Archive for the 'NJ – Bifurcate/Sever & Stays' Category

NEW JERSEY FEDERAL COURT GIVES OVERVIEW OF THE LAW IN GRANTING MOTION TO SEVER AND STAY BAD FAITH CLAIM (New Jersey Federal)

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This New Jersey federal case involved breach of contract and bad faith claims. The carrier successfully moved to sever and stay the bad faith claims.

General Bad Faith Principles

The court first stated general principles of New Jersey bad faith law.

  1. “A breach of the implied covenant of good faith and fair dealing, which is synonymous with a bad faith claim, focuses on the conduct of the insurer in its review and processing of a claim under an existing policy.”

  2. “It is a distinct cause of action from a policyholder’s breach of contract claim against an insurer.”

  3. “The breach of insurance contract claims concern policy coverage while bad faith claims concern the insurer’s general claims handling procedures, its claims conduct in the case at issue, and its knowledge and state of mind about the grounds for denial of coverage.”

  4. “Coverage is a necessary precondition to maintaining a bad faith claim predicated on a denial of benefits.”

  5. If the insured is unable to establish a right to the coverage claimed, the bad faith claim must be dismissed.”

  6. “Beyond the mere existence of coverage, ‘the plaintiff must show that no debatable reasons existed for denial of the benefits.’”

  7. “Under the ‘fairly debatable’ standard, ‘a claimant who [cannot] establish[] as a matter of law a right to summary judgment on the substantive claim [cannot] . . . assert a claim for an insurer’s bad faith refusal to pay the claim.’”

  8. “In other words, ‘a question of fact permits an insurer to ‘fairly debate’ an insured’s claim.’”

  9. “If 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.”

  10. To ultimately prevail, the plaintiff must also establish ‘the defendant’s knowledge or reckless disregard of the lack of a reasonable basis in denying the claim.’”

  11. “Bad faith can take the form of more than just improper denial of benefits.”

  12. “In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.”

  13. “Although the ‘fairly debatable’ and ‘unreasonable delay’ tests apply in different circumstances, the analysis under both formulations is essentially the same.”

General Principles Concerning Severing and Staying Claims

  1. “Severing claims under Rule 21 is appropriate where the claims to be severed are discrete and separate in that one claim is capable of resolution despite the outcome of the other claim.”

  2. “The effect of ordering severance is to separate the claims into ‘independent actions with separate judgments entered in each.’”

  3. “On the other hand, this Court can bifurcate claims for discovery and trial pursuant to Rule 42(b).”

  4. “Courts consider the same factors in deciding a motion to sever under Rule 21 as they do in resolving a motion to bifurcate under Rule 42(b).”

  5. “Courts consider the following prior to making this discretionary determination:

(1) whether the issues sought to be tried separately are significantly different from one another,

(2) whether the separable issues require the testimony of different witnesses and different documentary proof,

(3) whether the party opposing the severance will be prejudiced if it is granted, and

(4) whether the party requesting severance will be prejudiced if it is not granted.”

Applying Law to the Facts in a Bad Faith Case

The court observed “that [because] the ‘fairly debatable’ standard necessitates a ruling on coverage prior to the adjudication of a bad faith claim, courts in this district have opined that it is ‘[n]o surprise, then, that severance and stay of bad faith claims has been called the ‘prevailing practice’ in both the state and federal courts of New Jersey.’” Anticipating the outcome here, the court added that “[i]t is common practice in both state and federal court to sever breach of insurance contract claims from bad faith claims . . . and . . . [to] proceed[] with the bad faith claims [only] if necessary following the adjudication of the contract claim.” (internal quotation marks omitted).

Specifically, in this case, the court found:

The bad faith claim was significantly different than the contract claim.

  1. The bad faith claim goes to the carrier’s state of mind.

  2. By contrast, the carrier’s “intent is wholly irrelevant to the otherwise straight-forward questions” concerning payments due from the carrier under the contract.

  3.  Bad faith discovery will distract from, and “undoubtedly delay, the resolution of the primary focus of the case, i.e., whether plaintiff’s . . . claim should be paid.”

  4. Here, the court first has to resolve coverage, and even if there is coverage, it “can only reach the bad faith claim if it finds that there are no factual issues pertaining to Plaintiffs’ entitlement to coverage ….”

Thus, “[d]iscovery on the bad faith claim should therefore wait until the question of coverage is resolved.”

The bad faith claim and contract claim involve different discovery.

  1. First, the court agreed with the majority of prior precedent that “bad faith claims regularly demand different witnesses and documentary proof from breach of contract claims.”

  2. For example, “’[d]iscovery relating to claims personnel, claims handling procedures and guidelines, and best practices is not directly relevant to the contract claims …, [e.g.,] ‘classic bad faith discovery such as information concerning defendant’s claims handling policies and procedures, and the experience and work evaluations of its claims personnel . . . is irrelevant to plaintiff’s . . . breach of contract claims’”

  3. In this case, the insureds wanted discovery of the insurer’s: entire underwriting file; claims manuals concerning the coverage subject at issue; information and documents regarding policy underwriting, drafting, selling, pricing, issuing, preparing, delivering or assembling the policy; and information and documents regarding the carrier’s decisionmaking in not making certain payments under the policy.

  4. The court found these “categories of documents … largely irrelevant to the breach of contract claims, which hinge on whether the parties abided by the terms of the Policy.”

There is no prejudice in granting a stay and severance.

  1. The prejudice issue is “ultimately one of judicial economy.”

  2. In this case, “the expedient resolution of the breach of contract claim best serves the interests of both parties as the expansive and contentious discovery necessitated by the bad faith claim may distract from the coverage questions at the foundation of this case.”

  3. Thus, the coverage claim should be the initial focus.

  4. Defendant would suffer significant expenditures of time and money, which could be rendered unnecessary if it prevails on coverage.

  5. Further, “[i]t promotes judicial economy and efficiency by holding in abeyance expensive, time-consuming, and potentially wasteful discovery on a bad faith claim that may be rendered moot….”

Date of Decision:  June 2, 2020

J. Fletcher Creamer & Son, Inc. v. Hiscox Insurance Co., U.S. District Court District of New Jersey Civil Action No. 19-21638 (ES) (MAH), 2020 U.S. Dist. LEXIS 96986 (D.N.J. June 2, 2020) (Hammer, J.)

 

 

 

COURT GRANTS SUMMARY JUDGMENT ON STAYED BAD FAITH CLAIM ONCE IT WAS DETERMINED COVERAGE WAS NOT DUE (New Jersey Federal)

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Today’s post gives insurers some practical guidance on how to address dismissal of a stayed bad faith claim, upon the court’s determining no coverage is due.

This New Jersey federal decision puts an interesting twist on yesterday’s post summarizing a New Jersey federal ruling staying a bad faith claim pending the outcome of the insured’s coverage case. In yesterday’s post, the court severed and stayed the bad faith claim, awaiting the outcome of the coverage case. In today’s post, the court had already severed and stayed the bad faith claim awaiting the outcome of the coverage case.

The case had now reached the summary judgment stage. The insurer not only moved for summary judgment on coverage, however, but also moved for summary judgment on the severed and stayed bad faith claim. The court granted the insurer summary judgment on coverage, and on the otherwise stayed bad faith claim.

The insured purchased homeowners insurance that only covered claims if the property was owner occupied. Here, the insured rented out the property, and a fire loss occurred while the property was tenant occupied. The court ruled the policy language precluded coverage. It also rejected an equitable estoppel argument, because the insurer was unaware the property was tenant-occupied until after the fire. Thus, the court granted summary judgment on coverage.

The carrier had also moved for summary judgment on the severed and stayed bad faith claim. The insured argued that because the bad faith claim was severed and stayed, no discovery had been taken and the motion was premature. The court disagreed, finding the record sufficient to rule on the bad faith issue.

New Jersey law requires the bad faith plaintiff to “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 in denying the claim.” Further, “’[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 finding no coverage due on the breach of contract claim, the court necessarily also found the carrier had a reasonable basis to deny coverage. Thus, because the insured could not succeed on the underlying coverage claim, “the claim for bad faith cannot stand.”

Date of Decision: April 29, 2020

Rodriguez v. United Property & Casualty Insurance Co., U.S. District Court District of New Jersey Civ. No. 18-16939, 2020 U.S. Dist. LEXIS 78082 (D.N.J. April 29, 2020) (Thompson, J.)

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.)

(1) BAD FAITH CLAIM SURVIVES MOTION TO DISMISS WHERE CLAIM “HAS BEEN PRESENTED” IN THE COMPLAINT; (2) MOTION TO SEVER AND STAY DENIED WITH LEAVE TO SEEK LATER CASE MANAGEMENT ON DISCOVERY TIMING (New Jersey Federal)

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The defendant excess insurer was not notified of the claim and suit until after a jury verdict had been rendered. It denied coverage. The insured’s primary insurer paid the full verdict, and, as subrogee and assignee, brought breach of contract and bad faith claims against the excess insurer. (The complaint also brings breach of fiduciary duty claims against the insured’s broker, which are not addressed below.)

The excess insurer moved to dismiss the bad faith claim, arguing it could not be liable for bad faith because it had a reasonable basis to deny coverage. The court disagreed. It drew a distinction between adequately pleading a claim sufficient to survive a motion to dismiss, vs. adducing sufficient facts to defeat summary judgment. On a motion to dismiss, the issue is whether a “claim has been presented.” (Emphasis in original). Here, a claim had been presented in the pleadings.

The excess insurer alternatively moved to sever and stay the bad faith count. The court rejected this argument as well.

Judge Shipp ruled the bad faith claim was “not so ‘significantly different’ from the other claims … that it must be severed.” He added that the relief [the insurer] seeks—avoiding discovery into the bad faith claim—if appropriate, can be accomplished by staged discovery without severing the claim entirely.” Thus, while not severed or stayed, the insurer could raise discovery related requested to the assigned magistrate judge at the proper time.

Date of Decision: March 31, 2020

Mercury Indemnity Co. of America v. Great Northern Insurance Co., U.S. District Court District of New Jersey Civil Action No. 19-14278 (MAS) (LUG), 2020 U.S. Dist. LEXIS 56396 (D.N.J. Mar. 31, 2020) (Shipp, J.)

COURT DISTINGUISHES BAD FAITH CLAIM FROM BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING, AND REFUSES TO SEVER AND STAY THE LATTER CLAIM (New Jersey Federal)

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The insurer brought a declaratory judgment action seeking a finding of no coverage and to void the policy. The insured counterclaimed for declaratory judgment, breach of contract, and breach of the covenant of good faith and fair dealing. The insurer labeled this final count a bad faith claim, and argued such claims are routinely severed and stay. The insured argued this was not a bad faith claim, and that proving the covenant of good faith and fair dealing breach overlapped with proving the other two counts.

The court denied the motion to sever and stay the good faith and fair dealing count.

First, the court accepted that if the insured stated its claim was not a bad faith claim, then it was not a bad faith claim. It then went on to analyze the carrier’s argument that bad faith and the breach of the covenant of good faith and fair dealing were functionally equivalent, and should be treated in the same manner; again arguing bad faith claims are routinely severed and stay.

The court steadfastly disagreed for the following reasons:

(1) The insurer offered no argument opposing the insured’s position that there were no significant differences in the proofs for the “breach of fiduciary duty” claim and the other counterclaims.

(2) Because the implied covenant of good faith and fair dealing is inherent in every contract, it is intertwined with the contact claim, and these claims are not significantly different.

(3) Severing the claims might limit the insured’s ability to take discovery on the meaning of a particular phrase in the policy, and the insurer’s intent as to the meaning of that phrase. This would prejudice the insured, and could create procedural issues for the court if the insured opposed summary judgment on the ground that facts were unavailable per Rule 56(d). The court found no real prejudice to the insurer.

Lastly, if the case did go to trial, the court observed the insurer “can seek severance or bifurcation of some part of the case, although it is difficult to imagine the basis. However, at this stage, there is absolutely no basis for severance or stay, which would be unfair and grossly inefficient.”

Date of Decision: April 3, 2019

Progressive Garden State Insurance Co. v. Metius, U.S. District Court District of New Jersey Civil Action No. 18-2893 (WJM), 2019 U.S. Dist. LEXIS 57242 (D.N.J. April 3, 2019) (Falk, M.J.)

 

NEW JERSEY FEDERAL COURT OBSERVES ORDERS TO SEVER AND STAY BAD FAITH CLAIMS ARE COMMON IN NEW JERSEY STATE AND FEDERAL COURTS (New Jersey Federal)

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The carrier successfully moved to sever and stay plaintiff’s bad faith claim. The case involved a CGL policy, and the carrier’s refusal to defend and indemnify a breach of loyalty suit against the insured. The case is of some extra interest because it does not involve an underinsured motorist claim as the basis of a bad faith claim.

Magistrate Judge Mannion observed that it is common practice in New Jersey’s state and federal courts to sever and stay bad faith insurance claims, awaiting a decision on the breach of contract claim.

The court applied a four factor test: “(1) whether the issues sought to be tried separately are significantly different from one another[;] (2) whether the separable issues require the testimony of different witnesses and different documentary proof[] (3) whether the party opposing the severance will be prejudiced if it is granted[;] and (4) whether the party requesting severance will be prejudiced if it is not granted.”

Magistrate Judge Mannion referenced his earlier decision in the Legends case in support of his decision to sever and stay in this action.

First, the breach of contract claim concerns policy coverage, and the bad faith claim concerns claims handling, thus making them significantly difference.

Second, the bad faith claims call for discovery that is unnecessary to resolve the breach of contract claim, and different witnesses and documentary evidence to prove the bad faith case.

Third, where relatively little discovery has taken place, the insured is not prejudiced or denied an opportunity to pursue the bad faith claim, if successful on the breach of contract claim.

Fourth, the insurer is prejudiced if forced to litigate the bad faith claim because “the insurer would ‘suffer significant expenditure of time and money, [which would be] rendered needless if’ it were to prevail on the breach of insurance contract claim.”
Date of Decision: January 18, 2019

Spectrum Data Systems, LLC v. State Farm Insurance Co., U. S. District Court for the District of New Jersey, Civil Action No. 18-CV-10318-ES-SCM, 2019 U.S. Dist. LEXIS 9109 (D.N.J. Jan. 18, 2019) (Mannion, M.J.)

NOVEMBER 2018 BAD FAITH CASES: BAD FAITH CLAIM SEVERED AND STAYED UNDER FEDERAL RULES; BUT CONTRACT CLAIM FOR CONSEQUENTIAL DAMAGES FROM DELAY IN PAYMENT NOT STAYED (New Jersey Federal)

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Plaintiff was the beneficiary of a $1 Million life insurance policy. The carrier declined to pay benefits, and she brought 3 claims: (1) a declaration that the policy was valid and she was entitled to the proceeds; (2) breach of contract for damages resulting from delay in payment; and (3) bad faith. The carrier sought to sever the last two claims, and stay discovery, characterizing them both as bad faith claims.

The court found the delay in payment claim simply to be a contract claim for consequential damages, not bad faith in claims handling, and denied the motion on that count. The court also did not expect damage discovery to be extensive or complicated, and there would be no material benefit, or prejudice avoided, by severance and stay.

On the bad faith claim, the court recognized that stay and severance were common in bad faith cases; however, there was no automatic rule to that effect. Rather, each case is determined on its own merits. It cited to the Beachfront case for this proposition, though a stay was granted in that case due to prejudice in allowing the discovery to proceed. Similarly, in this case, plaintiff’s bad faith discovery requests were irrelevant to the underlying claims, and disproportional to those declaratory relief and contract claims.

Further, the focus of the underlying claims was whether the insured made misrepresentations when applying for insurance, whereas the focus of the bad faith case is claims handling and processes. Thus, the two types of claims and are best treated as distinct. Moreover, proof would involve different witnesses and documents. Further, there is also no prejudicial delay, as the bad faith claim could proceed promptly if plaintiff prevails on her contract claims.

Finally, the insurer would be prejudice by continuing with the bad faith discovery. It would have to undergo significant expenditure of time and money, which would be needless if it prevailed on the underlying claims.

Thus, the court severed and stayed the bad faith claim until resolution of those underlying claims.

Date of Decision: October 31, 2018

Ames v. USAA Life Ins. Co., U. S. District Court for the District of New Jersey Civil No. 18-9865 (RMB/JS), 2018 U.S. Dist. LEXIS 186315 (D.N.J. Oct. 31, 2018) (Schneider, M. J.)

 

OCTOBER 2018 BAD FAITH CASES: BIFURCATION OF BAD FAITH COUNT DENIED UNDER FEDERAL RULES WHERE CASE WAS OVER TWO YEARS OLD, ISSUES WOULD NOT BE DECIDED ON THE PLEADINGS, AND ADDITIONAL DISCOVERY REQUIRED TO MOVE TO NEXT STAGE OF LITIGATION (New Jersey Federal)

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In this complex federal case, the carrier sought to bifurcate trial and discovery on coverage and bad faith, asking the court to hold discovery in abeyance pending the coverage determination. The court declined.

“In determining whether bifurcation under Rule 42(b) is proper, ‘courts should consider whether bifurcation will avoid prejudice, conserve judicial resources, and enhance juror comprehension of the issues presented in the case.’” Applying this standard, the court found that “such considerations are not advanced by bifurcation, as this case: (1) was filed over two-and-a-half years ago; (2) will not be disposed of on the pleadings…; and (3) requires additional discovery to move on to the next stage of the litigation.”

The court found it exceedingly clear that this procedurally and substantively complex case was not going to be simplified or expedited “by holding bad faith discovery in abeyance pending a determination of coverage….” The court relied upon Magistrate Judge Clark’s opinion in National Union Fire Ins. Co. v. Becton, observing, “bifurcation of coverage and bad faith claims was not appropriate where case was pending for over three years, the case would not be disposed of on the pleadings, and discovery remained.”

Date of Decision: October 2, 2018

Ventrice v. Lexington Insurance Co., U.S. District Court District of New Jersey Civil Action No.: 2:16-cv-00660, 2018 U.S. Dist. LEXIS 169789 (D.N.J. Oct. 2, 2018) (Cecchi, J.)

AUGUST 2018 BAD FAITH CASES: OVERVIEW OF NEW JERSEY STANDARDS ON FAILURE TO SETTLE BAD FAITH AND FAIRLY DEBATABLE STANDARD; REQUIREMENT OF EXPERT TESTIMONY ON BAD FAITH; INSURED’S SETTLEMENT CONDUCT WHERE INSURER HAS DECLINED COVERAGE; SEVERANCE OF BAD FAITH CLAIMS (New Jersey Appellate Division) (Unpublished)

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This case addresses a wide array of New Jersey bad faith issues. The underlying facts involve disputed coverage and defense obligations in a suit against the insured based on the Telephone Consumer Protection Act (TCPA).

The insurer withdrew its defense based on trial court finding no coverage, which was later reversed on appeal

The insurer had been defending under a reservation of rights, but withdrew the defense when the trial court ruled no coverage was due. The underlying case proceeded. A $19 million judgment was entered on an unopposed summary judgment motion against the insured.

Subsequently, the appellate division reversed the trial court’s coverage ruling, and remanded to explore further factual issues before determining the coverage question.

The insured assigned it claims to the underlying plaintiffs, who counterclaimed for bad faith and failure to settle within policy limits, and who also intervened in the coverage dispute again alleging bad faith. Before reaching a jury in the declaratory judgment action, the court dismissed the bad faith claims “except for the count in its counterclaim that alleged [the insurer] acted in bad faith by failing to settle the underlying action at a time when it controlled that litigation and could have settled the claim within …  policy limits.”

The jury found for the insured on coverage, and the court further awarded attorney’s fees under R. 4:42-9(a)(6). The total award exceeded $5 million.

On appeal, the court went through the relevant policy language and exclusions in great detail. Among other issues addressed, it found the verdict should have been reversed on the issue of what constituted “property damage,” with a single exception, that was also the sole actionable occurrence. Thus, the judgment was significantly undermined on appeal.

Bad faith issues

The court then addressed a variety of bad faith issues. This was triggered by the insurer’s late effort on the eve of trial to renew an attempt to dismiss the bad faith failure to settle claims for failure to bring forth expert testimony to support the failure to settle claim.

The insured “objected to the untimeliness of the motion and requested an adjournment if the court was inclined to dismiss for lack of an expert.” The judge found that there was no actionable bad faith claim under the “fairly debatable standard”, and that the insured had failed to negotiate a reasonable settlement once the defense was withdrawn.

“Alternatively, the judge found that any assessment of [the insurer’s] conduct in this complex case was beyond the ken of the average juror and dismissed the bad faith failure to settle claim because [the insured] had no expert. Noting the case management order required [the insured] to furnish an expert report nearly one year earlier, she denied any adjournment and dismissed the bad faith failure to settle counterclaim.”

The Appellate Division agreed an expert was necessary, but reversed the trial court’s ruling. It found that the motion in limine was functionally a summary judgment motion that was untimely and prejudicial.

The Court then addressed the nature of New Jersey bad faith claims, and the standards applicable in first and third party contexts.

Standards for failure to settle within policy limits

The failure to settle a third party claim within policy limits is governed by the New Jersey Supreme Court’s Rova Farms decision. Because the insurer controls the settlement, it has a fiduciary obligation to exercise good faith in considering settlement. The decision not to settle within policy limits “must be a thoroughly honest, intelligent and objective” decision.

“It must be a realistic one when tested by the necessarily assumed expertise of the company. This expertise must be applied, in a given case, to a consideration of all the factors bearing upon the advisability of a settlement for the protection of the insured. While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.”

Expert needed on bad faith claim to assist jury

Rejecting a settlement by itself does not constitute bad faith. There must be “an assessment of the reasonableness of an insurer’s settlement negotiations in the underlying action” and this assessment “will likely hinge upon the credibility of fact witnesses, as well as expert testimony as to what went wrong on the settlement front and why.”

In this case, the factors were varied and complicated, and expert testimony was necessary to assist the jury in making a bad faith decision under Rova Farms and its progeny. Thus, the trial court was right on the issue that an expert was needed.

Some advice of how to handle late raised issues that will be allowed to go to trial, and the ability to sever bad faith claims

In reversing the dismissal, the appellate judges gave some practical advice to trial courts under these circumstances. Either the trial court have been adjourned to allow time to obtain the expert testimony and response, or the bad faith claim could have been severed and tried after the coverage case. The case was remanded for the trial judge to address the bad faith claim.

Some advice of using “fairly debatable” standard (Pickett) in failure to settle cases (Rova Farms)

The appellate judges then stated they would not address the issue of whether the trial judge’s fairly debatable ruling as a basis for dismissal was proper. The court then went on to discuss the interplay of Rova Farms and the Pickett fairly debatable standard at some length. It observed that the fairly debatable standard arose in the first party context, and that Rova Farms addressed failure to settle third party claims.

The Appellate Division had previously ruled that the fiduciary duty implicated in the third party failure to settle context does not exist in the first party context. However, another Appellate Division panel had ruled that the fairly debatable standard did apply in third party coverage cases (as differentiated from failure to settle cases). Thus, “[n]o reported New Jersey decision has addressed whether Pickett‘s ‘reasonably debatable’ standard applies to an insured’s bad faith refusal to settle claim.”

The Third Circuit has addressed the issue, and found that the Rova Farms’ standards, rather than the Pickett fairly debatable standards should control third party failure to settle claims.

“Whether [the insured] would be held liable for [the third-party’s] injuries was “fairly debatable,” but in the context of a third-party claim with a possibility of an excess verdict, Pickett supplies only part of the equation. The “fairly debatable” standard is analogous to the probability 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. This 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.

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.”

The present panel chose to decide the issue, though (no pun intended), it acknowledged “the appeal of the Third Circuit’s rationale. An insurer who, while exclusively controlling the litigation, acts in bad faith and refuses to settle a third-party claim within its insured’s policy limits exposes the insured to personal liability. The situation therefore presents different concerns from those posed by a suit where the insurer acts in bad faith and wrongfully denies contractual benefits to the insured under its policy of insurance.”

Failure to negotiate a settlement after coverage denial may not preclude a later bad faith claim

Finally, the panel rejected the trial court’s finding that the insured’s failure to negotiate a settlement once coverage was denied precluded the possibility of a later bad faith claim.

The court looked generally to case law concerning insured’s conduct in settling, or not settling, cases where the insurer has declined involvement on the basis it does not believe coverage is due. Insured are not required as a matter of law to settle at their own expense. Rather, “under certain circumstances, insureds could do so without violating policy terms where there has been a breach by the insurer.”

In sum, the panel reversed the bad faith claim dismissal and remanded the matter to proceed on the bad faith claim.

Date of Decision: July 31, 2018

Penn National Insurance Co. v. Group C Communications, Inc., New Jersey Superior Court Appellate Division, DOCKET NOS. A-0754-15T1 A-0808-15T1, 2018 N.J. Super. Unpub. LEXIS 1833 (N.J. App. Div. July 31, 2018) (O’Connor, Messano and Vernoia, JJ.)

 

MAY 2018 BAD FAITH CASES: BAD FAITH CLAIM SEVERED AND STAYED; SUMMARY JUDGMENT ON CONTRACT CLAIM REVERSED WHERE JUDGE FAILED TO MAKE FINDINGS OF FACT AND CONCLUSIONS OF LAW (Superior Court of New Jersey, Appellate Division)

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In this Hurricane Sandy related litigation, the insured brought claims for breach of contract and bad faith after the insurer denied coverage under a homeowner’s insurance policy pursuant to a surface water exclusion. The trial court severed and stayed the bad faith claim, and both parties moved for summary judgment on the breach of contract claim. The judge presiding over the motion proceeding granted summary judgment in favor of insurer, and denied the insured’s cross-motion for summary judgment “for the reasons set forth in [insurer’s] motion papers.” The motion judge “failed to make any findings of facts or reach any conclusions of law, as mandated by [New Jersey Rule of Court] 1:7-4(a).” The Appellate Division reversed and remanded, reasoning that “[a] trial judge is obliged to set forth factual findings and correlate them to legal conclusions[]” in accordance with the New Jersey Rules of Court.

Date of Decision: May 1, 2018

Estate of Doerfler v. Federal Insurance Co., Superior Court of New Jersey, Appellate Division, Docket No. A-3353-15T2, 2018 N.J. Super. LEXIS 69 (N.J. App. Div. May 1, 2018) (Fuentes, Manahan, and Suter, JJ.)