Archive for the 'NJ – Punitive Damages' Category

PUNITIVE DAMAGES NOT PERMITTED ABSENT A SPECIAL RELATIONSHIP OR AGGRAVATED CIRCUMSTANCES; FIRST PARTY INSURANCE CLAIMS DO NO CREATE A FIDUCIARY RELATIONSHIP (New Jersey Federal)

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The insured disputed the sum the insurer was willing to pay for property damage. She brought claims for breach of contract and breach of the implied covenant of good faith and fair dealing, seeking punitive damages on both counts. The original complaint was dismissed and she filed an amended complaint. The insurer moved to dismiss the punitive damages claims.

In New Jersey, punitive damages are governed by statute, N.J.S.A. §2A:15-5.12(a): “Punitive damages may be awarded to the plaintiff only if the plaintiff proves, by clear and convincing evidence, that the harm suffered was the result of the defendant’s acts or omissions, and such acts or omissions were actuated by actual malice or accompanied by a wanton and willful disregard of persons who foreseeably might be harmed by those acts or omissions.”

Under New Jersey law, punitive damages require more than showing a breach of good faith obligations. Egregious circumstances are required, described by the court as malicious, evil-minded, or wanton acts of reckless disregard. In this case, the insured failed to plead actual malice or a wanton and willful disregard for her rights, and the punitive damages claims were dismissed.

Specifically, as to the breach of contract claim, the insured claimed that “aggravated circumstances” were present, providing an exception to the usual rule that punitive damages cannot be recovered for contract claims. The court thought otherwise: “Plaintiff’s Amended Complaint does not provide adequate factual allegations to support this assertion, nor does she suggest the existence of any fiduciary relationship.”

As to the implied covenant of good faith and fair dealing claim, the court again focused on whether there was any special relationship between the insured and insurer, or aggravated circumstances. In a first party coverage case, New Jersey law holds there is no fiduciary relationship. Thus, punitive damages cannot be asserted under a special relationship theory. Further, as stated above, no aggravated circumstances were pleaded.

In addition, the court looked at the leading case of Pickett v. Lloyd’s on tort theories and punitive damages, stating:

Plaintiff relies on Pickett, … as to an insurance company’s bad faith liability when denying benefits or processing a claim. …. The court in Pickett held that a claimant must show that either there was no debatable reason to deny benefits or, as to a processing delay, no valid reason existed for the delay and the insurance company knew or recklessly disregarded that fact. …. The court also asserted that while there is no right to punitive damages for an insurer’s wrongful refusal to pay a first-party claim, “[d]eliberate, overt and dishonest dealings” were torts distinct from a bad-faith claim. …. As pled, Defendant’s behavior does not rise to the level of egregiousness required for an award of punitive damages. Plaintiff has not sufficiently alleged that there were any deliberate, overt, or dishonest dealings on Defendant’s part.

As the insured had already been given an opportunity to re-plead punitive damages in an amended complaint, the punitive damages claims were dismissed outright.

Date of Decision: June 20, 2019

Johnson v. Encompass Insurance Co., U. S. District Court District of New Jersey Civil Action No. 17-3527 (JMV) (MF), 2019 U.S. Dist. LEXIS 103290, 2019 WL 2537809 (D.N.J. June 20, 2019) (Vazquez, J.)

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.)

SEPTEMBER 2017 BAD FAITH CASES: NO BAD FAITH WHERE CLAIM DENIAL DEBATABLE, AND NO PUNITIVE DAMAGES CLAIM POSSIBLE (District of New Jersey)

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The insureds purchased a property in 2004. Initially, the insureds did not know that the property contained an underground heating oil tank. In May of 2014, the insureds had the tank removed. During removal, a municipal inspector detected a fuel oil discharge on the property. The discharge resulted in soil and groundwater contamination, and the insureds incurred significant remediation costs.

The insureds submitted claims for the remediation under their homeowners policies, to two insurers. The insurers rejected the claim because the loss was not a sudden and accidental occurrence. Insurer I’s expert report stated that the loss was not “a result from a quick, abrupt, or catastrophic event.”

The insureds filed a coverage action against Insurers I and II, and asserted claims of bad faith. The insurers moved for summary judgment on the bad faith claims, arguing that the insureds failed to show the absence of a reasonable basis for denial of the claim. The insureds did not contest insurers’ argument that its position was debatable, and as such, the Court deemed the issue conceded. Thus, the Court granted Insurer I and II’s motion for summary judgment as to the bad faith claim.

Insurer II also moved for summary judgment as to the insureds’ claim for punitive damages. Because the standard for punitive damages “is a showing by clear and convincing evidence of some egregious circumstances or wantonly reckless or malicious conduct by the insurer[,]” an even more exacting standard than the one used for bad faith, the Court struck this claim.

Date of Decision: August 17, 2017

Benjamin v. State Farm Ins. Co., No. 15-4123, 2017 U.S. Dist. LEXIS 131078 (D. N.J. Aug. 17, 2017) (Simandle, J.)

MARCH 2016 BAD FAITH CASES: (1) BAD FAITH CLAIM FOR FAILURE TO COMMUNICATE SETTLEMENT DEMANDS WITHIN POLICY LIMITS REQUIRE SAME PROOF UNDER PENNSYLVANIA OR NEW JERSEY LAW; (2) POTENTIAL LOWER STANDARD FOR PUNITIVE DAMAGES IN PENNSYLVANIA NOT A BASIS TO DISMISS CLAIM; (3) ACTIONABLE CLAIM AGAINST AN INSURER’S MANAGING AGENT FOR CONTRIBUTION (New Jersey Federal)

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In Allegheny Plant Services v. Carolina Casualty Insurance Company, the insured was subject to personal injury tort claims. The carrier provided defense counsel, and the case went to trial.  The jury verdict exceeded policy limits by nearly $700,000.  The insured brought suit against its insurer for failing to settle and/or inform the insured that there was an opportunity to settle within policy limits.  The insurer also sued appointed defense counsel.  Defense counsel joined the insurer’s agent that was allegedly engaged to monitor and manage the defense litigation, on a theory that the agent knew the policy limits and failed to manage the litigation prudently.

Although the case was transferred to New Jersey, the insured brought a Pennsylvania statutory bad faith claim against the insurer. The insurer sought to dismiss that claim on summary judgment. The court denied that motion.  Likewise the court denied the managing agent’s motion to dismiss defense counsel’s claim for contribution.

The court applied a conflict of laws analysis on the bad faith claim. Although New Jersey’s insurance bad faith claim is based in common law (the “fairly debatable” standard), not statute, the basic standards of proof are the same:  the lack of a reasonable basis to deny benefits, and a knowing or reckless disregard of that fact in denying benefits. The court observed that Pennsylvania’s courts had rejected proof of self-interest or ill-will as a third element.

The court then addressed the potential conflict between Pennsylvania’s right to punitive damages under the Bad Faith statute, and New Jersey’s general statute on punitive damages. It found a lack of clarity in the law on when punitive damages may be allowed under Pennsylvania’s Bad Faith statute, i.e., can punitive damages be awarded solely on a finding of statutory bad faith, and is that a different, lower, standard than an award of traditional punitive damages?

The court then stated: “I find it plausible that Pennsylvania would permit, if not require, a punitive damages award based on a bad faith verdict. Such a verdict, however, would have to carry within it the factual basis for a traditional award of punitive damages. Otherwise, punitive damages would be awarded in every bad faith case; if that had been intended, I would have expected a much clearer legislative statement to that effect. At any rate, such a conflict as to punitive damages—even if it existed—would not require me to dismiss Count 3, the relief sought here.”

Without resolving this critique of Pennsylvania law, the court went on to observe that should this issue arise at trial, Pennsylvania and New Jersey law could apply to proving bad faith, as both state’s laws are identical on that issue.  And, if it came down to it at trial, the parties could again move to determine which state’s law applied to punitive damages. Thus, there was still no basis to dismiss the case under either state’s law. Further, were there a true conflict, the court concluded that Pennsylvania law would apply; which would seem to resolve the punitive damages issue, but the court appeared to leave that open up to the time of trial.

As to the managing agent’s motion to dismiss, the court observed that the key to a viable claim for contribution among joint tortfeasors  is “common liability to the plaintiff at the time the cause of action accrued.” The court found that defense counsel’s third party complaint against the alleged agent adequately set forth a claim that that the managing agent contributed to a unitary injury suffered by the insured. Factual issues concerning the ability to control the defense, and the alleged agent’s contractual relations with the insurer, among other things, could not be disposed of at the motion to dismiss stage.

Date of Decision:  March 17, 2016

Allegheny Plant Servs. v. Carolina Cas. Ins. Co., No. 14-4265, 2016 U.S. Dist. LEXIS 35189 (D.N.J. Mar. 17, 2016) (McNulty, J.)

SEPTEMBER 2015 BAD FAITH CASES: COURT (1) FINDS CLAIM FOR BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING SUBSUMED IN COUNT FOR BAD FAITH; AND (2) DISMISSES DEMANDS FOR PUNITIVE DAMAGES AND ATTORNEY’S FEES IN FIRST PARTY BREACH OF CONTRACT/BAD FAITH CASE (New Jersey Federal)

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In Gilliam v. Liberty Mutual Fire Insurance Company, the insureds brought claims for breach of contract, breach of the covenant of good faith and fair dealing, and bad faith denial of insurance benefits after the insureds’ home suffered damage caused by Hurricane Sandy.

The insureds alleged that the insurer “improperly adjusted the claims” and “wrongfully denied at least a portion of the claim without adequate investigation.” The insureds further claim that they were underpaid for damages caused by Hurricane Sandy, and also alleged that the insurer “failed to affirm or deny coverage for their losses within a reasonable time period.”

The insurer sought to dismiss the breach of the implied covenant of good faith and fair dealing claim “on the ground that the claim is subsumed within [the insureds’] bad faith claim set forth in the third count of the complaint.”

The District Court stated that the New Jersey Supreme Court “has recognized a cause of action for, and established the applicable standard governing, an insurance company’s bad faith refusal to pay a claim pursuant to a policy of insurance.” In a case in which the insured brought an action against its insurance carrier, claiming breach of the implied covenant of good faith and fair dealing for failing to timely pay the insured’s claim, the New Jersey Supreme Court had found that the bad faith cause of action rested upon the implied covenant of good faith and fair dealing, which is “to be implied in every contract.”

Thus, the present District Court decision found that any analysis relevant to the determination of the insureds’ claim for breach of the implied covenant of good faith and fair dealing would be implicitly incorporated into the bad faith cause of action, and it dismissed this claim.

The District Court next addressed whether “punitive damages may be assessed against an insurance carrier for the allegedly wrongful withholding of insurance benefits.” In making this determination, the Court pointed to New Jersey case law for the proposition that punitive damage awards are prohibited in contract actions absent a special relationship between the parties. This “special relationship” exception has been narrowed to the extent that “an insurer’s task of determining whether the insurance policy provided coverage of an accident cannot be deemed to give rise to … a [fiduciary] duty on the part of the insurer.”

Rather, “[t]he parties, in this respect, are merely dealing with one another as they would in a normal contractual situation. They are not acting as principal and agent.”

In the present case, the insureds failed to plead facts that would show such egregious, intolerable, or outrageous conduct that would be sufficient to support an award of punitive damages. Further, the case was a first party insurance claim, which “cannot support a finding of a fiduciary relationship sufficient to invoke the special relationship exception to the general rule prohibiting punitive damage awards in actions of this form.”

Thus, there was no more than a breach of contract action, which lacked “in both aggravated circumstances and facts indicative of a fiduciary, or agent-principal, relationship between the parties,” and the Court dismissed the claim for punitive damages.

The Court also rejected the insureds’ claim for attorney’s fees because the matter involved a first party claim for which counsel fees may not be recovered.

Date of Decision: September 25, 2014

Gilliam v. Liberty Mut. Fire Ins. Co., CIVIL NO. 14-cv-00361, 2014 U.S. Dist. LEXIS 184510 (D.N.J. September 25, 2014) (Sheridan, J.)

This opinion is virtually identical to the decision in Torres v. Liberty Mutual Fire Insurance Company

SEPTEMBER 2015 BAD FAITH CASES: COURT (1) FINDS CLAIM FOR BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING SUBSUMED IN COUNT FOR BAD FAITH; AND (2) DISMISSES DEMANDS FOR PUNITIVE DAMAGES AND ATTORNEY’S FEES IN FIRST PARTY BREACH OF CONTRACT/BAD FAITH CASE (New Jersey Federal)

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The insureds brought claims for breach of contract, breach of the covenant of good faith and fair dealing, and bad faith denial of insurance benefits after the insureds’ home suffered damage caused by Hurricane Sandy.

The insureds alleged that the insurer “improperly denied at least a portion of the claim without adequate investigation” and they claimed to have been “underpaid to date for the damages sustained as a result of Hurricane Sandy.” The insureds further argued that the insurer “failed to affirm or deny coverage for their losses within a reasonable time period.”

The insurer moved to have the breach of the covenant of good faith and fair dealing count dismissed, along with the insureds’ demands for punitive damages and attorney’s fees.

The insurer sought to dismiss the breach of the implied covenant of good faith and fair dealing claim “on the ground that the claim is subsumed within [the insureds’] bad faith claim set forth in the third count of the complaint.”

The District Court stated that the New Jersey Supreme Court “has recognized a cause of action for, and established the applicable standard governing, an insurance company’s bad faith refusal to pay a claim pursuant to a policy of insurance.” In a case in which the insured brought an action against its insurance carrier, claiming breach of the implied covenant of good faith and fair dealing for failing to timely pay the insured’s claim, the New Jersey Supreme Court had found that the bad faith cause of action rested upon the implied covenant of good faith and fair dealing, which is “to be implied in every contract.”

Thus, the present District Court decision found that any analysis relevant to the determination of the insureds’ claim for breach of the implied covenant of good faith and fair dealing would be implicitly incorporated into the bad faith cause of action, and it dismissed this claim.

The District Court next addressed whether “punitive damages may be assessed against an insurance carrier for the allegedly wrongful withholding of insurance benefits.” In making this determination, the Court pointed to New Jersey case law for the proposition that punitive damage awards are prohibited in contract actions absent a special relationship between the parties.

This “special relationship” exception has been narrowed to the extent that “an insurer’s task of determining whether the insurance policy provided coverage of an accident cannot be deemed to give rise to … a [fiduciary] duty on the part of the insurer.”  Rather, “[t]he parties, in this respect, are merely dealing with one another as they would in a normal contractual situation. They are not acting as principal and agent.”

In the present case, the insureds failed to plead facts that would show such egregious, intolerable, or outrageous conduct that would be sufficient to support an award of punitive damages. Further, the case was a first party insurance claim, which “cannot support a finding of a fiduciary relationship sufficient to invoke the special relationship exception to the general rule prohibiting punitive damage awards in actions of this form.”

Thus, there was no more than a breach of contract action, which lacked “in both aggravated circumstances and facts indicative of a fiduciary, or agent-principal, relationship between the parties,” and the Court dismissed the claim for punitive damages.

It also rejected the insureds’ claim for attorney’s fees because the matter involved a first party claim for which counsel fees may not be recovered.

Date of Decision: September 26, 2014

Torres v. Liberty Mut. Fire Ins. Co., CIVIL NO. 13-CV-06051, 2014 U.S. Dist. LEXIS 184534 (D.N.J. September 26, 2014) (Sheridan, J.)

AUGUST 2015 BAD FAITH CASES: COURT (1) DENIES INSURER’S MOTION TO DISMISS NJCFA CLAIM AFTER INSUREDS PROVED INSTANCES OF BAD FAITH; (2) FINDS INSUREDS’ CLAIM FOR PUNITIVE DAMAGES INSUFFICIENT; AND (3) HOLDS THAT INSUREDS MAY BE ENTITLED TO ATTORNEYS’ FEES UNDER THE NJCFA ONLY (New Jersey Federal)

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In Ryan v. Liberty Mutual Insurance Company, the Court denied the insurer’s motion to dismiss a claim brought by its insureds under the New Jersey Consumer Fraud Act (“NJCFA”), dismissed the insureds’ claim for punitive damages, and denied the insurer’s motion to dismiss the insureds’ claim for attorneys’ fees.

The dispute arose after the home owned by the insureds was damaged during Hurricane Sandy. The insureds contended that the insurer “unreasonably and in bad faith denied coverage and underpaid for the damage.” The insureds further asserted that the insurer’s agents “improperly adjusted and denied [the insureds’] claims without adequate investigation, even though [the insureds’] losses were covered by the Policy.” Among other things, the insureds also claimed that the insurer was “deceptive in the adjustment of this claim” by “fraudulently creating values and assigning them to the covered loss to increase its own profitability” and by “fraudulently telling its policyholder that the losses were not covered despite evidence that they were.”

Finally, the insureds argued that the insurer’s response to the claim was part of “an ongoing, widespread and continuous scheme to defraud its insureds in the payment of benefits under their policies of insurance.”

In the complaint, the insureds assert claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the NJCFA. The insurer moved to dismiss the NJCFA claim, as well as the insureds’ claims for punitive damages and attorneys’ fees and costs.

The insurer argued that the NJCFA claim should be dismissed because the NJCFA “does not apply to disputes about insurance benefits or coverage.” The Court acknowledged that federal district courts in New Jersey “have split on whether to dismiss NJCFA claims based on an insurer’s denial of benefits.”

However, the Court pointed to case law from the Third Circuit, which noted that the NJCFA applies to a person’s fraudulent conduct whether it occurs “in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid.”

Here, the Court found that the insureds’ NJCFA claim goes to the insurer’s “subsequent performance of its obligations under the insurance contract.” The Court noted that the insureds do not merely allege that the insurer underpaid their benefits, which would only amount to breach of contract, but allege that the insurer acted fraudulently when investigating the property damage.

Because of this allegation, the insureds “make clear that their NJCFA claim targets [the insurer’s] conduct in performing its contract obligations – which distinguished their NJCFA claim from the type of mere underpayment allegation” that concerned the New Jersey Appellate Division when deciding whether to dismiss NJCFA claims based on an insurer’s denial of benefits.

Thus, the Court refused to dismiss the insureds’ NJCFA claims because it predicted the New Jersey Supreme Court would apply the act to the insurer’s allegedly deceptive conduct in investigating the insureds’ property damage.

The Court next dismissed the insureds’ claim for punitive damages, and noted that “deliberate, overt, and dishonest dealings, insult and personal abuse constitute torts entirely distinct from the bad-faith claim.” Because the insureds did not plead facts “that rise to the level of egregiousness necessary for punitive damages in an insurance contract case,” the Court dismissed the punitive damages claim.

Finally, the Court found that the insureds may be entitled to attorneys’ fees. The insureds requested attorneys’ fees in connection with their claim for breach of the implied covenant of good faith and fair dealing and in their Request for Relief, but the Court noted that the New Jersey Supreme Court has stated that the rule granting attorneys’ fees in an insurance action “does not apply when the insured brings direct suit against his insurer to enforce casualty or other direct coverage.”

Thus, the Court dismissed the insureds’ request for attorneys’ fees arising from their breach of implied covenant claim. However, the Court acknowledged that the insureds may be entitled to attorneys’ fees by virtue of their claims arising under the NJCFA, which mandates the recovery of attorneys’ fees. As such, the Court denied the insurer’s motion to dismiss the insureds’ claim for attorneys’ fees in the Request for Relief.

Date of Decision: July 8, 2015

Ryan v. Liberty Mut. Ins. Co., No. 14-06308, 2015 U.S. Dist. LEXIS 88907 (D.N.J. July 8, 2015) (Walls, J.)

MARCH 2015 BAD FAITH CASES: PLAINTIFF STATED BAD FAITH CLAIM WHEN ALLEGING THAT INSURER’S ADJUSTER ADMITTED A BASIS FOR LOSS AS TO WHICH COVERAGE WAS DUE, BUT INSURER LATER DENIED COVERAGE (New Jersey Federal)

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In Bannon v. Allstate Insurance Company, a Hurricane Sandy case, the policy provided “that coverage for dwellings or other structures did not include loss caused by ‘flood, including, but not limited to, surface water, waves, tidal water or overflow of any body of water or spray from any of these things, whether or not driven by wind.’” The insurer denied coverage.

However, in the Complaint, the insured alleged that the insurer’s adjuster had conceded that the home was destroyed by wind.  She further alleged “that other evidence, including statements from witnesses, photographic evidence, and professional opinions, support a finding that Plaintiff’s home was destroyed as a result of wind damage.” The insurer allegedly had called in an engineer to review the claim after the adjuster’s initial position.

The insured brought claims for breach of the implied duty of good faith and fair dealing, as well as breach of contract and under the Consumer Fraud Act (“CFA”).  The insured asserted that the insurer, through its “agents, servants, and employees, improperly adjusted and denied her claims, failed to properly investigate the damage, and unjustifiably refused to perform its obligations.”  The insurer moved to dismiss. The issue was whether the insurer’s position was “fairly debatable.”

The Court stated: “The question of whether the claim is ‘fairly debatable’ is, clearly, a fact-specific question. Moreover, it is not obvious from the face of the … Complaint, including the alleged facts that [the insurer’s] adjuster initially opined that the damage to Plaintiff’s home was cause by wind, and that [the insurer] sent an engineer to inspect the property after its denial of coverage, that the denial of coverage for alleged wind damages was ‘fairly debatable.’ While this claim may be subject to dismissal on a summary judgment motion, following discovery, the … Complaint states sufficient facts to permit the claim to go forward.”

The Court further followed “the Third Circuit’s lead by predicting that the New Jersey Supreme Court would find that the New Jersey CFA applies to the payment of insurance benefits.”

The Court did dismiss the punitive damages claim: “Even if Plaintiff can show that Defendant acted in bad faith, Plaintiff has not pleaded facts that rise to the level of egregiousness necessary for punitive damages in an insurance contract case. Certainly the facts as alleged do not show actual malice, or a wanton and willful disregard of persons who might be harmed.”

Finally, the court dismissed the attorneys’ fee claim, on the basis that Rule 4:42-9(a)(6) does not apply to first party claims, an issue that has been opened for review by New Jersey’s Supreme Court.

Date of Decision:  February 24, 2015

Bannon v. Allstate Insurance Company, Civil Action No. 14-1229 (FLW)(LHG), 2015 U.S. Dist. LEXIS 21591 (D.N.J. February 24, 2015) (Wolfson, J.)

 

FEBRUARY 2015 BAD FAITH CASES: ALLEGING THAT INSURER MALICIOUSLY AUDITED AND RE-ADJUSTED PREMIUMS DID STATE A CLAIM FOR BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING, EVEN WHERE CLAIMS HANDLING NOT INVOLVED; ATTORNEYS’ FEES NOT PERMITTED; PUNITIVE DAMAGES COULD BE PURSUED (New Jersey Federal)

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In LM Ins. Corp v. All-Ply Roofing Co. the insured alleged, among other things, that the insurer audited its premiums, and reclassified its employees, as revenge for underreporting income, and that this stated a bad faith claim.  The insurer argued there are no recognizable bad faith claims in New Jersey for audit or premium disputes, but rather bad faith claims against insurers in New Jersey are limited to claims handling issues.

The court found for the insured, and held that the insured stated a claim for breach of implied covenant of good faith and fair dealing against Plaintiff based on the insurer’s auditor re-classifying all of insured’s employees as roofers in retaliation for the insured under-reporting its payroll. The insurer had offered no binding authority that New Jersey law limits “bad faith” claims against insurers to claims handling, without affording a viable bad faith action with respect to premium disputes.

Specifically, New Jersey courts imply a duty of good faith and fair dealing in all contracts. “[W]hen a breach of the duty of good faith and fair dealing can be shown, liability may be had in tort as well as in contract under New Jersey common law. An insurer’s obligation to exercise good faith “depend[s] upon the circumstances of the particular case.” “The boundaries of ‘good faith’ will become compressed in favor of the insured depending on those circumstances” presented.

“[I]n New Jersey the covenant of good faith and fair dealing is contained in all contracts and mandates that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.'”

The insured’s Counterclaim states that the insurer’s policy contracts imply that it would deal fairly with the insured and perform its obligation under the contract in good faith. It also alleged that the auditor elected to maliciously disregard the insured’s course of business and performance while exhibiting egregious and outrageous misconduct when the insured attempted to have the classification revised, by claiming every employee of the insured was classified as a “roofer.”

In essence, the insured’s counterclaim stated sufficient facts to claim the insurer consciously manipulated the insured’s premium obligations so as to punish the insured for what the insurer deemed “under-reporting” of its payroll, while maximizing the insurer’s profit at the insured’s expense. This in effect injured the right of insured to receive the “fruits” of the contract, and the insureds were held to have stated a claim for breach of the implied covenant of good faith and fair dealing.

The court did dismiss the claim for statutory attorney’s fees, as inapplicable in first party cases, but did permit the punitive damages claim to go forward, as the counterclaim clearly alleged malice on the part of the insured’s auditor when he willfully, without cause and in retaliation, reclassified the insured’s employees to the highest classification.

Date of Decision:  January 23, 2015

LM Ins. Corp v. All-Ply Roofing Co., Civil Action No. 14-cv-04723, 2015 U.S. Dist. LEXIS 7621 (D.N.J. January 23, 2015) (Linares, J.)

 

DECEMBER 2012 BAD FAITH CASES: COURT DISMISSES BAD FAITH CLAIM BECAUSE DENIAL OF CLAIM ALONE DOES NOT AMOUNT TO LIABILITY; COURT ALSO RULES THAT ATTORNEYS FEES ARE IMPROPER WHERE DISPUTED POLICY IS A FIRST-PARTY SURETY CONTRACT OR BOND (New Jersey Federal)

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In Raritan Bay Fed. Credit Union v. CUMIS Ins. Soc’y, Inc., the court heard a carrier’s motion to dismiss its insured’s claim for bad faith and strike a request for attorney’s fees and punitive damages. The case arose from a coverage dispute over an “Employee or Director Dishonesty” policy purchased by the insured from the carrier.

In 2005, the insured, a credit union, began a new lending program whereby it extended its loan services to local automobile dealerships. However, the insured’s loan manager, who was in charge of approving or denying applications in conformance with the insured’s policy manual, began to obtain improper financial benefits for approving loans. As a result, the insured lost money when various loans defaulted. The insured filed a claim with the carrier, but was denied coverage. The insured subsequently filed suit against the carrier, alleging bad faith among other claims. The carrier filed the instant motion, seeking to dismiss the bad faith count.

The carrier argued that the insured’s complaint did not allege sufficient facts to support a finding of bad faith. In its complaint, the insured had alleged that the policy was meant to cover losses caused by an employee’s dishonest acts, and that in denying coverage for such an event, the carrier acted in bad faith. However, the court sided with the carrier, ruling that these allegations were insufficient to support a finding that the carrier acted with reckless indifference in denying the insured’s claim. The court did not grant leave to amend, but dismissed without prejudice, noting that the insured could amend its complaint if it later discovers facts sufficient to allege bad faith.

Next, the court granted the carrier’s motion to strike the insured’s request for punitive damages because the bad faith count had been dismissed and punitive damages are unavailable for the underlying contract claims.

Lastly, the court denied the insured’s request for attorney’s fees. Specifically, it reasoned that this request should be stricken because the policy at issue was a surety bond, not a liability and indemnity policy. Under New Jersey law, attorney’s fees are only permitted in cases dealing with a liability policy. According to N.J. Ct. R. 4:42-9(a)(6), a surety bond that protects an insured against a third-party is not actually a surety bond, but a liability policy. In such a case, attorney’s fees may be awarded.

However, the court held that the policy in this instance was a surety bond between the insured and its carrier. It did not protect against liability, but existed to pay the insured for acts or omissions of its employees. As such, the unambiguous language of the policy created a suretyship agreement or bond between the parties that fell outside the scope of N.J. Ct. R. 4:42-9(a)(6). Accordingly, the court granted the carrier’s motion and struck this request from the complaint.

Date of Decision: July 22, 2009

Raritan Bay Fed. Credit Union v. CUMIS Ins. Soc’y, Inc., 09-1512, 2009 U.S. Dist. LEXIS 63216, U.S. District Court for the District of New Jersey (D.N.J. July 22, 2009) (Wolfson, J.)