Archive for the 'NJ – Cooperation with insurer' Category

NO BAD FAITH WHERE COVERAGE AND CLAIM HANDLING CONDUCT WERE “FAIRLY DEBATABLE”; CFA INAPPLICABLE TO COVERAGE CLAIMS (New Jersey Federal)

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This case involves a fire damage claim to plaintiffs’ home.  This was the seventh fire in plaintiffs’ home.  The carrier denied coverage based on various theories, such as fraud in the application and during the investigation process, failure to cooperate, and alleged arson against plaintiffs.  Plaintiffs sued for breach of contract, violation of New Jersey’s Consumer Fraud Act (CFA) and bad faith.  The carrier moved for summary judgment on all claims.

Philadelphia Federal Judge Joel Slomsky was sitting by designation in this New Jersey Federal Action.  He denied summary judgment on the breach of contract claim, as disputes of fact remained for the jury on the above-referenced issues concerning the fire and insurance application; but he granted summary judgment on the CFA and bad faith claims.

Consumer Fraud Act Inapplicable

The CFA claim failed as a matter of law. Judge Slomsky observed, “New Jersey courts have consistently held that the Consumer Fraud Act does not apply to initial coverage.”  Here, the “case involves an initial coverage dispute based on Defendant’s denial of Plaintiffs’ fire loss claim. … Moreover, the record is devoid of any evidence of fraud by Defendant.”

Conduct in Coverage Denial and Claim Handling Fairly Debatable

New Jersey recognizes actionable insurance bad faith for both claim handling and coverage denial.  Coverage denial requires predicate proof that the claim denial was unreasonable.  Plaintiffs bad faith claims based on coverage denial and claim handling were fairly debatable as to their reasonableness, and thus bad faith could not exist.

Judge Slomsky observed, “if determining whether the insurer lacked a reasonable basis for denying a claim is ‘fairly debatable,’ then the insured cannot prevail on a bad faith claim. … In other words, if an insured cannot succeed on their substantive claim at summary judgment, then they cannot succeed on a bad faith claim premised on an insurer’s denial of coverage.”

The same “fairly debatable” standard applies to delays in claim handling.  “The insured must show that there was ‘no valid reason to delay and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.’ … But if the insured cannot succeed on summary judgment for its substantive claim, then it cannot prevail on a bad faith claim based on delay.”

Judge Slomsky already held that the breach of contract/coverage denial claim could not be decided on summary judgment because there were factual disputes.  “As a result, Plaintiffs “cannot establish as a matter of law a right to summary judgment” on their substantive claim, and ‘cannot succeed on [their] claim for bad faith[.]’”

Date of Decision:  August 9, 2021

Bui v. Mid-Century Insurance Company, U.S. District Court District of New Jersey No. CV 19-20053, 2021 WL 3486896 (D.N.J. Aug. 9, 2021) (Slomsky, J.)

INSUREDS HAD ONGOING DUTY TO COOPERATE, AND TO PROVIDE DOCUMENTS AND SUBMIT TO EXAMINATION UNDER OATH IN THIRD PARTY CASE, EVEN AFTER SETTLEMENT (New Jersey Federal)

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The insureds were attorneys sued by an insurance carrier. The insured attorneys sought coverage from their own professional liability carrier, and the malpractice carrier asserted no coverage was due. The attorneys/insureds and the professional liability carrier each sought a declaration in their favor on coverage.

The insureds won an early summary judgment ruling form a magistrate judge that the professional liability carrier had a duty to defend. The magistrate judge denied the professional liability carrier reconsideration and permission to take an interlocutory appeal.  She did not rule on any indemnification responsibility, as the underlying suit against the attorneys remained pending.

The professional liability insurer still wanted to take an examination under oath, and the insured responded by seeking a protective order.  Initially, the magistrate judge administratively terminated the case, pending the outcome of the underlying action.

Issues arose concerning the insured’s cooperation in connection with defending the underlying suit.  The magistrate judge reopened the case, ruling that an examination under oath should go forward, that the insureds had a duty to cooperate under the professional liability policy, and that the insureds were not entitled to defense costs during periods of non-cooperation.

The present decision involves an appeal to the District Court from the magistrate judge’s order.

The magistrate judge found the insureds had failed to cooperate by delaying the examination under oath, failed to respond to the professional liability carrier’s offer of defense, and failed to respond to a request for information. She held that although the insureds did not act in bad faith, their actions did appreciably prejudice the malpractice carrier.

On appeal, the District Court agreed that there had been a failure to cooperate, but this failure was not the result of bad faith. The District Court reversed, however, on the issue of appreciable prejudice, finding none. Most important, the insurer had not “irretrievably lost the opportunity to take [an examination under oath]….” Nor was the carrier “precluded from discovering facts that may weigh against coverage under the Policy.”

The District Court agreed with the magistrate judge that there was no appreciable prejudice due to the insured’s refusal to respond concerning the carrier’s providing a defense, stating: “Irrespective of whether Plaintiffs accepted or rejected the defense offer before the [underlying] suit settlement, the only issue remaining post settlement pertains to indemnification. … Thus, there can be no appreciable prejudice … for its inability to defend the [underlying] suit before it settled. Any dispute regarding Plaintiffs’ alleged failure to provide information, including defense costs, may be addressed when the indemnification issue is decided. Accordingly, because [the professional liability carrier] failed to demonstrate appreciable prejudice, it cannot disclaim coverage for Plaintiffs’ noncooperation under the Policy.”

The District Court affirmed the magistrate’s ruling that there was no defect in the malpractice carrier’s reservation of rights.

Likewise, the District Court upheld the magistrate’s decision that the carrier was entitled to the examination under oath, and finding a failure to cooperate. First, the right to take the examination had not been waived. Nor was the request for the examination unreasonable or unfair: “For the reasons already stated, [the] ROR was proper after this Court determined that [the underlying] suit triggered a duty to defend and reserved on the issue of indemnification. It would defy logic to find that [the professional liability carrier] has a duty to defend and properly reserved its rights as to liability yet preclude an EUO to investigate the underlying claims pursuant to the Policy.”

Finally, simply settling the case did not end the insured’s obligations to cooperate under the policy, which expressly provided the insurer with the right to take an examination under oath.

Date of Decision:  September 23, 2020

Karzadi, v. Evanston Insurance Company, U.S. District Court District of New Jersey No. 17-5470 SDWCLW, 2020 WL 5652442 (D.N.J. Sept. 23, 2020) (Wigenton, J.)

NOVEMBER 2012 BAD FAITH CASES: COURT AFFIRMS TRIAL COURTS RULING THAT PREJUDICE TO CARRIER WARRANTED FORFEITURE OF COVERAGE BY INSURED (New Jersey Appellate Division)

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In Demasi v. Lexington Ins. Co., an insured appealed the trial court’s grant of summary judgment to its carrier in a coverage and bad faith suit brought by the insurer. The dispute stemmed from a fire at a property owned by the insured. After discovering the fire, the insured made a claim for benefits under a homeowner’s policy purchased from the carrier. During the litigation, the insured was required to provide a variety of documents to the carrier, but it failed to oblige the request. The carrier had requested specific documents because it suspected that arson had occurred at the insured property.

The insured’s failure to produce the requested documents resulted in a breach of a policy provision requiring him to cooperate with the carrier. As such, the trial court granted the carrier’s summary judgment motion because the insured failed to comply in good faith with the discovery requests. The appellate court affirmed the trial court’s findings, reasoning that the carrier had suffered an “appreciable prejudice,” warranting a forfeiture of coverage by the insured.

Date of Decision: July 23, 2010

Demasi v. Lexington Ins. Co., NO. A-3206-08T3, 2010 N.J. Super. Unpub. LEXIS 1762, New Jersey Superior Court – Appellate Division (App.Div. July 23, 2010) (Axelrad and Espinosa, JJ.)