Archive for the 'NJ – Claims Handling Procedures' Category

MAY 2017 BAD FAITH CASES: FINEMAN, KREKSTEIN & HARRIS OBTAINS DISMISSAL OF BAD FAITH CLAIM WHERE COMPLAINT FAILS TO ALLEGE ACTIONABLE CLAIM OF IMPROPER INVESTIGATION (New Jersey Federal)

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Fineman, Krekstein & Harris obtained dismissal of a bad faith claim against the insurer where the insured’s complaint did not set out sufficient facts to make a plausible claim for an inadequate investigation.

The court observed that under the federal rules, courts carry out a three-tiered test to determine if a complaint can survive a motion to dismiss: (1) the court “must take note of the elements the plaintiff must plead to state a claim.”; (2) “the court ‘should identify allegations that, because they are no more than conclusions, are not entitled to the assumption of truth.”; and (3) “when there are well-pleaded factual allegations, the court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.”

In applying this process, the court observed that under New Jersey law, a bad faith plaintiff must show both “the absence of a reasonable basis for denying the claim for coverage; and … that the insurer knew or recklessly disregarded its absence of a reasonable basis.” Further, “if an insurance company’s reasons for denying coverage are ‘fairly debatable,’ then the insurance company cannot be liable for bad faith.”

In this case, the issue was whether the insured’s property loss was the result of vandalism or theft. The insurer’s investigator concluded, after providing the details for his reasoning, that the loss was due to uncovered theft. The insurer denied coverage on that basis. The insured alleged coverage was denied in bad faith on the alleged basis that the insurer did not “undertake an independent investigation into the cause of the alleged loss.”

The court rejected this argument. It found that the insured “failed to allege facts demonstrating that [the insurer] lacked a reasonable basis for denying the claim for coverage, or that it knew or recklessly disregarded its absence of a reasonable basis.” There was no dispute that an investigation was conducted and the investigator concluded the loss was due to theft, not vandalism. There were no allegations of fact to support a claim that the investigation was conducted in bad faith. Rather, the pleadings merely showed that the insured disagreed with how the insurer conducted its investigation. Even if this alleged negligence, “allegations of simple negligence or mistake cannot support a claim for bad faith.”

The court stated: “Indeed, there are no factual allegations indicating that [the insurer] conducted a sham investigation in order to wrongfully deny [the] claim, or that [the] investigation was so woefully deficient that it should have known it lacked a reasonable basis to deny coverage.”

Thus, the motion to dismiss was granted, the court adding that the insured “may move to amend its counterclaim should discovery later reveal bad faith conduct….”

Date of Decision: April 25, 2017

American Southern Home Insurance Company v. Unity Bank, No. 16-3406, 2017 U.S. Dist. LEXIS 62381 (D.N.J. Apr. 25, 2017) (Wolfson, J.)

Hema Mehta of Fineman, Krekstein & Harris was defense counsel.

 

APRIL 2017 BAD FAITH CASES: A COMPLAINT ALLEGING BAD FAITH MUST CONTAIN FACTUAL ALLEGATIONS OF KNOWING OR RECKLESS CONDUCT (New Jersey Federal)

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In our post earlier today, we noted a Pennsylvania Federal Court dismissing bad faith claims for conclusory pleadings, without prejudice. Below is a New Jersey Federal Court doing the same.

Plaintiffs are homeowners who purchased an insurance policy, which they alleged entitled them to coverage for property damage sustained by their home. After the Insurer denied coverage, the Plaintiffs brought suit alleging breach of contract and bad faith. The Insurer later filed a Motion to Dismiss as to the bad faith claim.

The Court granted the motion and agreed that Plaintiffs had failed to state a cognizable bad faith claim. The Court recognized that New Jersey defines bad faith as: (1) the lack of a “fairly debatable” reason for failing to pay a claim, and (2) knowing or reckless disregarded for the lack of a reasonable basis in denying the claim. The lone allegation in the Complaint as to the second element was Plaintiffs’ assertion that the Insurer had “reckless disregard for the rights of the Plaintiffs.”

The Court held that this conclusory allegation was insufficient to state a claim because it left “the Court to infer reckless indifference from the fact that Defendant denied coverage.” The Court declined to take such a leap. The Complaint lacked any allegations explaining how the Insurer acted recklessly, and the Court refused to infer bad faith conduct simply because the Insurer had denied coverage. As the Court explained, this was they very type of speculative pleading forbidden by Twombly and Iqbal. Thus, the Court dismissed the claim, without prejudice.

Date of Decision: April 3, 2017

Williams v. State Farm Fire & Cas. Ins. Co., No. 16-9028, 2017 U.S. Dist. LEXIS 50261 (D.N.J. Apr. 3, 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.)

FEBRUARY 2017 BAD FAITH CASES: INSURER NOT REQUIRED TO REIMBURSE PRIVATE DEFENSE COUNSEL (New Jersey Appellate Division)

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A default was taken against the insured, who hired his own counsel to defend the matter, without notice to the insurer. The court found this a breach of the insured’s duty. However, once put on notice of the suit and default, the insurer took prompt action to vacate the default and settle the matter.

Among other things, the insured sued for bad faith on the basis of the insurer’s refusal to reimburse private counsel’s legal fees. The court granted summary judgment, as the insurer never denied coverage, there was no reason to hire private counsel had the insured put the insurer on notice, and there was no permission from the insurer to hire that counsel as required by the policy.

Date of Decision: December 7, 2016

Kim v. Leading Ins. Group & Leading Ins. Servs., No. A-5161-14T1, 2016 N.J. Super. Unpub. LEXIS 2599 (App.Div. Dec. 7, 2016) (Reisner and Sumners, JJ.) (Unpublished)

DECEMBER 2016 BAD FAITH CASES: NO BAD FAITH WHERE EVIDENCE FAILED TO SHOW LACK OF REASONABLE EVALUATION OR INVESTIGATION; NO PRIVATE ACTION UNDER UNFAIR CLAIMS SETTLEMENT PRACTICES ACT (New Jersey Federal)

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In this Superstorm Sandy property damage case, the insured alleged bad faith, among other claims. The court found the insured could not overcome the “fairly debatable” standard, and make a case for an unreasonable denial that was reckless or intentional in nature.

The insured only provided invoices, an itemized bill for the repair work performed, and corresponding proofs of payment in support of its claim; but none of those documents provided evidence that the property damage at issue occurred as a result of water backup and sump overflow as opposed to flooding. Nor did these documents do anything to contradict the results of the insurer’s investigation and inspection to determine the cause of the reported damages. There was “nothing evidential to suggest that Defendant lacked a reasonable basis for denying Plaintiff’s claim or that Defendant had knowledge of or showed a reckless disregard of the lack of a reasonable basis for denying the claim.” Summary judgment was entered for the insurer.

In addition, the insured had alleged a violation of the Unfair Claims Settlement Practices Act, apparently claiming bad faith; however, there is no private cause of action under that statute. Thus, summary judgment was granted on that issue as well.

Date of Decision: November 15, 2016

Carevel, LLC v. Aspen Am. Ins. Co., No. 13-7581, 2016 U.S. Dist. LEXIS 157919 (D.N.J. Nov. 15, 2016) (Walls, J.)

SEPTEMBER 2016 BAD FAITH CASES: MERE MISTAKES ARE NOT BAD FAITH (New Jersey Federal)

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The federal district court observed that mere mistakes cannot be the basis for bad faith claims under New Jersey law. Opposing the insurer’s summary judgment motion, the insureds asserted 4 bases for bad faith. Of the four grounds asserted for bad faith, two were unsupported and on the other two, the plaintiffs themselves conceded were mistakes by the insurer.  The mistakes included an incorrect date that was corrected; and a statement that the policy lapsed, but the policy was not treated as lapsed.

Date of Decision: July 12, 2016

Andrews v. Merchs. Mut. Ins. Co., 2016 U.S. Dist. LEXIS 89997 (D.N.J. July 12, 2016) (Rodriguez, J.)

Waterfall

Photo by M. M. Ginsberg

APRIL 2016 BAD FAITH CASES: AN INSURER’S DELAY IN ISSUING A COVERAGE DECISION IS NOT, ON ITS OWN, SUFFICIENT TO SUPPORT A BAD FAITH CLAIM (New Jersey Federal)

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In Puzzo v. Metropolitan life Insurance Co., the Court held that an insured could not amend his declaratory judgment complaint to include allegations of bad faith where he failed to allege he was entitled to coverage as a matter of law.

The insured suffered serious brain injuries as a result of a car collision. Pursuant to two insurance policies, the insurer provided the insured with short term disability benefits under both policies, and for approximately two years, provided long term disability benefits.  Approximately two years after the insured’s injury, the insurer terminated the long term disability payments under both policies.  Plaintiff appealed the insurer’s decision under ERISA’s administrative appeals process, but the insurer never issued a final decision on appeal.

The insured brought a declaratory judgment action against the insurer and later sought to amend his complaint under Fed. R. Civ. P. 15(a) to include claims of bad faith.  In the insured’s Motion to Amend he alleged that the insurer acted in bad faith by withholding documents for long periods of time and for failing to obtain necessary medical records before the deadline for issuing a decision on the appeal expired.

The Court denied Plaintiff’s Motion to Amend finding that as alleged, the proposed amendment did not contain sufficient facts to support a finding of bad faith as a matter of law, and was therefore futile.  The Court held that the critical question in a bad faith case was whether there was a “fairly debatable” reason for denying coverage, or in a “delay case”, for delaying a coverage opinion.  Although the insured sufficiently plead that the insurer delayed in responding to his appeal, these allegations were insufficient to show bad faith.  The insured also had to plead that coverage under the policy was not “fairly debatable” and the insurer knew or recklessly disregarded this lack of a reasonable basis when it delayed its coverage decision.   The Court denied the insured’s Motion to Amend, holding that delay, without a corresponding duty to provide coverage, cannot provide a basis for bad faith.

Date of Decision: March 29, 2016

Joseph Puzzo v. Metropolitan Life Ins. Co., NO. 3:15-cv-3190, 2016 U.S. Dist. LEXIS 40766 (D.N.J. March, 29, 2016) (Wolfson, 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.)

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.)

JANUARY 2016 BAD FAITH CASES: PENNSYLVANIA COURT APPLYING NEW JERSEY LAW FINDS THAT BAD FAITH QUESTION COULD GO TO JURY, EVEN WITHOUT ADJUSTER’S TESTIMONY FOR SUMMARY JUDGMENT PURPOSES, IN THE ABSENCE OF ANY SETTLEMENT OFFER BY INSURED WHERE THERE SEEMED TO BE NO DEFENSE TO ONE COMPONENT OF INSURED’S DAMAGES CLAIMS (Philadelphia Federal)

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In Stern v. AAA Mid-Atlantic Insurance Company, the Pennsylvania federal court applied New Jersey bad faith law to an Underinsured Motorist claim.

The court applied the fairly debatable standard, which it quoted as: “To show a claim for 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 of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one. * * * implicit in that test is our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless * * * indifference to facts or to proofs submitted by the insured.”

The insured put on a case at arbitration showing physical injuries, pain and suffering, and economic damages, which resulted in a meaningful award, including a specific finding of economic damages. The insurer’s refusal to pay the insured anything focused on claims for non-economic damages, with no explanation about why it would not settle the economic damages claim.  The court found that “Defendant’s failure to make any settlement offer in the face of Plaintiffs’ proofs and a substantial arbitration award relating specifically to economic losses could be interpreted by a reasonable juror as reckless indifference to the facts.”  The insurer’s verbal threshold argument was deemed inapplicable to underinsured claims.

The court concluded, in denying the insurer’s summary judgment motion: “At trial, Defendant will undoubtedly present testimony from its adjusters as to their analysis of both the economic and non-economic components of the claim, and Plaintiffs will be at a tactical disadvantage by having failed to depose them. The defense is correct that ordinarily a plaintiff’s failure to explore the thought process of the claims adjusters would be fatal to a claim for bad faith. But given the broad confines of this case and Defendant’s failure to make any offer whatsoever, there is a basis on which a jury could reasonably find bad faith. The evidence may be scant, but I cannot conclude that it is non-existent.”

Date of Decision:  December 3, 2015

Stern v. AAA Mid-Atlantic Ins. Co., CIVIL ACTION No. 15-0960, 2015 U.S. Dist. LEXIS 162713 (E.D. Pa. December 3, 2015) (McHugh, J.)