Archive for the 'NJ – Agents and Administrators' Category

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

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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)

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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)

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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)

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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)

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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)

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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)

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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)

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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)

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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.)

MAY 2014 BAD FAITH CASES: NEW JERSEY DISTRICT COURT FINDS THAT “FAIRLY DEBATABLE” STANDARD DID NOT APPLY IN CONTEXT OF THIRD PARTY CLAIM, WHERE INSURED ASSERTED BAD FAITH FOR FAILURE TO SETTLE WITHIN POLICY LIMITS TO AVOID AN EXCESS VERDICT (New Jersey Federal)

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In State National Insurance Company v. County of Camden, the County was sued for a serious personal injury sustained when the injured party drove off the road and into a guardrail owned and maintained by the County. After a series of events, including the jury awarding over $31 Million and the trial judge reducing the award to over $19 Million, the County eventually settled, while the case was pending on appeal, for over $15 Million.

The insurer contended that the County: delayed in notifying it of the lawsuit, repeatedly represented that the case was within the County’s $300,000 self-insured retention, made errors in investigating and defending the case, and that the County’s re-valuation of the case four days into trial breached the insurance contract’s notice provision and the adequate investigation and defense condition to coverage.

The insurer brought an action (1) seeking declaratory relief that there was no coverage; (2) claiming a breach of the duty of good faith based on the County’s alleged failure to settle the Anderson claim within the County’s self-insured retention of $300,000; and (3) claiming breach of the duty of good faith for the County’s alleged failure to tender the self-insured retention.

The County raised counterclaims against the insurer, including: (1) a claim for breach of contract (2) a claim for a declaratory judgment that there was coverage; and (3) a claim for bad faith with respect to the insurer’s handling of the underlying tort matter, thereby exposing the County to a verdict of over $20 million in excess of its policy limits.

The insurer sought summary judgment on three issues: (1) whether the insurance contract required the carrier to defend and investigate the underlying litigation; (2) the adequacy of the County’s defense and investigation of the underlying suit; and (3) whether insurer acted in bad faith or breached any duty of good faith and fair dealing.

After a lengthy analysis denying the insurer’s first two arguments on summary judgment, the court addressed the bad faith claim. This came down to an analysis on the proper bad faith standard to apply in a third party context involving an excess verdict situation, being either the “reasonably debatable” standard, as exemplified in Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (N.J. 1993), or the standard set out in Rova Farms Resort, Inc. v. Investors Ins. Co. of America, 65 N.J. 474, 323 A.2d 495 (N.J. 1974).

The County argued that the insurer never issued a coverage denial, never performed an independent coverage evaluation, refused to engage in settlement discussions, and failed to protect the County from an excessive verdict even though it knew the matter could be settled within the policy limits. The insurer argued that the County misled the insurer and did not live up to its bargain under the insurance policy.

Without going into the detail of all facts, the court concluded that there were disputed issues of fact, but then observed that it must decide the issue of law as to whether the insurer’s actions should be viewed under the “fairly debatable” standard, which requires a finding that the insurer had no debatable basis to deny coverage, and that the insurer acted with reckless disregard to the facts and proof submitted by the insured or whether the “fairly debatable” standard did not apply to the case at hand because that standard is only employed in cases involving first-party claims, rather than bad faith claims in the third party failure to settle context.

The court also noted that 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.

As noted by the court, the standard for evaluating good faith under Rova Farms is that a decision not to settle must be a thoroughly honest, intelligent and objective one, which is realistic when tested by the necessarily assumed expertise of the insurance company. Such expertise must be applied, in any given case, to a consideration of all factors bearing upon the advisability of settling for insured’s protection.

The insurer’s or its attorney’s views on liability are an important factor, a good faith evaluation under Rova Farms requires more, including consideration of the anticipated verdict range (should it be adverse); the strengths and weaknesses of all of the evidence to be presented by both sides to the extent known; the history of the particular geographic area in similar cases; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.

The court concluded that the “fairly debatable” standard did not apply to the analysis of the bad faith claim in the case before it. It observed that even though no bright-line rule was established in the case law as to whether the “fairly debatable” standard only applies to first-party claims, and there was no specific case precluding the application of that standard here, it still found that the rationale of Rova Farms was more applicable to the County’s action than the rationale of Pickett.

The court looked at both Pickett and Rova Farms in coming to its conclusion. It observed that Picket explained Rova Farms, and stated that Rova Farms held that an insured may recover more than the policy limit for a liability insurer’s bad-faith refusal to settle a third-party claim against its insured within that limit, when the refusal results in the third party obtaining a judgment against the insured that exceeds the policy limit.

The terms of a liability policy prevent the insured from settling on its own behalf except at its own expense, and thus the carrier makes itself the agent of the insured in this respect, creating an inherent fiduciary obligation.

This duty to act on the insured’s behalf means that a decision not to settle within the policy limits must be an honest one, resulting from a weighing of probabilities in a fair manner. To be a good faith decision, it must be an honest and intelligent one in the light of the insurer’s expertise in the field. Thus, where reasonable and probable cause appears for rejecting a settlement offer and for defending the damage action, the good faith of the insurer will be vindicated.

The court noted that a Rova Farms bad faith claim is a simple breach of contract claim and is a cause of action against an insurer in those instances where certain circumstances coalesce, i.e., there is a settlement demand within the policy limits, the insurer in bad faith refuses to settle the claim, and the verdict above the policy limits is returned. In that defined setting, the carrier’s bad faith failure to settle the claim within the policy limits may render the carrier liable for the entire judgment, including the excess above the policy limits.

Pickett itself, however, involved a first party claim. In that context, the court adopted a “balanced approach” to analyzing first party bad faith claims.

Thus, to 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. This was distinguished from the Rova Farms standard.

The court then cited a Third Circuit case for the proposition that although the issue of whether the insured would be held liable for the third-party plaintiff’s injuries was “fairly debatable,” in the context of a third-party claim with a possibility of an excess verdict, Pickett supplies only part of the equation.

Thus, the fairly debatable standard is analogous to the probability that liability will attach in a third-party claim, but it does not consider the likelihood of an excess verdict. A third-party claim that may exceed the policy limit creates a conflict of interest in that the limit can embolden the insurer to contest liability while the insured is indifferent to any settlement within the limit.

Such a conflict is not implicated when the insured is a first-party beneficiary, where the claimant and the insurer are in an adversarial posture and the possibility of an excess verdict is absent. Thus, Rova Farms, not Pickett, protects insureds who are relegated to the sidelines in third-party litigation from the danger that insurers will not internalize the full expected value of a claim due to a policy cap.

Applying its analysis to the facts asserted by the County, the County claimed that there was a refusal to perform an independent analysis of the underlying case or participate in preparing for trial, and after the trial was underway, there was a refusal to participate in settlement talks, even though the demand was $10 million, and the trial judge had recommended settlement in the $6 million — $8 million range, both within policy limits.

The County also alleged that counsel had been appointed for the insurer to observe the penultimate day of trial and reported that a jury verdict potential was in the $10 million to $15 million range, that a reasonable settlement value was $4 million, and that there was a small window to settle the case the next day before the jury returned its verdict.

The County argued that instead of settling within policy limits, the carrier instead focused on supporting its case to disclaim coverage under the policy based on the County’s alleged breach of the adequate defense provision.

The insurer argued that the facts should have taken this matter out of a Rova Farms analysis, and into Pickett: (1) the County maintained full control over the defense; (2) the insurer was relegated to the sidelines, (3) the insurer denied coverage on the last day of trial just before the jury returned its verdict, and (4) the County had the ability to settle the case itself.

Were there no dispute of fact on these issues, the court stated that Pickett might have applied. However, there were disputes as to the insurer’s duty to provide a defense, as to whether the County’s control over the litigation was by its own choice or was the result of necessity due to the alleged refusal of the carrier to get involved, and the County’s ability to settle on its own without input from the insurer, particularly when any proposed settlement would exceed the County’s SIR and implicate duties and obligations in the CGL policy.

Thus, in denying summary judgment, viewing the insurer’s action in the light most favorable to the County, it could be found by a jury that the insurer did not diligently seek a possible settlement to protect the larger interest of its insured, and instead focused on its own interest in its attempt to pay nothing by disclaiming coverage instead of the $10 million policy limit.

The case differed from the Pickett determination of whether the insurer had a reasonable basis for denying the County’s claim for defense and coverage under the $10 million policy, and it was instead more analogous to the Rova Farms analysis.

Date of Decision: March 31, 2014

State National Ins. Co. v. County of Camden, CIV. NO. 08-5128(NLH)(AMD), 2014 U.S. Dist. LEXIS 43229 (D.N.J. March 31, 2014) (Hillman, J.)