that would show such egregious, intolerable, or outrageous conduct that would be sufficient to support an award of punitive damages. Further, the case was a first party insurance claim, which “cannot support a finding of a fiduciary relationship sufficient to invoke the special relationship exception to the general rule prohibiting punitive damage awards in actions of this form.”

Thus, there was no more than a breach of contract action, which lacked “in both aggravated circumstances and facts indicative of a fiduciary, or agent-principal, relationship between the parties,” and the Court dismissed the claim for punitive damages.

The Court also rejected the insureds’ claim for attorney’s fees because the matter involved a first party claim for which counsel fees may not be recovered.

Date of Decision: September 25, 2014

Gilliam v. Liberty Mut. Fire Ins. Co., CIVIL NO. 14-cv-00361, 2014 U.S. Dist. LEXIS 184510 (D.N.J. September 25, 2014) (Sheridan, J.)

This opinion is virtually identical to the decision in Torres v. Liberty Mutual Fire Insurance Company

MARCH 2015 BAD FAITH CASES: NO BAD FAITH UNDER “FAIRLY DEBATABLE” STANDARD WHERE DISPUTE EXISTED OVER MATERIAL FACT; INSUREDS DEEMED TO HAVE RECEIVED POLICY SO LONG AS THEIR BROKER RECEIVED IT (New Jersey Federal)

Print Friendly, PDF & Email

In Dooley v. Scottsdale Insurance Company, the insured homeowners suffered a flood in their home from a frozen/burst piping system, during a nearly four week hiatus from their home in December. There was a dispute of fact over whether the insureds turned off their heat, or left the thermostat on at a low temperature, to prevent the pipes from bursting. There was policy exclusion for freezing pipes, with an exception, however, where the insured used “reasonable care to: (a) Maintain heat in the building….”

The insurer conducted an investigation, including obtaining and reviewing the electric (heating related) bills during the month at issue; and an expert analysis as to whether the pipes could have frozen even if the thermostat was left at the lowest functioning temperature (he concluded they could not have frozen).  The company refused the claim and the insured brought a bad faith claim, among others.

In addressing the argument that coverage had to be provided because the carrier allegedly never provided a copy of the policy to the insureds, the court found against the insureds.  It held that the insureds were “in constructive receipt of the full policy as a matter of law when … their retail agent, received a copy….” Thus, the Court did not have to address the argument. Citing prior case law, “while ‘[i]nsurance companies have an obligation to supply insureds with a copy of their policy,’ … under New Jersey law, [the insureds] need not have received the entire policy directly to be bound by its terms. That [their broker] received the full policy is sufficient.”

Thus, “’[t]he delivery of information by an insurance company or insurance intermediary to the broker of the insured is tantamount to providing that information to the insured.”

On the issue of summary judgment under the policy exclusion based on the expert testimony concerning the thermostats, the court found there was a dispute of fact, taking the facts most favorably the insured.  The insured husband claimed he set thermostat on low. If this were the case, per the defense expert, freezing should not have occurred; and the insureds took reasonable steps to prevent it in this factual scenario.

The jury would have to decide this set of facts against the defense expert’s testimony that the pipes could not have burst if the thermostat were even set low.

This same finding, however, permitted summary judgment for the insurer on the bad faith claim. Under New Jersey law, in the first party context, “’[t]o show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. …. If a claim is ‘fairly debatable,’ no liability in tort will arise.’”

Under the fairly debatable standard, “a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.” Where “’factual issues exist as to the underlying claim (i.e., questions of fact as to whether plaintiff is entitled to insurance benefits-plaintiff’s first cause of action), the Court must dismiss plaintiff’s second cause of action-the “bad faith” claim.’”

In this case, there was a genuine dispute of material fact as to whether the insureds left the thermostats on before they departed, thus precluding any potential bad faith claim.

Date of Decision:  February 18, 2015

Dooley v. Scottsdale Ins. Co., CIVIL ACTION NO. 12-1838 (JEI/KMW), 2015 U.S. Dist. LEXIS 19140 (D.N.J. February 18, 2015) (Irenas, J.)

JULY 2014 BAD FAITH CASES: INSURER’S MOTION TO DISMISS HOSPITAL’S BAD FAITH BREACH OF CONTRACT CLAIM DENIED (New Jersey Federal Court)

Print Friendly, PDF & Email

The plaintiff/counterclaim-defendant insurer brought claims against defendant/counterclaim-plaintiff hospital for failure to require patients to pay certain out-of-pocket expenses. The insurer originally brought a claim alleging that the hospital had violated ERISA by refusing to charge the expenses to patients. The hospital counterclaimed, alleging the insurer failed to reimburse the hospital for care given to its insureds.

In its counterclaim, the hospital alleges that, through an agent, the insurer entered into an oral agreement with the hospital in which the insurer waives its right to audit the hospital in exchange for a substantially discounted rate. The insurer alleges that it later discovered that the hospital was not charging patients co-insurance in accordance with a cost-sharing plan between them. After the hospital declined to charge these costs to patients, the insurer stopped paying for patient care.

The hospital, however, contends that it was never required to initiate a cost-sharing plan, but did so under pressure from the insurer. Further, the hospital states that the insurer withheld coverage pending an audit which was allowed by the hospital in contravention to its prior discount agreement. The insurer brought suit against the hospital, alleging fraud, unjust enrichment, and ERISA violations. The hospital countersued, claiming breach of contract, breach of the implied covenant of good faith and fair dealing, and common law fraud.

In considering the insurer’s motion to dismiss the hospital’s claim of breach of the implied covenant of good faith and fair dealing, Judge Martini found that the hospital’s complaint satisfies the pleading standards set forth in F.R.C.P. 8(a).

The court stated that, in New Jersey, “the implied covenant of good faith and fair dealing is inherent in every contract, and requires that neither party shall do anything which would have the effect of destroying or injuring the right of the other party to receive the full fruits of the contract . . . “

Further, a plaintiff must allege bad faith in order to prevail on a claim for breach of the covenant.

The court found that the hospital’s allegations regarding the oral agreement with the insurer’s agent, although unlikely, did state a valid claim for breach of the implied covenant if viewed in the light most favorable to the hospital. The court rejected the insurer’s arguments that the alleged oral agreement was a “re-pricing agreement” instead of a contract, and that the alleged contract was between the hospital and the agent, not the insurer.

The insurer also alleged that the hospital had failed to plead bad faith; however, the Court found that allegation that the insurer agreed to pay the claims after finishing the audit but failed to do so was a sufficient to survive a motion to dismiss.

The Court denied the insurer’s motion to dismiss the breach of contract and breach of the implied covenant. The Court did grant the motion with regard to the fraud claim, but gave the hospital leave to amend.

Date of Decision: June 11, 2014

Connecticut General Life Insurance Company v. Roseland Ambulatory Surgery Ctr., 2014 U.S. Dist. LEXIS 79189, No. 2:12-05941  (D.N.J. June 11, 2014) (Martini, J.)