Archive for the 'NJ – Federal Pleading Adequate' Category

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.)

MARCH 2017 BAD FAITH CASES: AMENDED BAD FAITH CLAIM ADEQUATE TO MEET TWOMBLY/IQBAL ON KNOWING OR RECKLESS DISREGARD (New Jersey Federal)

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The court previously allowed the insured to amend its inadequately pleaded bad faith claim, based on a refusal to defend and indemnify it for settlement of a trademark infringement action, which the insured litigated unsuccessfully at trial and had up on appeal at the time of settlement.

Under New Jersey law, the bad faith plaintiff must show (1) an absence of a reasonable basis for denying benefits under the policy, and (2) the insurer’s knowledge or reckless disregard of the lack of a reasonable basis in denying the claim. The court originally ruled that the insured adequately pleaded there was no reasonable basis to deny benefits, and the judge saw “no reason to now disturb that finding that is now law of the case.”

The amended allegations went to the test’s second prong, and the court found the new allegations in the amended bad faith claim adequate.

The insured alleged that the insurers had “independently investigated [the insured’s] claim for coverage in the [Underlying] Action; that the Insurers’ counsel confirmed that coverage was due under the policy; that the Insurers were aware that proceedings in the [Underlying] Action were costly and rapidly progressing, and aware of the status of the case; that [the insured’s] counsel explained in correspondence that the Insurers owed a duty to defend under New Jersey law; and that the Insurers ‘have delayed the processing of the claim knowingly or in reckless disregard of the fact that they had no valid reason for doing so.’” These allegations went beyond mere legal conclusions and met the Twombly/Iqbal standards.

Date of Decision: February 14, 2017

Product Source International, LLC v. Foremost Signature Ins. Co., No. 15-8704, 2017 U.S. Dist. LEXIS 21460 (D.N.J. Feb. 15, 2017) (Simandle, J.)

APRIL 2016 BAD FAITH CASES: (1) PLAUSIBLE BAD FAITH CLAIM PLEADED BASED ON INSURER’S IME RESULTS, BUT (2) BAD FAITH CLAIM IS SEVERED AND STAYED (New Jersey Federal)

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In Abiona v. Geico Indemnity Company, the insurer sought to dismiss the underinsured motorist bad faith claim, and if not dismissed, then to sever and stay the bad faith claims.  The claim was not dismissed, but the court did agree to sever and stay the bad faith claim.

The insured alleged that the insurer completely denied UIM benefits, declined to participate in non-mandatory find arbitration, and failed to present any good faith settlement offer, despite the insured’s submitting extensive medical records to support the claim of severe and permanent injury.  This documentation allegedly included the insurer’s own IME report, which opined that “the insured is a surgical candidate from the injuries sustained by this accident if the epidural injection therapy does not resolve the significant pain from the herniated lumbar disc caused by this accident.”

In refusing to dismiss the bad faith claim, the court found that the insurer’s medical opinion that surgery could be required “nudges” the allegation of reckless disregard of the lack of a reasonable basis to deny the claim “across the line from conceivable to plausible.”

Next the court found it had jurisdiction to hear the case, when looking at the contract damages, and potential consequential and punitive damages permitted under New Jersey’s bad faith law.

On the issue of severance and stay, the court observed: “The prevailing practice in both state and federal court is to sever breach of insurance contract claims from bad faith claims, and to proceed with the contract claim before turning to the bad faith claim (if still necessary after adjudicating the contract claim).”  The court added that:  “Severance of a bad faith claim will often be desirable because, as courts have recognized, there is real potential for prejudice to the insurer should it ‘be required to produce its claim file prematurely.’”

The court accepted the insurer’s assertion that it would suffer prejudice without severance, and described the insured as “merely” arguing that judicial economy weighs against severance – a position contrary to the above-stated principles and numerous cases following those principles. It quoted from an earlier state court decision: “The toll on judicial economy by allowing full-disclosure up front . . . is obvious. Requiring simultaneous discovery on both claims will result in a significant expenditure of time and money, generally rendered needless if the insurer prevails on plaintiff’s UM or UIM claim.”  Thus, it granted the motion to stay and sever in the interests of judicial economy and to avoid prejudice to the insurer.

Date of Decision:  March 16, 2016

Abiona v. Geico Indem. Co., 2016 U.S. Dist. LEXIS 34179 (D.N.J. Mar. 16, 2016) (Hillman, J.)

OCTOBER 2015 BAD FAITH CASES: COURT DOES NOT DISMISS CLAIMS FOR ATTORNEY’S FEES IN BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING CLAIM AS POTENTIALLY BEING A FORM OF CONSEQUENTIAL DAMAGES (New Jersey Federal)

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In Breitman v. National Surety Corporation, the court was faced with the question of whether an insured could request attorney’s fees as part of consequential damages to a claim of bad faith.

The case arose out of a Hurricane Sandy coverage dispute in which the insurer originally denied the insured’s claim for loss and damage to the insured’s property caused by flood, not wind, as a result of Hurricane Sandy. The insured alleged that the insurer “conducted an improper adjustment, wrongfully denied his claim, and delayed payment.” The insured filed suit and set forth claims for breach of contract, breach of the duty of good faith and fair dealing/bad faith, and violations of the New Jersey Consumer Fraud Act. The insurer moved to strike the request for attorney’s fees from the bad faith claim.

In refusing to strike the insured’s request for attorney’s fees as part of his claim for breach of the duty of good faith, the court noted that under New Jersey law, “attorney’s fees are recoverable where provided for under a court rule or statute, pursuant to a contract, or where counsel feels are a traditional element of damages in a particular cause of action.” The court acknowledged that New Jersey law does not allow for an insured to recover attorney’s fees in a direct suit against his insurer for coverage, but explained that fees may be recoverable on a bad faith claim because “consequential economic damages are part of the damages award in a cause of action for bad faith.”

While the insurer urged the court to hold otherwise, the court stated that it was not necessary to conclusively decide this issue at such an early stage in the litigation. As the insured was able to plausibly show that fees may be part of the consequential damages on a claim of bad faith, the court permitted the request to remain, and reasoned that the issue of damages would be revisited if the insured later proved his claim against the insurer.

Date of Decision:  September 29, 2015

Breitman v. Nat’l Sur. Corp., CIVIL ACTION NO. 14-7843, 2015 U.S. Dist. LEXIS 130744 (D.N.J. September 29, 2015) (Simandle, J.)

MARCH 2015 BAD FAITH CASES: MOTION TO DISMISS NOT SUITABLE MEANS TO ADDRESS WHETHER INSURER’S POSITION WAS FAIRLY DEBATABLE, IN THIS ACTION, AND WAS THEREFORE DENIED (New Jersey Federal)

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In Zodda v. National Union Fire Insurance Company, the insured pleaded bad faith, among other claims, for denial of benefits on a disability policy.  The insured brought claims against multiple insurers, alleging an elaborate scheme in marketing the disability insurance at issue, and in denying benefits.  As to the insurance bad faith claim, the insurers brought motions to dismiss under Twombly/Iqbal.

Defendants attempted to introduce a letter concerning the insured’s medical condition to show that coverage was at least fairly debatable, and thus not subject to a bad faith claim.  The court rejected this effort at the motion to dismiss stage. The medical records relied upon were both outside the complaint, and contradicted by the allegations in the complaint.  Further, the motion was premature because “[a] factual issue that appears debatable at the motion to dismiss stage may prove immaterial following discovery.” Thus, whether or not the material facts were fairly debatable would be best addressed at the summary judgment stage, after discovery.

The court did dismiss the claim against one insurer, however, because that insurer had sold its business, prior to the relevant time period, and no request was made to that insurer to pay the benefits at issue. “Under these circumstances, [that insurer] cannot be liable for a bad faith insurance claim when it had no connection to the policy at the point when the claim was denied.”

Date of Decision:  March 4, 2015

Zodda v. National Union Fire Insurance Company, Civil Case No. 13-7738, 2015 U.S. Dist. LEXIS 26206 (D.N.J. March 4, 2015) (Hochberg, J.)

OCTOBER 2014 BAD FAITH CASES: NEW JERSEY FEDERAL JUDGE ELUCIDATES HOW INSUREDS ADEQUATELY PLED BAD FAITH UNDER TWOMBLY TO AVOID DISMISSAL UNDER “FAIRLY DEBATABLE” STANDARD (New Jersey Federal)

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Laing v. American Strategic Insurance Corporation is a Hurricane Sandy case, alleging that the insurer failed to properly adjust the claim and underpaid under the terms of the policy. The insureds alleged that the insurer both misrepresented the scope of the insurance policy and made false representations regarding scope of the damage to their home. Among other claims, the insureds sought relief for breach of the implied covenant of good faith and fair dealing and for bad faith.

The court found that New Jersey’s Supreme Court has held these two putative causes of action amount to the same claim, with the cause of action now being seen as rooted in contract rather than tort.  In interpreting the breach of the implied contractual covenant of good faith and fair dealing in the first party context, an insured must prove (1) the absence of a reasonable basis to deny benefits; and (2) that the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.

There is no bad faith if an insurance claim is “fairly debatable”.  The presence of a “fairly debatable” claim is found where the insured “cannot establish ‘as a matter of law a right to summary judgment on the substantive claim,’ i.e., the underlying contract claim.”

In this case, the insurer moved to dismiss the breach of good faith claims under Twombly/Iqbal in federal court; however, the court found that the pleadings were sufficient to make out a bad faith claim.

The court cited with approval the following allegations being sufficient to support plaintiffs’ case at the pleading stage:  the insurer “refused to pay [Plaintiffs’ claim] in full, despite there being no basis whatsoever on which a reasonable insurance company would have relied to deny the full payment”: the insurer “knew or should have known that it was reasonably clear that the claim was covered”; the insureds “hav[ing] complied with all policy provisions and hav[ing] cooperated fully with the investigation of this claim,” “[the insurer] and/or its agents improperly adjusted the Plaintiffs’ claim”;  the “adjuster misrepresented the cause of, scope of, and cost to repair”; and the insurer “denied at least a portion of the claims without an honest investigation.”

Assuming these allegations to be true as it must under Rule 12(b)(6), this did not make out a fairly debatable case for the insurer at this stage of the litigation. Thus, the court refused to dismiss the claims.

Date of Decision:  October 1, 2014

Laing v. Am. Strategic Ins. Corp., Civil Action No. 14-1103 (MAS) (TJB),  2014 U.S. Dist. LEXIS 139739 (D.N.J. Oct. 01, 2014) (Shipp, J.)

 

THE NEW LAW OF PLEADING BAD FAITH IN FEDERAL COURT

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In 2007, the U.S. Supreme Court reinterpreted the standards for pleading under Rule 8(a), making it harder for a plaintiff to survive a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted.

In deciding a motion to dismiss under Federal Rule of Civil Procedure12(b)(6), trial courts are still required to accept as true all of the factual allegations in the complaint. Federal Rule of Civil Procedure 8(a)(2) further requires, however, that a plaintiff proffer “enough facts to state a claim to relief that is plausible on its face.”  Bell Atlantic Co. v. Twombly, 127 S. Ct. 1955, 1974 (2007) (emphasis added).  “Factual allegations must be enough to raise a right to relief above the speculative level.”  As interpreted by the United States Court of Appeals for the Third Circuit:  “That is to say, there must be some showing sufficient to justify moving the case beyond the pleadings to the next stage of litigation.”  Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008).

Further, a plaintiff is required to do more that assert “labels and conclusions”; and “a formulaic recitation of the elements of a cause of action will not do.”  Twombly, 127 S. Ct. at 1964-65.  In light of Twombly, “it is no longer sufficient to allege mere elements of a cause of action; instead ‘a complaint must allege facts suggestive of [the proscribed] conduct.’”  Phillips, 515 F.3d at 233 (quoting Twombly, 127 S. Ct at 1969 n. 8).

In Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009),  the Supreme Court appears to have taken this test further, making it harder to plead a complaint that will withstand a motion to dismiss.  As with Twombly, there must be allegations of sufficient facts to meet the now stricter standards of Rule 8(a).  Ashcroft makes clear that “[t]he plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully. … Where a complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short of the line between possibility and plausibility of “entitlement to relief.”’”

Further, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Thus, consistent with Twombly, fill-in-the-blank boilerplate statements of the elements of a cause of action will not work in making out a complaint.

The Supreme Court is directing trial judges to accept the truth of well-pleaded facts, though not legal conclusions; but then there is another step to follow:  whether these facts taken as true can show there is an actionable wrong.  Then comes something new from the Court.  Determining whether there is a plausible claim is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”  This appears to leave open the very real possibility that different judges might find the very same claims in a complaint plausible — vs. merely possible — depending on their different experiences and the thinking arising therefrom.  Paying careful attention to the judge in a case, and his/her history, becomes even more important.

Though the Court does not say it, when it refers to the concept of “showing” in Rule 8(a), it appears to be telling the trial court judge to determine in his/her own judgment when, taking the complaint’s factual allegations as true, these allegations can then meet the burden of proof of the claim asserted — or whether they cannot get over the barrier of a 50/50 guess.  If this reading is correct, then a “possible” claim in the Court’s new nomenclature means 50% or less likelihood — and dismissal; while “plausible” means more than 50% — and the case may proceed to the discovery stage.

However, this reading becomes subject to more scrutiny in a bad faith case, where the plaintiff has to show bad faith by clear and convincing evidence, an even higher standard of proof.  The bad faith plaintiff must show that there is no reasonable basis to deny benefits, and that the insurer consciously or recklessly disregarded the absence of a reasonable basis.  If facts are pleaded that can be interpreted just as easily for a reasonable basis as against, the issue will become whether a bad faith claim even survive a 12(b)(6) motion.

The Ashcroft Court states that the Twombly Court found that the conduct pleaded in that case, which may have been reflective of an illicit conspiracy by the defendants, failed to set out a claim “because [the conduct pleaded] was not only compatible with, but indeed was more likely explained by, lawful, unchoreographed free-market behavior.” In Ashcroft itself, the court found that “respondent’s complaint  has not ‘nudged [his] claims’ of invidious discrimination ‘across the line from conceivable to plausible.’”

In deciding the motion to dismiss, the Ashcroft Court had first identified all of the boilerplate legal allegations that it did not have to accept as true under Twombly.  The facts of the case are so unusual that they do not necessarily provide a good example of the second prong of possible vs. plausible.

Of specific interest in that case, however, is the reading that Rule 8(a) controls Rule 9.  Rule 9 allows intent to be pleaded generally.  Thus, there now apparently have to be facts pleaded that give a context to support a knowing or reckless intent; and a defendant’s knowledge can no longer be baldly pleaded or accepted without such a factual context.  The import for pleading a bad faith claim’s second element is clear.  There must be some factual context pleaded as a basis for asserting the insurer’s knowing or reckless disregard of the reasonable course of conduct that the insurer should have taken.

As to what will happen if a trial court dismisses a case on a Twombly/Ashcroft motion, the Third Circuit has issued a strong directive to a trial judge who properly dismissed the claims under Twombly, but did not give the plaintiff leave to amend:  “Nonetheless, the District Judge erred when he dismissed the complaint without offering Phillips the opportunity to amend her complaint. It does not matter whether or not a plaintiff seeks leave to amend. We have instructed that if a complaint is vulnerable to 12(b)(6) dismissal, a district court must permit a curative amendment, unless an amendment would be inequitable or futile.” Phillips v. County of Allegheny, 515 F.3d at 236.  This is the likely course that will be followed by federal trial courts in Pennsylvania, at least on a first dismissal.