Archive for the 'NJ – Coverage Issues' Category


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The insurer filed a declaratory judgment action concerning first party property damage to a commercial building. The insureds counterclaimed for breach of contract and bad faith, and the insurer moved to dismiss the bad faith counterclaim.

Under New Jersey law, “to establish a claim for bad faith in the insurance context, a [claimant] must show two elements: (1) the insurer lacked a ‘fairly debatable’ reason for its failure to pay a claim, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”

“To meet the ‘fairly debatable’ standard, a claimant must be able to establish, as a matter of law, a right to summary judgment on the substantive claim; if [claimant] cannot establish a right to summary judgment, the bad faith claim fails. In other words, if there are material issues of disputed fact which would preclude summary judgment as a matter of law, an insured cannot maintain a cause of action for bad faith.” “Thus, dismissal of the bad faith claim is proper when the insured cannot prevail on summary judgment for the underlying insurance claim.”

“[A] bad faith claim against the insurance company fails at the motion to dismiss stage if the claimant cannot establish a right to summary judgment on the substantive claim.”

The case involved an alleged partial building collapse. There were issues of fact as to what caused the collapse, the resolution of which were necessary to determine coverage under the policy. There were also issues concerning policy interpretation. The insureds took the position that the insurer’s policy interpretation position was irrelevant to bad faith, rather than arguing the insurer’s position was incorrect and taken in bad faith. The court found this argument fatal to the insured’s bad faith claim.

Moreover, the court concluded the insurer’s reading of the insurance policy provided a reasonable basis to deny the claims. It stated that denying benefits on the basis there was no coverage “is the ‘easiest to understand’ why the denial of insurance claims is ‘fairly debatable.’” Thus, the insureds failed to show the insurer lacked a fairly debatable reason to deny the claim. Further, “[b]ecause this deficiency cannot be cured by further amendment or through discovery, the Court dismisses Defendants’ claim for bad faith with prejudice.” (Emphasis in original)

The court also dismissed the insured’s punitive damages claim, with prejudice, stating “an insured who cannot state a claim for bad faith damages is necessarily unable to prevail on a claim for punitive damages under the higher standard of egregious circumstances.”

Finally, the court dismissed the claims for attorney’s fees and legal costs with prejudice, under either the contract or bad faith claims. “New Jersey law does not allow awards of attorney’s fees and costs ‘to an insured who brings direct suit against his insurer to enforce casualty or other direct coverage.’”

Date of Decision: February 10, 2020

Merchants Mutual Insurance Co. v. 215 14th St., LLC, U.S. District Court District of New Jersey Civil Action No. 19-9206 (ES) (SCM), 2020 U.S. Dist. LEXIS 23664 (D.N.J. Feb. 10, 2020) (Salus, J.)


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The insured had a long-term care policy. The carrier denied coverage and the insured sued for breach of contract, bad faith, and breach of the duty to act in good faith. The trial court granted summary judgment on all counts, and the Appellate Division affirmed.

The crux of the case involved policy interpretation and the carrier’s alleged failure to review a physician letter/plan. The trial court found the policy was unambiguous, i.e., it was not susceptible to two reasonable readings of the same policy language, one of which favored the insured over the insurer. Rather, the language was clear, sufficiently prominent, and written in plain language. That language put the insured’s claims outside the policy’s coverage terms.

To the extent the physician letter may have arguably come within the policy’s coverage, the evidence showed that letter was never provided to the carrier before suit. Further, there was no other evidence showing the insurer acted unreasonably.

As to bad faith, “[t]he trial court also found that the bad faith claim failed under the ‘fairly debatable’ standard, since plaintiff could not establish the breach of contract claim as a matter of law.” As stated above, the Appellate Division affirmed on all counts.

Date of Decision: November 12, 2019

Cooper v. CNA Insurance Co., Superior Court of New Jersey Appellate Division DOCKET NO. A-4824-17T4, 2019 N.J. Super. Unpub. LEXIS 2316, 2019 WL 5884584 (App. Div. Nov. 12, 2019) (Koblitz, Mawla, Whipple, JJ.) (unpublished)


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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)


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In this case, the parties disputed the law governing the allocation of insurance coverage payments. At the end of the day, there was no actionable bad faith.

The insurer paid costs for home modifications to cover the needs of the quadriplegic insured, as well as some medical costs, both payments totaling the number provided as the policy limit. The partially paid hospital providing services to the insured asserted, however, that the insurer’s manner of allocating the funds was incorrect, i.e., the policy limits should have gone entirely to its medical costs and expenses. Thus, the hospital argued the insurer must pay additional sums for medical costs it should have paid originally, instead of paying for the home modifications.

The New Jersey Appellate Division panel agreed that the insurer properly relied upon prior Appellate Division precedent both in the manner of allocating payment, and the insurer’s refusal to pay the hospital any sums beyond its policy limits. The court stated the insurer “processed the claim in good faith for the benefit of its insured” in justifiably relying on this case law.

The court recognized that an “insurance carrier may be liable for payments even if such payment exceeds the policy’s coverage limit, if the manner in which the carrier has handled a claim evidences ‘misconduct or bad faith.’” In this case, however, the insurer “acted in good faith reliance on” controlling precedent, “which is evidenced by the fact that it actually exhausted [the insured’s] policy in paying for his necessary home modifications.” There was no evidence of misconduct or bad faith, and no damages beyond what was already paid could be awarded.

Date of Decision: June 25, 2019

Robert Wood Johnson University Hospital v. Plymouth Rock Assurance Insurance Co., New Jersey Superior Court Appellate Division DOCKET NO. A-4195-17T3, 2019 N.J. Super. Unpub. LEXIS 1453 (App. Div. June 25, 2019) (Hass, Mitterhoff, Sabatino, JJ.)


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Bad faith claims failed in two recent New Jersey cases, one in the Superior Court’s Appellate Division, and the other after removal to federal court.

Case 1:  There Can be no Bad Faith if Coverage is Not Due 

The New Jersey Superior Court Appellate Division affirmed the trial court’s ruling that there was no “property damage” as defined under the policy, because lost money is not “tangible property.” The trial court thus granted summary judgment on the coverage claim. It had also dismissed the insured’s bad faith claim.

The Appellate Division affirmed the judgment that no coverage was due. In light of the absence of any coverage duty, it found no need to address any other arguments, presumably including the bad faith claim.

Date of Decision: May 9, 2019

Estate of Louis F. Keppel v. Angela’s Angels Home Healthcare, Superior Court of New Jersey Appellate Division DOCKET NO. A-3868-17T1, 2019 N.J. Super. Unpub. LEXIS 1068 (N.J. App. Div. May 9, 2019) (Currier, Koblitz, Mayer, JJ.)

Case 2:  The Insured’s Conclusory Allegations Fail to Set Out a Plausible Bad Faith Claim

The insured brought a breach of contract and bad faith complaint against the carrier in the Superior Court, which was removed to federal court on diversity grounds. She alleged the carrier did not pay the full amount due on her water loss. No motion to dismiss the contract claim was asserted, but the insurer did move to dismiss the insured’s bad faith claim and request for punitive damages.

The bad faith count included allegations that the insurer “(1) failed to properly and promptly investigate Plaintiff’s claims; (2) denied and delayed her coverage with no debatable reason to do so; (3) violated the Unfair Claims Settlement Practices Act; and (4) unreasonably denied adjusting and paying Plaintiff’s claim.”

These allegations did not support a plausible bad faith claim under federal pleading standards. The court stated:

To allege bad faith in the insurance context under New Jersey law, a plaintiff must allege facts to plausibly suggest that the insurer (1) did not have a “fairly debatable” reason for its failure to pay the claim, and (2) that the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim. … Here, Plaintiff alleges no facts to plausibly suggest that Defendant lacked a fairly debatable reason for denying the claim or that it knew or recklessly disregarded the lack of a reasonable basis for doing so. Plaintiff simply provides bald legal conclusions in claiming that Defendant’s failure to pay amounted to bad faith. Because conclusory allegations are not sufficient, [the bad faith count] is dismissed.

Once the court dismissed the bad faith claim, there was no basis to pursue punitive damages. The only remaining claim was for breach of contract, and the rare circumstances allowing punitives damages for breaches of contract did not exist on this complaint.

Date of Decision: May 29, 2019

Johnson v. State Farm Fire & Casualty Co., U.S. District Court District of New Jersey Civil No. 18-15209 (RBK/KMW), 2019 U.S. Dist. LEXIS 89613 (D.N.J. May 29, 2019) (Kugler, J.)


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In this case, the court provides a concise and clear analysis of New Jersey’s “fairly debatable” standard in bad faith cases. If an insured cannot win summary judgment on coverage, then the claim is fairly debatable and there can be no bad faith as a matter of law.

In this disability case, medical and vocational experts disputed each other on critical points. This created issues of material fact as to whether the insured could perform in any gainful occupation; a dispute that could only be decided by a jury.   Thus, the court denied the insured summary judgment on coverage.

This necessarily made the claim “fairly debatable” for bad faith purposes, and the court granted summary judgment to the insurer on the bad faith claim.

Date of Decision: April 29, 2019

Bell v. Crown Life Insurance Co., U. S. District Court District of New Jersey Civil Action No. 3:16-cv-8006-BRM-DEA, 2019 U.S. Dist. LEXIS 79013 (D.N.J. April 29, 2019) (Martinotti, J.)


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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.)



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The insurer cancelled a workers’ compensation policy, and suit was brought for failing to meet statutory requirements to do so, along with a bad faith claim. The trial court found the cancellation proper.

The New Jersey Appellate Division reversed, and reinstated a bad faith claim for further proceedings, based on allegations that the carrier revoked coverage after failing to file a timely statutory certification, and later attempted to cure its alleged failure by backdating a form.

M&S Waste Service, Inc. v. Praetorian Insurance Co., New Jersey Superior Court Appellate Division DOCKET NO. A-4860-15T1, 2018 N.J. Super. Unpub. LEXIS 1981 (N.J. App. Div. Aug. 24, 2018) (Accurso and Messano, JJ.)



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The central discussion in this case focused on the duty to defend as distinguished from the duty to reimburse. Where there is coverage on the face of the complaint a defense must be provided, with two exceptions. If there are covered and uncovered claims, or the coverage issue is of a kind that cannot be determined through the underlying action against the insured, then the obligation to defend becomes an obligation to reimburse defense costs if it is later determined coverage was due. Thus, an insurer can reserve its rights and dispute coverage, which can turn the duty to defend into a duty to reimburse.

In this case, there was a policy exclusion with anti-concurrent and anti-sequential language, when compared to the allegations in the complaint, made it premature “to order [the insurer] to assume responsibility for the defense since it was unclear, based on the anti-concurrent and anti-sequential language in the exclusion, whether any claims would be covered.” Thus, the duty to defend became a duty to reimburse.

The insured settled the claim, and sought recovery under the Griggs rule. Under Griggs: “Where an insurer wrongfully refused coverage and a defense to its insured, so that the insured is obliged to defend himself in an action later held to be covered by the policy, the insurer is liable for the amount of the judgment obtained against the insured or of the settlement made by him. The only qualifications to this rule are that the amount paid in settlement be reasonable and that the payment be made in good faith.” The Court refused to apply Griggs to this case where a duty to deny a defense and coverage was made in good faith.

Further, the insurer did not breach its duty of good faith in the steps taken to deny the claim. There was no unreasonable delay in denying the claim, and no purported to prejudice the insured.

This opinion provides a good overview of New Jersey law on policy interpretation and coverage disputes, coverage disputes involving exclusions, and anti-concurrent/anti-sequential clauses.

Date of Decision: July 20, 2018

Wear v. Selective Insurance Co., New Jersey Superior Court Appellate Division, DOCKET NO. A-5526-15T1 A-0033-16T1, 2018 N.J. Super. LEXIS 108 (App. Div. July 20, 2018) (Koblitz, Manahan, Suter, JJ.)


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The insureds’ water heater leaked resulting in $8,654 in water damage and $66,415 in mold damage. The insurer paid the $8,654, but only paid $10,000 for the mold damage, per the policy’s mold exclusion and sublimit. The insureds claimed that the refusal to pay the entire $66,415 violated the insurance policy.

In arguing for coverage beyond the $10,000 sublimit, the insureds argued “that their loss was caused by water, not mold, and that Defendants therefore are obligated to pay for the entire amount of the loss.” They focused on the allegation “that the mold growth was a result of the broken valve on the hot water heater, and argue that the mold is the ‘loss,’ rather than the ‘cause.’”

The court, however, recognized that the policy contained an anti-sequential provision: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.” It found there is no public policy violation “when parties to an insurance contract agree that there will be no coverage for loss due to sequential causes even where the first or the last cause is an included cause of loss.”

The court concluded that because the anti-sequential clause applied to the mold exclusion, the policy limited mold recovery to $10,000, regardless of whether the mold resulted from the valve leak. Therefore, the court ruled that the insurer did not breach the insurance contract.

As to the bad faith claim, under New Jersey law, an insurance company is required to act in good faith to the insured with respect to a first-party claim. However, an insurance company is not liable if a decision with respect to a claim is “fairly debatable.” Further, “[a] claimant who cannot establish a substantive claim that the policy was breached, however, cannot prevail on a claim for an insurer’s alleged bad faith refusal to pay the claim.”

Applying these principles, the court found no actionable bad faith claim: “[A] claim for bad faith is not plausible because Defendants responded to Plaintiffs’ claims, paid the amounts they determined were owed under the contract, and did not disregard any obligations or unreasonably fail to investigate or settle Plaintiffs’ claims.” Thus, the bad faith claim was “at a minimum, fairly debatable” and was dismissed.

Date of Decision: May 23, 2018

Hobbs v. US Coastal Ins. Co., U. S. District Court, District of New Jersey Civil Action No. 17-3673, 2018 U.S. Dist. LEXIS 86484 (D.N.J. May 23, 2018) (Rodriguez, J.)