Archive for the 'NJ – Sureties' Category

SEPTEMBER 2017 BAD FAITH CASES: MERE DISAGREEMENT OVER CONTRACT INTERPRETATION DOES NOT AMOUNT TO BAD FAITH IN SUIT AGAINST SURETY (New Jersey Federal)

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Between 2010 and 2016, the insurer issued various performance and payment surety bonds on behalf of ongoing construction projects. In connection with these bonds, the insurer also entered into General Indemnity Agreements (“GIA”) with the plaintiffs.

After execution of one of the GIAs, the insurer began receiving claims against the performance bonds. By November of 2016, insurer made payments totaling $8,424,302.57 toward resolving those claims. However, the insurer estimated that its potential liability for the claims could exceed $18 million.

Under the GIA, the insurer interpreted the plaintiffs as indemnitors and principals of the bonds. As such, the insurer wrote to the plaintiffs on two separate occasions, and demanded that the plaintiffs post cash collateral in the amount of $18,807,737.47 to cover the full amount of the claims. Plaintiffs then filed suit against the insurer and alleged breach of the implied covenant of good faith and fair dealing, and violations of various state consumer fraud statutes, among other claims. The insurer moved to dismiss.

In dismissing the breach of the implied covenant of good faith and fair dealing claim, the Court ruled that “[p]laintiffs’ allegations . . . do little more than indicate a disagreement over contractual interpretation, and fail to provide with any specificity how [the insurer] acted in bad faith.” The Court further held that such conclusory and vague pleading failed to comport with Federal Rule of Civil Procedure 8(a)(2), which requires a short and plain statement showing that the pleader is entitled to relief. Citing the same reasoning relating to the inadequacy of the plaintiffs’ pleading, the Court also dismissed the plaintiff’s state fraud claims against the insurer.

Date of Decision: September 13, 2017

Greenskies Renewable Energy, LLC v. Arch Insurance Co., No. 16-5243-SDW-LDW, 2017 U.S. Dist. LEXIS 148185 (D. N.J. Sept. 13, 2017) (Wigenton, J.)

 

JUNE 2015 BAD FAITH CASES: COURT DISMISSES CLAIM FOR BAD FAITH BREACH OF A SURETY BOND BECAUSE NO SUCH CAUSE OF ACTION IS RECOGNIZED IN NEW JERSEY (New Jersey Federal)

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In U.S. Sewer & Drain, Inc. v. Earle Asphalt Company, the Court dismissed a claim for bad faith breach of a surety bond after the Court found that no such cause of action is recognized in New Jersey. The case arose out of a public construction contract to widen and improve a section of public highway. As required by the New Jersey Bond Act, a payment bond to the New Jersey Turnpike Authority (“NJTA”) was required.

The contractor/defendant arranged for the plaintiff subcontractor to “provide materials and services for the installation of pipelining as part of the project.” However, the contractor refused to pay the subcontractor after a dispute arose about job performance. The subcontractor subsequently made a claim on the payment bond, which the surety refused to pay. The subcontractor brought claims against both the contractor and the surety, including a claim for bad faith breach of a surety bond. The surety sought to dismiss this claim because New Jersey does not recognize a cause of action for bad faith breach of a surety bond.

The contractor cited a case in which the Appellate Division rejected an argument that bail bond issuers were exempt from New Jersey’s Unfair Claims Settlement Practices Act (“USCPA”). The Court found this case to be irrelevant because the statutory provision at issue there did not create a private cause of action. Moreover, the ruling in that case concerning the applicability of the USCPA to sureties was superseded by N.J.A.C. 11:2-17.2.

The Court addressed the only other case finding a cause of action for bad faith breach of a surety bond, which “noted that the New Jersey Supreme Court had recognized the bad faith cause of action against insurers” in a case decided in 1993. However, neither the New Jersey Supreme Court nor any other state court in New Jersey has followed this holding, and two more recent decisions explicitly declined to follow the ruling.

Therefore, the Court found that no cause of action for bad faith breach of a surety bond is recognized in New Jersey, and dismissed the bad faith claim.

Date of Decision: June 1, 2015

U.S. Sewer & Drain, Inc. v. Earle Asphalt Co., Civ No. 15-1461, 2015 U.S. Dist. LEXIS 70178 (D.N.J. June 1, 2015) (Thompson, 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.)