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.)

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