Archive for the 'NJ – Discovery and Evidence' Category

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UNDER NEW JERSEY LAW WHERE INSURED CANNOT ESTABLISH A BREACH OF THE INSURANCE CONTRACT (New Jersey Appellate Division) (Unpublished)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 (unpublished)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INSURER DID NOT SHOW INSURED’S BAD FAITH IN BRINGING FAILED LITIGATION AGAINST INSURER (New Jersey Appellate Division) (Unpublished)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)

APRIL 2018 BAD FAITH CASES: INSURER FAILS TO (1) MEET ITS BURDEN OF SHOWING THAT PRIVILEGED INFORMATION SOUGHT IS MATERIAL AND (2) THAT BIFURCATION OF BAD FAITH CLAIM WOULD SERVE JUDICIAL ECONOMY (New Jersey Federal)

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In this complex coverage dispute, the insurer appealed two magistrate judge’s decisions to the district judge: (1) a 2017 opinion and order denying insurer’s motion to compel the insured’s production of privileged documents concerning the underlying lawsuits and settlements; and (2) a 2018 opinion and order denying the insurer’s motion to bifurcate and stay discovery regarding the insured’s bad faith counterclaim. The underlying litigation concerned occurrence-based policies that provided coverage for over two decades, and whether insurer has a duty of coverage regarding several class-actions and anti-trust actions brought against the insured after the policy period.

In affirming the magistrate’s 2017 order, the court held that the insurer failed to show how the privileged information was both relevant and material, and failed to show how it could not obtain this information through less intrusive means.

Regarding the 2018 bifurcation order, the insurer argued that “under New Jersey law ‘a policyholder should not be permitted to engage in discovery related to a bad faith claim until such time as it has established as a matter of law that it was entitled to coverage.’” The court rejected this argument, under Federal Rule 42 which governed in this federal action. The district judge held that the insurer failed to meet its burden of showing that bifurcating the bad faith claim would serve judicial economy and not prejudice the parties.

Date of Decision: April 12, 2018

Travelers Casualty & Surery Co. v. Becton Dickinson & Co., United States District Court, District of New Jersey, Civil Action No. 14-4410 (JMV), 2018 U.S. Dist. LEXIS 61853 (D.N.J. Apr. 12, 2018) (Vazquez, J.)

 

FEBRUARY 2018 BAD FAITH CASES: COURT REVERSES ITS DECISION TO BIFURCATE BAD FAITH DISCOVERY BECAUSE OF LENGTH OF DISCOVERY PROCESS; ALLOWS BAD FAITH QUESTIONS AT 30(b)(6) DEPOSITION; AND QUASHES SUBPOENA ON INSURED’S LAWYER IN UNDERLYING ACTION (New Jersey Federal)

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This case involves a discovery dispute regarding coverage litigation between the parties, and the court’s reversing its decision to bifurcate bad faith discovery.

The insurer was seeking a declaration there was no obligation to defend or indemnify in connection with two antitrust lawsuits the insured settled for $100,000,000. The insured brought claims for bad faith, alleging the insurer failed to conduct a reasonable investigation of the underlying actions and the claim for coverage. The insurer argued the insured breached various policy conditions, specifically when it failed to notify the insurer of the underlying action until ten years after the settlement, with the insured arguing no appreciable prejudice from the late notice.

The Court previously bifurcated the bad faith discovery in the interests of judicial economy.

The insurer sought a protective order prohibiting the insured from inquiring into certain topics related to the bad faith claim during a Rule 30(b)(6) deposition of the insurer’s corporate representative. On the other hand, the insured moved to quash the insurer’s subpoena upon its attorney in the underlying action.

First, the Court vacated its earlier order bifurcating the bad faith discovery, reasoning that years later discovery does not appear to be nearing the finish line. The Court explained that further bifurcation would just lead to two protracted discovery battles. As such, the Court denied the insurer’s motion for a protective order.

Regarding the insured’s motion to quash, the Court found that the insurer “failed to establish that [the insured] placed . . . privileged information sought at issue in this matter or that such information is material to the issues before th[e] Court . . . .” and consequently granted the insured’s motion to quash the subpoena.

Date of Decision: January 30, 2018

National Union Fire Insurance Co. of Pittsburgh, P.A. v. Becton, No. 14-4318, 2018 U.S. Dist. LEXIS 14558 (D.N.J. Jan. 30, 2018) (Clark, III, MJ.)

 

JANUARY 2018 BAD FAITH CASES: COURT ALLOWS LIMITED BAD FAITH DISCOVERY ON THIRD PARTY ADMINISTRATOR THAT WAS NOT PARTY TO THE BAD FAITH ACTION (District of New Jersey)

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In this reinsurance litigation, non-party Resolute Management, Inc. (“Resolute”) filed a motion to quash a FRCP 30(b)(6) deposition served upon it by Defendant/insured J.M. Huber Corporation. Resolute sought a protective order barring the insured from inquiring into certain subjects during the future depositions of two of its employees. Additionally, Plaintiff/insurer Continental Casualty moved for a protective order barring the insured from inquiring into certain subjects during the insurer’s 30(b)(6) deposition. The insured opposed both Resolute’s motion and the insurer’s motion.

BACKGROUND

The factual background is as follows: Between 1969 and 1994, the insurer issued policies to the insured that were subject to “incurred loss retrospective premium plans” whereby the insured’s premiums are calculated according to the total number of payments and reserves on claims submitted under the policies. The retrospective premiums are calculated annually on the 1st of December, and continue year to year until all claims submitted are closed or until the maximum premium is reached. These retrospective premiums are called “Rating Plan Adjustments.”

The insurer sued over multiple unpaid invoices from previous Rating Plan Adjustments. The insurer alleged it was owed $33,629 under a March 2012 invoice, $737,116 under a March 2013 invoice, and $978,222 under a February 2014 Rating Plan Adjustment calculation. As such, the insurer brought claims for breach of contract and unjust enrichment.

The insured then filed its answer and brought counterclaims for breach of contract and breach of the duty of good faith and fair dealing. The insured alleged that, for decades, both parties enjoyed a professional and amicable relationship where any questions the insured would have about the Rating Plan Adjustments would be satisfactorily answered by the insurer and then promptly paid.

According to the insured, this all changed in 2010 when Berkshire Hathaway and its affiliates, Resolute and National Indemnity Company (“NICO”) “entered into an agreement with [the insurer] pursuant to which [the insurer’s] legacy asbestos and environmental pollution liabilities were transferred to NICO.”

It was alleged that once NICO assumed the insurer’s liabilities, Resolute became a third-party administrator of the insured’s asbestos and environmental claims. After having questions about the particular invoices on the Rating Plan Adjustments, the insured contends that neither the insurer nor Resolute satisfactorily addressed its concerns, and the insured was never provided with an adequate explanation as to the basis of the contested premiums.

ARGUMENTS

In filing the motion to quash, Resolute wanted to prevent the insured from exploring particular subjects during depositions concerning Resolute’s and the insurer’s (1) corporate practices, (2) claims handling procedures, and (3) the corporate relationships between the insurer, Resolute, NICO, and Berkshire Hathaway. The motion concerns both the Rule 30(b)(6) depositions and the depositions of particular Resolute employees.

The insurer and Resolute argued that the insured’s 30(b)(6) deposition topics were overbroad, would cause an undue burden, and would seek irrelevant information. They argued that the insured should only seek information relevant to the calculation of the retrospective premiums, and that the insured’s efforts were unreasonably duplicative because the insured seeks very similar, if not identical, information from both Resolute and the insurer.

The insured argued that all of the information was necessary for the claims and relevant. Resolute and the insurer also filed a motion for a protective order, seeking to bar the insured from inquiring into certain topics during the depositions of two particular Resolute employees. The insured took the position these employees are key witnesses.

COURT’S ANALYSIS

Initially, in discussing Federal Rule of Civil Procedure 26, the Court stated that “[it] is required to limit discovery where (i) the discovery sought is unreasonably cumulative or duplicative, or can be obtained from some other source that is more convenient, less burdensome, or less expensive; (ii) the party seeking discovery has had ample opportunity to obtain the information by discovery in the action; or (iii) the proposed discovery is outside the scope permitted by Rule 26(b)(1).”

The Court also addressed FRCP 45 governing subpoenas. The Court stated that four circumstances would warrant it to quash or modify a subpoena: (i) if the subpoena fails to allow a reasonable time to comply; (ii) if it requires a person to comply beyond the geographical limits specified in Rule 45(c); (iii) if it requires disclosure of privileged or other protected matter, if no exception or waiver applies; or (iv) if it subjects a person to an undue burden.

Failure to specify basis for objections and harm from compliance

The Court ruled that Resolute failed to (1) state its objections to the insured’s subpoena with specificity, and (2) it further failed to articulate any specific harm that could arise with its compliance. Thus, the court denied Resolute’s motion to quash. For the same reasons, the Court also denied Resolute’s motion for a protective order.

Discovery limited on some topics

Ruling in Resolute’s favor, the Court found that some of the insured’s deposition topics did exceed the scope of permissible discovery, and specifically limited such topics. These included (1) privileged information between Resolute and the insurer, (2) lawsuits against Resolute involving its administration of claims on behalf of other insurers, (3) particular document demands it found unreasonably cumulative, and (4) the insurer’s losses under other policies and Resolute’s knowledge thereof.

Discovery of corporate relationships, claims handling, and operating protocols relevant within limits

The Court further ruled that “discovery into the corporate relationships between [the insurer, Resolute, NICO, and Berkshire Hathaway], along with Resolute’s claims handling practices and operating protocols, is relevant to [the insured’s] claims and defenses in this matter.”

However, the Court went on to limit the discovery here to only relevant pieces of information, such as Resolute’s corporate structure and its affiliations.

The Court further limited the insured’s inquiries to “communications and correspondence regarding Resolute’s administration of Defendant’s claims; and Resolute’s policies, procedures and practices regarding the administration of claims on behalf of Plaintiffs involving retrospective premiums and its financial goals related to the same.”

The Court looked at a prior case involving Resolute, Pepsi-Cola Metro. Bottling Co. v. Ins. Co. of N. Am., No. CIV 10-MC-222, 2011 U.S. Dist. LEXIS 154369, 2011 WL 239655 (E.D. Pa. Jan. 25, 2011). That case also involved a bad faith claim against insurers, where the insureds “sought discovery from the insurers’ claims handler, non-party Resolute Management, Inc. by way of a 30(b)(6) subpoena. The 30(b)(6) subpoena sought information related to Resolute’s corporate relationships and structure and its operating protocols and business practices.

Resolute moved for a protective order and to quash the 30(b)(6) subpoena claiming that the information sought regarding its corporate relationships and business practices was irrelevant to the plaintiff’s claims against its insurers for bad faith.” Resolute argued “that its operating protocols and business practices were irrelevant to the plaintiff’s allegations….”

The Pepsi Court “noted that [t]o show bad faith, as opposed to mere negligence ‘a review of the policies and procedures of the companies in order to determine whether those policies instructed claims handlers to act in bad faith or provided them with an incentive structure that led to bad faith action is necessary,”

“Accordingly, in light of the plaintiff’s contention that the reinsurance relationship between the plaintiff’s insurers and Resolute and their claims handling practices may have resulted in the bad faith denial of the plaintiff’s claims, the [Pepsi] court found that the plaintiff had provided sufficient evidence of the relevance of the information sought by the subpoena and allowed the plaintiff to obtain discovery regarding Resolute’s corporate relationships and structure and its operating protocols and business practices.”

The present Court followed the Pepsi opinion, and agreed with the insureds’ position in concluding “that Defendant has demonstrated the requisite relevance of the information it seeks to its claims in this matter. In this case, Defendant claims that once Resolute became Plaintiffs’ third-party administrator, Defendant received improper and unexplained retrospective premium notices from Resolute and a letter from Resolute ‘abruptly’ denying coverage for a claim which Plaintiffs had long been providing coverage. …. Because Defendant’s bad faith claims against Plaintiffs result from conduct which arose when Resolute began handling Defendant’s claims, Defendant claims that the corporate relationships between Plaintiffs, Resolute, NICO and Berkshire Hathaway, and the corporate practices of these entities as they relate to Resolute’s claims handling practices is relevant to Defendant’s bad faith claim against Plaintiffs.”

Thus, “discovery into the corporate relationships between Resolute and Plaintiffs and Resolute as its affiliates, along with Resolute’s claims handling practices and operating protocols, is relevant to Defendant’s claims and defenses in this matter.” The Court went to limit that discovery: “However, while the Court will permit discovery into Resolute’s corporate relationships and general practices, Defendant’s requests must be narrowed to seek such information only as relevant to the claims in this matter.”

The Court found that the insurer failed to articulate the specific harm it would suffer if it complied with the insured’s subpoena, so its motion for a protective order was denied. Similarly, the Court also limited the scope of the insured’s discovery against the insurer to relevant information.

Date of Decision: December 19, 2017

Continental Casualty Co. v. J.M. Huber Corp., No. 13-4298 (CCC), 2017 U.S. Dist. LEXIS 208182 (D.N.J. Dec. 19, 2017) (Clark, III, M.J.)

 

Update to Prior Post on Discovery Opinion (New Jersey Federal)

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We originally posted a summary of the New Jersey Federal District Court’s August 2017 opinion in Legends Management Co. v. Affiliated Insurance, concerning various discovery issues. Since that time, two more closely related discovery opinions have issued, as well as an opinion concerning severance and stay of the bad faith claim.

Of note in the third discovery opinion is the Court’s ruling that the insurer, which brought a claim under the Insurance Fraud Act and could be entitled to attorneys fees and costs, did not have to produce its attorney invoices until that claim had been determined on the merits.  Summaries of the three cases can be found here.

OCTOBER 2017 BAD FAITH CASES: COMPLAINT STATES PLAUSIBLE BAD FAITH CLAIM BASED ON CLAIMS HANDLING; COURT SEVERS AND STAYS BAD FAITH CLAIM (New Jersey Federal)

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The insured alleged that she suffered serious bodily injuries after a rear-end collision. The vehicle at fault only had $25,000 in available coverage, and the insured’s UIM policy contained limits of $100,000 per person and $300,000 per accident. Alleging injuries amounting to $75,000 in value, the insured filed a UIM claim with the insurer. The insured allegedly forwarded all documentation supporting her injuries to the insurer’s claims adjuster, but the insurer ignored her documentation or acted with reckless indifference to the documentation provided. She filed a claim against the insurer for breach of the implied duty of good faith and fair dealing.

The insured moved to dismiss this claim, arguing that (1) the Court lacked federal subject matter jurisdiction because the insured’s claim does not exceed $75,000; and (2) that the insured failed to state a claim upon which relief can be granted. The insured also moved to sever and stay the insured’s bad faith claim, pending the disposition of the insured’s claim for breach of contract.

(1) The Court denied insurer’s motion to remand, reasoning that “[the insured’s] bad faith claim, if successful, includes the potential for an award of consequential damages and punitive damages . . .” that would exceed the jurisdictional threshold of $75,000.

(2) The Court denied the insured’s motion to dismiss, reasoning that the complaint “sets forth numerous examples of bad faith conduct that sufficiently allege[s] a ‘reckless disregard’ for [the insured’s] rights.” These allegations included delay tactics, conducting an improper investigation, and failing to evaluate medical records in a reasonable manner.

(3) Finally, the Court granted the insurer’s motion to sever and stay the bad faith claim from the insured’s breach of contract claim, citing judicial economy and avoiding prejudice to the insurer.

Date of Decision: September 12, 2017

Gussman v. Government Employees Insurance Company, No. 16-8563, 2017 U.S. Dist. LEXIS 146995 (D. N.J. Sept. 12, 2017) (Rodriguez, J.)

SEPTMEBER 2017 BAD FAITH CASES: COURT ANALYZES ATTORNEY-CLIENT PRIVILEGE AND WORK PRODUCT AS TO BOTH INSURER’S AND INSURED’S COUNSEL; DISCOVERY OF REGULATORY COMPLAINT DEPENDENT ON WHETHER THERE IS A PENDING INVESTIGATION (New Jersey Federal)

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Following in today’s discovery theme, this opinion addresses application of the attorney-client privilege and the work product doctrine in the context of making or investigating an insurance claim. It has the unusual aspect that it includes not only an analysis of the insurer’s attorney, but the conduct and communications of the insured’s attorney.

The court found that the insurer’s communications with its counsel were in the nature of legal advice. Thus, virtually all communications were subject to the attorney client privilege. However, as to the insured’s counsel, the court concluded that some of the attorney’s functions did not include rendering legal advice. Thus, some communications between the insured’s counsel and the insured were not protected by attorney client privilege.

As to the work-product doctrine, the key issue is when litigation was reasonably anticipated. As to the insurer’s counsel, litigation was not reasonably anticipated until approximately one month from retention, so the doctrine did not apply to counsel’s work prior to that time. Certain investigative reports had to be produced.

Similarly, the court found that the insureds could not have reasonably anticipated litigation until over one year after they hired counsel. The court found that there were documents “prepared in the ordinary course of [counsel’s] claims investigation … and cannot now be protected as work product because they are useful in this case. While they may contain [counsel’s] mental impressions and opinions, they were not created in anticipation of litigation, and the work product doctrine does not apply.”

Finally, the insureds sought “production of a letter and claim fraud referral forms [the insurer] submitted to New Jersey’s Office of Insurance Fraud Prosecutor (‘OIFP’).” The insurer was withholding these documents “pursuant to statutory authority, N.J.S.A. 17:33A-11; regulatory authority, N.J.A.C. 11:16-6.11, and the State Deputy Attorney Gener[al]’s non-disclosure request applicable to insurance companies.” Whether production could be required depended upon the existence of a pending investigation. If OIFP “is conducting an investigation … ordering disclosure via [the insurer] would ‘circumvent and nullify the statute’ and could further taint or prejudice the investigation.” Thus, the court ordered the insurer to “submit an affidavit from the OFIP as to whether an investigation is open or not….”

Subsequent to the Court’s original August 22, 2017 opinion, there was a supplemental decision issued on September 22, 2017.  This opinion does not materially alter the points discussed above.

Subsequent to the September 22, 2017 opinion, the Court issued two additional opinions.  The first (issued on September 26, 2017) severed and stayed the bad faith claim. Next, on October 13, 2017, the Court issued another opinion on discovery, which did not address the bad faith discovery because that had been stayed, but went on to address more definitively issues concerning the attorney-client privilege and work product doctrine.

Of additional note is the Court’s October 13th ruling that the insurer did not have to produce its attorney invoices at this time during litigation on its insurance fraud claim against the insured.  The Court concluded that such documentation would only have to be produced if and after the insurer prevailed on this claim, as the invoices themselves are not necessary to resolve the issue of whether the insured caused any damages through insurance fraud.

Date of Decision: August 22, 2017, September 22, 2017, October 13, 2017.

Legends Management Co., LLC v. Affiliated Insurance Co., Civil Action No. 2:16-CV-01608-SDW-SCM, 2017 U.S. Dist. LEXIS 134020 (D.N.J. Aug. 22, 2017) (Mannion, M.J.)

Legends Management Co. v. Affiliated Insurance Co., Civil Action No. 2:16-CV-01608-SDW-SCM, 2017 U.S. Dist. LEXIS 154773 (D.N.J. Sept. 22, 2017) (Mannion, M.J.)

Legends Mgmt. Co., LLC v. Affiliated Ins. Co., Civil Action No. 2:16-CV-01608-SDW-SCM, 2017 U.S. Dist. LEXIS 170326 (D.N.J. Oct. 13, 2017) (Mannion, J.)

JANUARY 2016 BAD FAITH CASES: PENNSYLVANIA COURT APPLYING NEW JERSEY LAW FINDS THAT BAD FAITH QUESTION COULD GO TO JURY, EVEN WITHOUT ADJUSTER’S TESTIMONY FOR SUMMARY JUDGMENT PURPOSES, IN THE ABSENCE OF ANY SETTLEMENT OFFER BY INSURED WHERE THERE SEEMED TO BE NO DEFENSE TO ONE COMPONENT OF INSURED’S DAMAGES CLAIMS (Philadelphia Federal)

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In Stern v. AAA Mid-Atlantic Insurance Company, the Pennsylvania federal court applied New Jersey bad faith law to an Underinsured Motorist claim.

The court applied the fairly debatable standard, which it quoted as: “To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one. * * * implicit in that test is our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless * * * indifference to facts or to proofs submitted by the insured.”

The insured put on a case at arbitration showing physical injuries, pain and suffering, and economic damages, which resulted in a meaningful award, including a specific finding of economic damages. The insurer’s refusal to pay the insured anything focused on claims for non-economic damages, with no explanation about why it would not settle the economic damages claim.  The court found that “Defendant’s failure to make any settlement offer in the face of Plaintiffs’ proofs and a substantial arbitration award relating specifically to economic losses could be interpreted by a reasonable juror as reckless indifference to the facts.”  The insurer’s verbal threshold argument was deemed inapplicable to underinsured claims.

The court concluded, in denying the insurer’s summary judgment motion: “At trial, Defendant will undoubtedly present testimony from its adjusters as to their analysis of both the economic and non-economic components of the claim, and Plaintiffs will be at a tactical disadvantage by having failed to depose them. The defense is correct that ordinarily a plaintiff’s failure to explore the thought process of the claims adjusters would be fatal to a claim for bad faith. But given the broad confines of this case and Defendant’s failure to make any offer whatsoever, there is a basis on which a jury could reasonably find bad faith. The evidence may be scant, but I cannot conclude that it is non-existent.”

Date of Decision:  December 3, 2015

Stern v. AAA Mid-Atlantic Ins. Co., CIVIL ACTION No. 15-0960, 2015 U.S. Dist. LEXIS 162713 (E.D. Pa. December 3, 2015) (McHugh, J.)

MARCH 2015 BAD FAITH CASES: NEW JERSEY APPELLATE DIVISION MAKES CLEAR THAT PROPER PRACTICE REQUIRES SEVERING BAD FAITH CLAIM FROM UNINSURED MOTORIST CLAIM, AND STAYING DISCOVERY OF THE BAD FAITH CLAIM UNTIL THE UNDERLYING CLAIM IS DETERMINED (New Jersey Appellate Division)

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In Wacker-Ciocco v. GEICO, the court addressed the applicability of its earlier decision in Procopio v. Government Employees Insurance Company, 433 N.J. Super. 377, 80 A.3d 749 (App. Div. 2013), on the issue of discovery and severance of bad faith claims.  In the earlier case, the appellate court had ruled that where an uninsured motorist and bad faith claim are bifurcated for trial, it was an abuse of discretion for the trial court to order that discovery on both claims proceed simultaneously.

In Wacker-Ciocco, some bad faith materials had been produced prior to the motion to sever, and the trial court found the cat was therefore out of the bag, and the motion to sever was denied.  The appellate court found that this was a misinterpretation of its prior case law on the severance of bad faith claims from the uninsured motorist claim, and the stay of bad faith discovery pending the outcome of the uninsured motorist claim.

In Procopio, the Court had stated: “[It] 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 by a favorable ruling for the insurer in the UM or UIM litigation. This procedure also avoids the premature disclosure of arguably privileged materials to the prejudice of the insurer’s defense while, at the same time, preserving the insured’s pursuit of its bad faith claim.”

The court observed that an insured cannot reach the bad faith claim until it proves its entitlement to coverage, and the court further observed the higher standard placed on an insured in proving bad faith claims (and that the plaintiff’s complaint only pleaded bad faith in a conclusory manner, and failed to plead wrongful intent).

The judicial efficiency arguments set out in Procopio did not disappear “simply because some discovery relevant to the bad faith claim was produced,” and it was clear discovery on that issue was not complete.  Thus, “the competing interests implicated by ordering simultaneous discovery on both the coverage and bad faith claims remained in play.”

The court reversed the trial court orders, and granted the motions “to sever and stay the bad faith claim and related discovery until the underlying UIM claim was decided.”

Date of Decision: March 16, 2015

Wacker-Ciocco v. GEICO, DOCKET NO. A-2547-13T4, 2015 N.J. Super. LEXIS 38   (App. Div. March 16, 2015) (Espinosa, Lihotz, St. John, JJ.)