Archive for the 'NJ – Coverage Issues' 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.)

 

 

 

NO COVERAGE DUE = NO BAD FAITH (New Jersey Federal)

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This case involved multiple coverage disputes with different carriers over the same events. New Jersey District Court Judge Michael A. Shipp issued three opinions in this action on the same date (as well as a fourth opinion in a related action). This summary addresses the three coverage/bad faith opinions.

The insured provided services to a Medicare/Medicaid drug plan provider. The plan provider was sanctioned for improprieties with its plan, and was suspended from the program. In turn, the provider brought breach of contract and fraud claims against the insured for its alleged failures in providing services, and its misrepresentations in hiding its failures, all of which caused the sanctions and suspension. The insured ultimately settled the case with the Medicare provider and sought recovery from its various insurers for defense costs and/or indemnification.

The first opinion involves coverage claims against Travelers and ACE (the excess insurer to Travelers), and a bad faith claim against ACE. The court found that no coverage was due from Travelers or ACE under their polices, and thus no defense obligation existed.

On the issue of bad faith, the court applied the “fairly debatable” standard set out in Pickett v. Lloyd’s. If a bad faith plaintiff “could not have established as a matter of law a right to summary judgment on the substantive claim [it] would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.”

The court then set out the more detailed criteria to determine the issue.

Judge Shipp observed that “’[a] more difficult application of the standard arises when the issue involves not a denial or refusal to pay a claim but … inattention to payment of a valid, uncontested claim.” (Court’s emphasis). “’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.’”

“’In either case (denial or delay), liability may be imposed for consequential economic losses that are fairly within the contemplation of the insurance company.’” “Whether arising under a denial of coverage or a delay in processing a claim, ‘the test appears to be essentially the same.’”

In the first opinion, the court found the insured was not entitled to coverage from Travelers or ACE under commercial general liability and umbrella policies. Thus, the insured could not “assert a claim for bad faith against ACE.”

The second opinion involved breach of contract and bad faith claims against Allied World Specialty Insurance Company, which had issued a D&O policy. Again, the court found no coverage due, and so no bad faith.

The third opinion addresses claims against Atlantic Specialty Insurance Company and RSUI Indemnity Company (the excess carrier). Breach of contract claims were raised against both carriers, involving D&O defense or coverage, as well as a bad faith claim against Atlantic Specialty. As in the other two opinions Judge Shipp found no coverage due under the Atlantic Specialty policy. Thus, “[b]ecause Atlantic Specialty’s Policy does not provide coverage for the [underlying] action, [the insured] cannot recover consequential damages for Atlantic Specialty’s alleged bad faith delay.”

Dates of Decision: May 31, 2020

Benecard Services, Inc. v. Allied World Specialty Insurance Co., U.S. District Court District of New Jersey Civil Action No. 15-8593 (MAS) (TJB), 2020 U.S. Dist. LEXIS 94806 (D.N.J. May 31, 2020) (Shipp, J.)

The opinion involving Travelers and ACE can be found here.

The opinion involving Allied can be found here.

The opinion involving Atlantic Specialty can be found here.

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.)

Some Important Insurance Coverage Issues for COVID-19 Business Loss Claims

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COVID-19 is a potential $1,000,000,000,000+ catastrophe for businesses. Insurance coverage demands for COVID-19 business interruption losses are exploding. Many insurers are denying coverage, and insureds’ lawsuits for coverage and bad faith have begun.  Questions of what business interruption losses should be covered by insurance even reached the COVID-19 daily briefing this past Friday.

Various states, including, e.g., Pennsylvania (Pennsylvania House Bill 2372) and New Jersey (Assembly, No. 3844), are seeing proposed legislation that would require insurers to pay for billions or trillions of dollars in business interruption losses, even if the insurance policies otherwise would not provide such coverage. These proposals usually have a plan tying insurer payments to a fund that would at least partially reimburse insurers for such payments, so they are not bankrupted. On the federal level, the idea is circulating for a “Pandemic Risk Insurance Act” that “would create a reinsurance program similar to the Terrorism Risk Insurance act for pandemics, by capping the total insurance losses that insurance companies would face.”

While these efforts may ultimately overwrite disputes that would otherwise wind up before every state and federal court, we are only discussing the law as it currently stands on a few COVID-19 coverage issues.

The “Loss Due to Virus or Bacteria” Exclusion

A central starting point is whether policies have a “Loss Due To Virus Or Bacteria” exclusion. This ISO drafted exclusion was originally promulgated in 2006, and is typically numbered CP 01 40 07 06. A copy of the exclusion can be found here.

Paragraph B of the exclusion states, “[w]e will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” Paragraph A provides, “[t]he exclusion set forth in Paragraph B applies to all coverage under all forms and endorsements that comprise this Coverage Part or Policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.” The exclusion’s language makes clear, however, it does not displace other exclusions addressing claims not subject to the virus and bacteria exclusion. Foley v. Wisconsin Mutual Insurance Co., 915 N.W.2d 455 (Wis. App. 2018).

ISO issued a July 6, 2006 circular entitled, “New Endorsements Filed To Address Exclusion Of Loss Due To Virus Or Bacteria,” explaining the exclusion. The drafters write, “[t]he exclusion … applies to property damage, time element and all other coverages….” The circular’s introduction gives three specific examples of excluded viruses, “rotavirus, SARS, [and] influenza (such as avian flu).” The drafters further observe that “[t]he universe of disease-causing organisms is always in evolution.” As we all now know, the original SARS virus and COVID-19 are part of the same virus family.

The introduction adds, “[d]isease-causing agents may render a product impure (change its quality or substance), or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property. When disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property … cost of decontamination … and business interruption (time element) losses.”

Under the heading “Current Concerns,” the circular states, “[a]lthough building and personal property could arguably become contaminated (often temporarily) by such viruses and bacteria, the nature of the property itself would have a bearing on whether there is actual property damage. An allegation of property damage may be a point of disagreement in a particular case.” Exclusions addressing “specific exposures relating to contaminating or harmful substances … enable elaboration of the specific exposure and thereby can reduce the likelihood of claim disputes and litigation.”

The authors clearly were thinking of pandemics in drafting this exclusion. They state, “[w]hile property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent.” To address these concerns, ISO is “presenting [the Loss Due to Virus or Bacteria] exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.”

In one recently filed COVID-19 case from the District of Columbia, Washington’s mayor had issued an order forbidding table seating at restaurants. The restaurant-plaintiff suffered business losses. The insurer denied coverage, and the owner filed a declaratory judgment complaint seeking coverage. A copy of the Complaint in Proper Ventures, LLC v. Seneca Insurance Co., can be found here.

Among other grounds for denial, the insurer relied on the “Exclusion of Loss Due to Virus or Bacteria.” The complaint alleges, however, this exclusion does not apply. While this seems implausible per the above discussion, the plaintiff asserts that the “loss of Business Income is not otherwise excluded under the Policy. … [because the] loss of Business Income was not ‘caused by or resulting from’ a virus as its loss occurred as a result of the Mayor’s Order.” The plaintiff essentially argues for coverage solely based on a civil authority closure, by contending that the government action in closing the premises cuts off the virus as a causal factor. Once civil authority causation supersedes virus causation, so the argument goes, the exclusion falls by the wayside.

As set forth above, the exclusion’s Paragraph A specifically provides that “[t]he exclusion set forth in Paragraph B applies to all coverage under … forms or endorsements that cover business income, extra expense or action of civil authority.” The insured will have to overcome this express policy language in the first instance to be able to proceed on its argument.

If insureds making this superseding cause argument can get past the language in Paragraph A on “action of civil authority,” courts addressing the intervening cause issue would look to the governing law on interpreting the exclusion’s “caused by or resulting from” language. E.g., in various jurisdictions, some courts may measure this by a proximate cause standard, others by a “but for” standard, and others by a substantial cause standard (somewhere between “but for” and proximate cause). Under any causation standard, however, insureds making this argument are still depending on courts eliminating the “why” in the chain of events leading civil authorities to issue closure orders.

General Comments on the Property Damage, Business Interruption, and Civil Authority Closures

The 2006 ISO circular foresaw that in the absence of the virus and bacteria exclusion (i) “the nature of the property itself would have a bearing on whether there is actual property damage: and (ii) “[a]n allegation of property damage may be a point of disagreement in a particular case.”

The property damage issue includes two basic prongs: business interruption coverage and coverage for the acts of civil authorities. In the former, there must be “direct physical loss or damage”; and in the later, there must be damage to other property within a specified distance from the insured’s property, or in the “immediate area” of the insured’s property.

There is some case law, in other fact scenarios, addressing the concept of whether unseen or gaseous substances contaminating property can constitute direct physical damage or loss. For example, a 2014 New Jersey federal case, Gregory Packaging, Inc. v. Travelers Property Casualty Co., addressed ammonia contamination, and a 2016 Oregon federal case, Oregon Shakespeare Co. v. Great American Ins. Co. (later vacated by the parties’ agreement), addressed smoke from forest fires closing down plaintiff’s business operations. In a 2015 case involving an odor of cat urine permeating a condominium, New Hampshire’s Supreme Court gathered cases on both sides of the issue in evaluating what degree of physical alteration is needed to find a direct physical loss. Mellin v. Northern Security Ins. Co. That court held an alteration affecting the sense of smell was a physical alteration. This contrasted with a 2010 Michigan federal court decision finding strong odors and the presence of mold insufficient to constitute direct physical loss. Universal Image Prods. v. Chubb Corp.

The reality is that the decision concerning direct physical damage or loss, and property damage, may well ride on the judge’s own intellectual framework for addressing the physical nature of real, but invisible, phenomena. We can expect courts to address issues as to whether the presence of the virus on a surface is sufficiently intermingled with the surface material as to alter that property, or whether it is separate from the surface. For example, if the virus is on all the tables in a restaurant, and successfully can be cleared off with a disinfectant in an hour, was there direct physical damage or loss? If so, did it only exist for an hour?

What if the virus has reached more difficult to clean parts of the same restaurant, the owner-insured cannot be certain all potentially exposed areas have been sanitized, and the restaurant stays closed because of the risk? Moreover, how does the insured prove the virus is actually present on any surface in the restaurant at all, or how long that presence persisted? Imagine that proof issue in a much larger scenario, like a warehouse, where one employee out of hundreds develops COVID-19, and the entire warehouse might have to be closed and sanitized. It is unlikely that there is going to be testing to determine where the virus actually might be located before sanitizing takes place. There may not even be testing to determine whether the virus is even present at all on any surfaces inside the facility, but only fast action to eliminate potential risk.

The experts required to answer questions of what is physical, or whether matter has been altered on a microscopic level, may well be biochemists or physicists in addition to virology experts, though some of these concepts appear to verge on metaphysics.

Another issue is the duration of any direct physical damage or loss, or any property damage. Even in cases of demonstrable physical loss or damage through viral presence on the premises, those damages can likely be remediated through sanitizing the insured’s property. While the sanitized premises may be cleaned and the damage cured, the remediation might mean very little if the same pattern of contamination will regularly repeat itself every time people are allowed back on the premises, as employees or customers.

More significantly, greater economic business losses may well be based upon contamination events that have not happened. Such losses arise only because the insured, public, and government are trying to prevent that contamination from ever occurring in the first instance, i.e., much of the real economic business loss is the consequence of prophylactic action to avoid risk, rather than the virus’ actual presence on an insured’s premises.

What if there is no Arguable Property Damage, and a Business is Closed because of Fear or as a Prophylactic Measure?

Thus, the broader economic question may involve those circumstances where the virus is not actually on or in the insured’s property, or on or in any property within the distance necessary to invoke civil authority coverage. Rather, the insured’s business is closed, either voluntarily or by government order, out of fear the premises might become contaminated, or that the business premises might simply act as a meeting ground for spreading infection among employees and customers independent of whether any part of the premises is contaminated. The prevention rationale may reach even further outside a concern for direct physical loss or damage, e.g., reasoning that if businesses are closed people will not be taking public transportation to visit the business, or milling about on the streets to walk to a busines

In one New York federal case dealing with the “direct physical loss or damage” language, the court found that “[t]he words ‘direct’ and ‘physical,’ which modify the phrase ‘loss or damage,’ ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure.” Newman Myers Kreines Gross, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014). (Emphasis added)

Another New York federal case addressed coverage in a dispute involving purely economic damages resulting from the events of 9/11. Philadelphia Parking Authority v. Federal Insurance Co., 385 F. Supp. 2d 280 (S.D.N.Y. 2005) (interpreting Pennsylvania law). In that case, the plaintiff parking garage operator lost business at the Philadelphia airport due to diminished air travel after the 9/11 tragedy. It sought coverage from its insurer for these economic losses. The court found that the business impacts flowing from 9/11 could not serve as the source of a covered loss. These economic business losses lacked the predicate of direct physical loss or damage to the insured’s property. Rather, the insured’s loss of business itself was the only damage to the insured. Similarly, an Iowa federal court ruled that a putative loss of use in business operations occasioned solely by the “threat” of a flood was not physical loss or damage. Phoenix Insurance Co. v. Infogroup, Inc. 147 F. Supp. 3d 815 (S.D. Ia. 2015).

Was Insurance Available to Cover Business Losses before the Current Outbreak?

Another issue will likely be whether insurance coverage was available for viral pandemics before the COVID-19 outbreak. For example, an insured may argue that its reasonable expectations require reading business interruption or civil authority coverage to include pandemics, as there is no other means to obtain insurance coverage for these potential epidemics, making the policy’s coverage somehow illusory. Among other things, insurers may respond that insureds could have purchased coverage for pandemics before the COVID-19 crisis; therefore, the policy language should not be read beyond its ordinary meaning to provide coverage where coverage does not reasonably exist under the policy’s plain language.

In an April 3, 2020 declaratory judgment filing in Texas, the plaintiff theater and restaurant owner seeks coverage under a “Pandemic Event Endorsement.” A copy of the complaint in SCGM, Inc. v. Lloyds of London, U.S. District Court Southern District of Texas, No. 4:20-cv-01199, can be found here. The complaint alleges “[f]ollowing the 2014 Ebola crisis, many insurance carriers made specific exclusions for Ebola and other communicable diseases and viruses. Lloyds sought to take advantage of the exclusions in coverage by rolling out a Pandemic Event Endorsement that claimed to ‘fill in the gaps that [other insurers] creatively exclude or do not address’ that may relate to future pandemics.”

The endorsement, attached as an exhibit to the complaint, defines “pandemic event” to include either “(a) the actual presence of an Infected Person within a Covered Location; or, (b) the announcement by a Public Health Authority that a specific Covered Location is being closed as a result of an Epidemic declared by the CDC or WHO.” The endorsement limits “covered disease” to 25 specifically listed “pathogens, their mutations or variations” and a 26th category for other diseases designated by Lloyds. The complaint alleges Lloyds took the initial position that COVID-19 “is not covered under the Pandemic Event Endorsement as it is not a named disease on that endorsement.” Plaintiff counters that “Severe Acute Respiratory Syndrome associated Coronavirus (SARS-CoV) disease” is specifically named, that SARS-CoV-2 is the virus causing COVID-19, and that SARS-CoV-2 is a variant of SARS-CoV-1, i.e., a named pathogen.

[We note here that the World Health Organization has stated the International Committee on the Taxonomy of Viruses “announced ‘severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2)’ as the name of the new virus on 11 February 2020.  This name was chosen because the virus is genetically related to the coronavirus responsible for the SARS outbreak of 2003. While related, the two viruses are different.” Thus, this litigation may also involve whether the relationship constitutes a mutation or variation sufficient to come within the list.]

Even assuming some level of coverage on any of the above discussed grounds, there will likely be additional issues arising in COVID-19 cases that will require analyzing a wider range of a policy’s terms, conditions, sublimits, etc. In evaluating whether to fight the above-described battles, both insureds and insurers should look at the practical consequences of each and every particular policy language battle. The meaning of success should be measured against how things could stand at the end of the war, and not just any one battle.

For any additional information on these issues, you can contact S. David Fineman, dfineman@finemanlawfirm.com or Lee Applebaum, lapplebaum@finemanlawfirm.com.

 

 

INJURED PARTY HAS NO STANDING TO BRING DIRECT THIRD PARTY BAD FAITH CLAIM, EVEN IF AN ADDITIONAL INSURED; BAD FAITH COVERAGE DENIAL CANNOT BE BASIS FOR PUNITIVE DAMAGES (New Jersey Federal)

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The plaintiff stored its food products in the insured’s warehouse. The products were damaged and plaintiff made demand for the damages. The insured sought indemnification from its carrier, which refused coverage based on a care, custody and control exclusion.

The plaintiff sued, and the insured joined its insurer as a third party defendant seeking indemnification against plaintiff’s claims. The injured plaintiff itself also brought third party claims against the same insurer for declaratory judgment and bad faith, both for third party liability and bad faith, and for first party claims. The defendant was an additional insured under the policy. [Though not discussed below, the plaintiff also joined the insured’s agent for failing to obtain proper coverage.]

The insurer sought summary judgment on the insured’s liability claims and plaintiff’s third party claims. The insurer also sought to dismiss the plaintiff’s punitive damages claim against the insurer on the first party claims.

As to the insured’s liability claim, the court denied summary judgment based on a reasonable expectations argument that required more discovery of the facts on what the insured sought and what the carrier led the insured to believe.

As to the plaintiff’s direct third party and bad faith claims against the defendant’s insurer, the court granted summary judgment. While plaintiff was an additional insured, it was not seeking a defense or coverage for claims made against it. Rather, it was seeking to force the insurer to indemnify the insured against the plaintiff’s own claims. Under the policy, and New Jersey law, the plaintiff had no standing to bring direct indemnity claims prior to any settlement or judgment; and it had no standing to bring bad faith claims that only belonged to the insured.

The insurer did not seek summary judgment on plaintiff’s first party claims, but only sought to dismiss the punitive damages claim associated with that count.

The court framed this as follows: “Plaintiff submits that its Third Party Complaint sufficiently supports an award based on egregious and wonton willful disregard by [the insurer] because it shows that [the insurer] denied [the insured] first party coverage in contravention of the terms of the policy and insurance agent’s understanding of the policy.” [It is not clear why the plaintiff had standing to bring a first party claim on the basis that the insurer denied coverage to another party, the insured, which was also a party to the case and was well able to bring such a claim if it were viable.]

The court held that even if the insured denied the first party coverage claim in bad faith, this was insufficient to state a punitive damages claim. The court observed that New Jersey’s Supreme Court does not allow for punitive damages in wrongful refusal to pay first party claims absent egregious circumstances, and an alleged bad faith breach of the insurance contract does not by itself reach that level. “Therefore, here, even if the Third Party complaint supports the inference that [the insurer’s] denial was wrongful or in bad faith, the allegation[s] do not support Plaintiff’s conclusion that denying liability on the basis that the policy did not cover damage to property of others was egregious conduct.”

Date of Decision: March 18, 2020

Pavino v. Cold Storage, U.S. District Court District of New Jersey Civil Action No. 18-14596, 2020 U.S. Dist. LEXIS 46562 (D.N.J. Mar. 18, 2020) (Rodriguez, J.)

NO BAD FAITH WHERE COVERAGE ISSUES FAIRLY DEBATABLE; NO PUNITIVE DAMAGES WHERE NO BAD FAITH; NO RIGHT TO ATTORNEY’S FEES IN DIRECT ACTION (New Jersey Federal)

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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.)

NO BAD FAITH UNDER NEW JERSEY LAW WHERE INSURED CANNOT ESTABLISH A BREACH OF THE INSURANCE CONTRACT (New Jersey Appellate Division) (Unpublished)

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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)

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

NO BAD FAITH WHERE INSURER JUSTIFIABLY RELIES ON EXISTING CASE LAW PRECEDENT (New Jersey Appellate Division)

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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.)

TWO NEW JERSEY CASES FINDING NO BAD FAITH: (1) NO BAD FAITH WHERE NO COVERAGE IS DUE (New Jersey Superior Court Appellate Division); (2) NO PLAUSIBLE BAD FAITH CLAIM PLEADED UNDER NEW JERSEY LAW (New Jersey Federal)

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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.)