Archive for the 'NJ – No coverage due, no bad faith' Category

TWO BAD FAITH OPINIONS BY NEW JERSEY DISTRICT JUDGE HILLMAN: (CASE 1) CLAIM ADEQUATELY PLEADED, MOTION TO SEVER AND STAY DENIED (CASE 2) NO COVID-19 COVERAGE DUE = NO BAD FAITH (New Jersey Federal)

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This post summarizes two bad faith opinions issued by New Jersey District Judge Hillman in September.

CASE 1 – FIRST PARTY PROPERTY BAD FAITH CLAIM CAN PROCEED

In this first party property damage case, the insurer offered one-ninth of what the insured claim was due.  The insured brought breach of contract, breach of the implied covenant of good faith and fair dealing, and bad faith claims.  The insurer moved to dismiss the latter two claims, and if unsuccessful, moved to sever and stay the bad faith claim.

Breach of implied contractual covenant good faith and fair dealing subsumed in bad faith claim

Judge Hillman first found that the bad faith claim and breach of the implied covenant of good faith and fair dealing claim were redundant.  “[T] requirement to act in ‘good faith’ in processing a claim under an insurance contract is simply the flip-side of the requirement that an insurer may not act in ‘bad faith; in processing that claim. As such, Plaintiff’s claim for the breach of the implied covenant of good faith and fair dealing contained in both of Plaintiff’s counts is redundant of, and subsumed by, Plaintiff’s bad faith claim and must be dismissed as a stand-alone claim, if Plaintiff had intended it to be as such.”

Bad faith claim adequately pleaded

Judge Hillman then found the insured adequately pleaded its bad faith claim.  “[A]n insurance company may be liable to a policyholder for bad faith in the context of paying benefits under a policy. The scope of that duty is not to be equated with simple negligence. In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits.”

To meet this standard:

  1. “[A] plaintiff must show the absence of a reasonable basis for denying benefits of the policy.”

  2. “If a plaintiff demonstrates the absence of a reasonable basis, he must then prove that the defendant knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”

  3. In other words, an insurance company does not act in bad faith if a plaintiff’s insurance claim was “reasonably debatable.”

  4. A claim is “reasonably debatable” if a plaintiff cannot establish as a matter of law a right to summary judgment on the underlying breach of contract claim.

The court agreed some of the plaintiff’s complaint made conclusory allegations, but sufficient facts were pleaded to make out a plausible bad faith claim.  These include factual allegations that the insurer:

  • made misrepresentations concerning the lack of documentation for “abatement and appraisal,”

  • failed to indicate what ongoing investigation was being pursued in violation of the New Jersey Unfair Claims Settlement Practices,

  • determined that Plaintiff was improperly claiming damage for a pre-existing loss of 2013 in the absence of any evidence that there was pre-existing damage in the building from a loss in 2013,

  • made false statements concerning the extent of damage to [building] units 403, 407, 300 and 301,

  • threatened [the insured] with prosecution for “concealment, misrepresentation or fraud” when it knew that the only misrepresentation and fraud committed in connection with this claim had been committed by Great American, and

  • did all these things with the intentional purpose to deny its $267,429.73 claim, which is supported by the estimate of an actual building contractor, and not by a company … that provides services as “independent adjusters” for numerous insurance companies including Great American, and instead pay a fraction of that claim.

Motion to Sever and Stay Denied Without Prejudice

The court applied the four factor test for apply Federal Rule of Civil Procedure 21.  These four factors include:

“(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.”

Judge Hillman observed the tension at issue: “As a general principle it makes sense to hold off discovery on an insurer’s alleged bad faith when such claim is premised on the insured’s success in proving its breach of contract claim. If it is determined that the insurance company did not breach the parties’ contract, then it cannot be found that it acted in bad faith, and, thus, discovery on a claim that may never be considered would tend to be a wasteful expenditure of the parties’ and the Court’s resources. At the same time, however … if an insured is successful on its breach of contract claim and discovery on the insured’s bad faith had been stayed, parties and witnesses may need to be re-deposed and documents re-scanned for relevancy, privilege and other concerns, which would also tend to be wasteful.”

He then observed: “These competing concerns are the reason why the four-factor test is employed to determine whether severance and stay is proper in the particular circumstances of an individual case. In this case, [the insurer] has failed to demonstrate how the general principles of severance and stay of a bad faith claim are specifically applicable here. Unlike [the situation] where the plaintiff had propounded extensive interrogatories relating to the production of voluminous documents not directly related to the plaintiff’s individual dispute, [the insurer] has not indicated that Plaintiff has demanded documents and other information separate from what Plaintiff would demand for its breach of contract claim. Thus, even accepting that the first factor has been met, at this time the Court cannot assess the second factor regarding “whether the separable issues require the testimony of different witnesses and different documentary proof,” and the subsequent third and fourth factors of the Rule 21 test.”

Thus, Judge Hillman denied the request to sever the insured’s bad faith claim and stay discovery on that claim, without prejudice. He added, however, that the insurer could “renew its motion, if appropriate, before the magistrate judge after discovery has commenced.”

Date of Decision:  September 1, 2021

801 Asbury Avenue, LLC v. Great American Insurance Company, U.S. District Court District of New Jersey No. 1:20CV16522NLHAMD, 2021 WL 3910147 (D.N.J. Sept. 1, 2021) (Hillman, J.)

CASE 2 – NO COVID-19 COVERAGE DUE = NO BAD FAITH

This Covid-19 business loss coverage case follows the logic in the Pennsylvania and New Jersey decisions summarized in yesterday’s (September 27, 2021) posts; and in an earlier August 2021 ruling by Judge Hillman.  Like those decisions, Judge Hillman first finds no coverage due for Covid-19 business closure losses. As to bad faith, he then states:

“Here, Plaintiff’s bad faith claim is based on Defendant’s denial of coverage, but as detailed above, that denial of coverage was proper as a matter of law. Accordingly, a bad faith claim based on these facts would not survive dismissal.”

Judge Hillman cited his own August 2021 Covid-19 decision in  Z Business Prototypes LLC v. Twin City Fire Insurance Co., summarized here, “dismissing with prejudice plaintiff’s bad faith claim based on denial of coverage where the virus exclusion applied and barred coverage….”

Date of Decision: September 21, 2021

ABC Children’s Dentistry, LLC v. The Hartford Insurance Company, U.S. District Court District of New Jersey No. CV 20-10044, 2021 WL 4272767 (D.N.J. Sept. 21, 2021) (Hillman, J.)

DENIAL CANNOT BE IN BAD FAITH WHEN THE INSURED’S COVID-19 COVERAGE CLAIM IS REJECTED (Philadelphia Federal and New Jersey Federal)

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The following summaries of two recent Covid-19 coverage cases only address the bad faith issues in those cases. We quote the courts’ clear statement of the law on bad faith in Pennsylvania and New Jersey, made after finding no coverage due in these Covid-19 business loss cases.

First, is Judge Rufe’s recent decision in Infinity Real Estate v. Travelers:

But because Defendant had a reasonable basis for denying Plaintiff’s claims, the denial could not have been in bad faith. See Rancosky v. Wash. Nat’l Ins. Co., 170 A.3d 364, 373 (Pa. 2017) (citations and quotations omitted) (Finding bad faith requires that the insurer “did not have a reasonable basis for denying benefits under the policy.”).

Date of Decision:  September 13, 2021

Infinity Real Estate, LLC v. Travelers Excess and Surplus Lines Company, No. CV 20-6398, 2021 WL 4169417 (E.D. Pa. Sept. 13, 2021) (Rufe, J.)

A virtually identical approach is taken in New Jersey District Judge Martini’s  resolution of a bad faith claim, after finding no coverage for the insured’s Covid-19 business loss claims. Judge Martini states:

[U]nder New Jersey law, to state a claim for bad faith denial of insurance coverage, Plaintiffs were required to show that: “(1) [Defendant] lacked a reasonable basis for its denying benefits, and (2) [Defendant] knew or recklessly disregarded the lack of a reasonable basis for denying the claim.” …. A denial of coverage is, by definition, not made in bad faith where the claim itself is “fairly debatable.” …. Here, because the Court has already determined that Plaintiffs’ claim was not, as a matter of law, covered under the Policy, it stands to reason that Plaintiffs’ claim was “fairly debatable” and Defendant’s denial of coverage therefor was reasonable.

Date of Decision:  August 26, 2021

OTG Management PHL LLC v. Employers Insurance Co. of Wausau, U.S. District Court District of New Jersey, No. 2:21-CV-01240-WJM-MF, 2021 WL 3783261 (D.N.J. Aug. 26, 2021) (Martini, J.)

NO COVERAGE DUE FOR COVID-19 LOSSES IN LIGHT OF VIRUS EXCLUSIONS, AND THUS NO BAD FAITH POSSIBLE (New Jersey Federal - two cases)

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Today’s post addresses two recent cases where New Jersey federal judges held Covid-19 business loss claims barred by insurance policy virus exclusions.

Case 1 (Judge Hillman)

In this Covid-19 business closure case, the insured claimed coverage was due for business interruption, and under the policy’s civil authority coverage provision.  The carrier denied coverage based upon a virus exclusion.  The insured brought breach of contract and bad faith claims, which the insurer successfully moved to dismiss.

First, after an extensive analysis and review of developing case law, the court found the Covid-19 business loss barred by the policy’s virus exclusion.

As to bad faith, the court observed that under New Jersey law, causes of action for bad faith can include a denial of insurance coverage, or conduct that goes beyond coverage denial.  In coverage denial cases, the insured has to prove the lack of a reasonable basis to deny benefits, and a knowing or reckless disregard of the unreasonableness of the carrier’s denial.

Such claims cannot survive if they are fairly debatable; nor can there be a cognizable “bad faith claim for denial of coverage if the insurer was correct as a matter of law in denying coverage.” [Interestingly here, the court cites Third Circuit case law supporting this principle where the courts were addressing Pennsylvania’s bad faith statute, and not New Jersey’s common law insurance bad faith law.  The court also cited this “Pennsylvania” case law on bad faith reaching beyond coverage denial claims.]

New Jersey Federal Judge Hillman dismissed the bad faith claim with prejudice, stating

In the context of a claim for coverage based solely on the Closure Orders where there are no claims that the insured property or nearby property has been physically damaged and access to Plaintiff’s property has not been entirely prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Plaintiff has not shown bad faith in Defendant’s lack of investigation or by denying Plaintiff’s claim. Discovery on this issue would not change that conclusion. As detailed above, the Court has already concluded Defendant was correct as a matter of law in denying Plaintiff coverage. Accordingly, the Court will dismiss with prejudice Plaintiff’s bad faith claim.  …. “Because the Court has found that [the insurer] was not obligated to provide coverage under the terms of the Policy, the bad faith claim similarly fails.”

Judge Hillman looked to Judge Kugler’s 2020 Shore Options opinion, summarized here, to support this conclusion.

Date of Decision:  August 9, 2021

Z Business Prototypes LLC v. Twin City Fire Insurance Company, U.S. District Court District of New Jersey No. CV 20-10075, 2021 WL 3486897 (D.N.J. Aug. 9, 2021) (Hillman, J.)

Case 2 (Chief Judge Wolfson)

After a lengthy analysis, Chief Judge Wolfson ruled that New Jersey’s principles governing insurance policy interpretation required application of a virus exclusion to bar coverage for a group of restauranteurs asserting Covid-19 business loss claims.  She then entered a judgment on the pleadings for the insurer on plaintiffs’ bad faith claim.

We quote the Chief Judge’s bad faith reasoning in full:

In Pickett v. Lloyd’s, 131 N.J. 457, 481 (1993), the New Jersey Supreme Court enumerated two situations under which an insurance company can be held to have acted in bad faith in the context of a first party claim: (1) “denial of benefits” and (2) “processing delay.” The Court reasoned that, like all contracts, an insurance contract contained a covenant of good faith and fair dealing in its performance and enforcement. …

Thus, the Court concluded that the insured should have a remedy when the insurer breaches its fiduciary duty to its insured by acting in bad faith. Id. To prove 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 or the lack of a reasonable basis for denying the claim.” “While the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is reckless indifference to facts or to proofs submitted by the insured, neither negligence nor mistake is sufficient to show bad faith.” …. Rather, it must be demonstrated that the insurer’s conduct is unreasonable and the insurer knows that the conduct is unreasonable, or that it recklessly disregards the fact that the conduct is unreasonable. ….

In the present matter, Plaintiffs assert a claim that Defendant acted with bad faith when it denied benefits set forth in Plaintiffs’ contract with Defendant. … However, as previously discussed, Plaintiffs’ losses are barred by the Virus Exclusion. Consequently, because no coverage exists for Plaintiffs’ claims, the bad faith claim fails.

Date of Decision:  August 12, 2021

JRJ Hospitality, Inc. v. Twin City Fire Insurance Company, U.S. District Court District of New Jersey No. 320CV13095FLWDEA, 2021 WL 3561356 (D.N.J. Aug. 12, 2021) (Wolfson, J.)

[Yesterday’s post summarized a separate August 9, 2021 New Jersey Federal Court opinion, addressing the same bad faith coverage issues, though outside the Covid-19 context, likewise concluding that if no coverage is due, bad faith is not possible.]

NO BAD FAITH POSSIBLE WHERE NO COVERAGE DUE IN THIS COVID-19 CASE (New Jersey Federal)

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New Jersey Federal Judge Wolfson denied plaintiff coverage in this Covid-19 business loss case.  Judge Wolfson found the policy’s virus exclusion unambiguously applied, denied the insured’s motion for summary judgment, and granted the carrier judgment on the pleadings.

[For those interested in the detailed reasoning behind this Covid-19 coverage decision, a copy of Judge Wolfson’s opinion can be found here.  We are only focusing on the bad faith claim.]

In a closing footnote, Judge Wolfson observed:

Neither party includes in its briefing any argument with respect to Plaintiff’s bad faith claim. Nevertheless, it is well-established that under New Jersey law, “a claimant must be able to establish a right to summary judgment, as a matter of law, for coverage before asserting a bad faith claim against an insurer for their refusal to pay a claim.” Mitra v. Principal Ins. Co., No. 15-1259, 2015 WL 4139015, at *3 (D.N.J. July 7, 2015) (citing Polizzi Meats v. Aetna Life & Cas. Co., 931 F. Supp. 328, 339 (D.N.J. 1996). In other words, where the plaintiff cannot “establish a right to summary judgment, the bad faith claim fails.” Id. Accordingly, because Plaintiff has not established a right to summary judgment on its coverage claim, its bad faith claim must also be dismissed.

Date of Decision:  July 29, 2021

Metuchen Center, Inc. v. Liberty Mutual Insurance Company, U.S. District Court District of New Jersey No. CV2012584FLWTJB, 2021 WL 3206827 (D.N.J. July 29, 2021) (Wolfson, C.J.)

NO BAD FAITH CLAIM WHERE NO COVERAGE DUE (New Jersey Federal)

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This is a New Jersey Covid-19 coverage case.  The insurer rejected business loss coverage for a law firm’s Covid-19 business interruption claims, arguing (1) there was no direct physical loss and (2) the virus exclusion applied.

The insured brought claims for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing. New Jersey Federal Judge Bumb observed that “[a]ll the claims require as a threshold matter that Plaintiff is entitled to coverage under the Policy due to the circumstances outlined above, despite [the insurer’s] denial of Plaintiff’s insurance claim.”

Thus, the insured had to prove both “(1) that Plaintiff suffered “direct physical loss of or physical damage to Covered Property” and (2) that the Virus Exclusion does not apply.” The court assumed arguendo the direct physical loss element went in the insured’s favor, to solely address the virus exclusion.  Judge Bumb held the virus exclusion applied to preclude coverage for all of the insured’s claims, including allegedly breaching the duty of good faith and fair dealing.

“In sum, because (1) the Virus Exclusion is unambiguous, (2) the Virus Exclusion excludes from coverage any losses caused by a virus, (3) COVID-19 is a virus, and (4) the but for cause of Plaintiff’s alleged losses and this case is COVID-19, [the insurer’s] denial of Plaintiff’s insurance claim was appropriate. Therefore, Plaintiff’s claims in this action are legally insufficient.”

Date of Decision:  April 14, 2021

Stern & Eisenberg, P.C. v. Sentinel Insurance Company, Limited, U.S. District Court District of New Jersey No. 20-CV-11277RMBKMW, 2021 WL 1422860 (D.N.J. Apr. 14, 2021) (Bumb, J.)

IF COVERAGE IS NOT DUE, BAD FAITH CLAIM FAILS (New Jersey Federal)

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This case involved a professional errors and omissions policy, with a bodily injury exclusion. The carrier denied a defense and indemnification based on this exclusion, but the insured asserted in its complaint that there was an applicable policy exception to this exclusion, bringing claims for breach of contract and bad faith.

On a motion to dismiss, the court found the exclusion applied, and the exception to the exclusion did not apply, and dismissed the breach of contract claim.

Addressing the insured’s bad faith claim, the court observed that, “In order to state a claim for bad faith denial of insurance coverage, a plaintiff must allege the following: (1) the insurer lacked a reasonable basis for denying benefits, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”  Further, “if ‘a claim is fairly debatable, no liability in tort will arise.’”

Interestingly, the court cited Third Circuit precedent on Pennsylvania’s bad faith statute for the proposition that “there can be no bad faith claim for denial of coverage if the insurer was correct as a matter of law in denying coverage.”

“Because the Court has found [the insurer] was not obligated to provide coverage under the terms of the Policy, the bad faith claim similarly fails.”

Date of Decision: September 21, 2020

Shore Options Inc. d/b/a Remax v. Great American Insurance Group, U.S. District Court District of New Jersey No. CV 20-03835 (RBK/JS), 2020 WL 5627211 (D.N.J. Sept. 21, 2020) (Kugler, 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.)

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)