Archive for the 'NJ – Coverage Issues' Category

OCTOBER 2017 BAD FAITH CASES: NO MERITORIUS DEFENSE TO DEFAULT JUDGMENT WHERE POLICY OBTAINED BY FRAUD; INNOCENT THIRD-PARTY NOT ENTITLED TO MINIMUM COVERAGE BECAUSE VEHICLE USED COMMERCIALLY (District of New Jersey)

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Defendants owned a transportation company and used their van to transport passengers between states, for a fee. The insured alleged that a defendant/insured fraudulently used his ex-wife’s personal information to obtain insurance on the van. The van collided with another vehicle on the New Jersey Turnpike. One passenger was injured.

It is undisputed that the van operated as a livery vehicle or taxi at the time of the accident. The policy contains a liability coverage and medical expense exclusion precluding coverage for commercial conveyance.

The insurer asserted a claim for statutory insurance fraud under N.J.S.A. 17:33A-1 (Count I), declaratory relief stating that it has no liability or obligation to pay or indemnify anyone injured in the accident (Count II), and common law fraud (Count III). The insurer moved for default judgment against the defendants/insureds and for summary judgment as to the claims of its alleged coverage obligations. The passengers cross-moved for declaratory judgment, and alleged that they were entitled to minimum coverage pursuant to New Jersey state law.

“[I]n order to establish liability for insurance fraud, [the insurer] must demonstrate that the defendant ‘presented any knowingly false or misleading statement in an insurance application.” The defendant “admitted wrongdoing in procuring a personal policy in the name of [his ex-wife], despite knowing that the Policy would be used for commercial purposes . . . .” As such, the Court granted the insurer a default judgment on the insurance fraud claim, stating “no facts suggest that the . . . Defendants would have a meritorious defense against the common law fraud claim. “The Court further held the policy void ab initio.

Lastly, the Court addressed whether New Jersey’s public policy of compensating innocent third-party accident victims compelled the insurer to provide minimum coverage to the passengers. The Court observed that the New Jersey No Fault Act “is designed to ‘ensure that automobile accident victims are not left without the means to recover financially for their injuries from a judgment-proof tortfeasor[,]’” However, the Court ultimately held that because the van operated as a commercial vehicle at the time of the accident, it did not qualify as an “automobile” under the act. Therefore, the insurer is not required to remit minimum coverage to the third-party passengers.

Date of Decision: September 22, 2017

21st Century Insurance Co. v. Santana, No. 15-7075, 2017 U.S. Dist. LEXIS 155083 (D.N.J. Sept. 22, 2017) (Wolfson, J.)

OCTOBER 2017 BAD FAITH CASES: RESOLUTION OF COVERAGE DISPUTE IN INSURER’S FAVOR LED TO DISMISSAL OF BAD FAITH CLAIM BASED ON SAME COVERAGE DISPUTE (Middle District)

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The insured’s property included a bulk liquid storage facility, and operated a propane gas distribution center containing six large liquid propane storage tanks. The policy included a variety of standard exclusions. Five months after the policy issued, the insured noticed sinkholes at the base of its propane tanks. The insured filed a property loss notice with the insurer, and retained an engineering firm to conduct a site inspection.

The engineering firm concluded that the sinkhole opened up after a period of excessive rainfall. The insurer began investigating the claim under a full reservation of its rights. It ultimately denied coverage pursuant to the policy’s “Cost of Excavation,” “Land and Water,” and “Earth Movement Exclusions”. However, the insurer invited the insured to submit further documentation that could alter its denial of coverage. After some back-and-forth, the insured ultimately brought suit for breach of contract and bad faith. The insurer moved for summary judgment on both claims.

The Court granted the insurer’s motion to dismiss the breach of contract claim for two reasons. First, the insured failed to meet its burden of establishing that the actual property covered under the policy was damaged. Second, the Court ruled that the policy’s flood exclusion precluded coverage. The flood exclusion excluded coverage for damaged caused by “surface water,” and the insured’s own engineering firm confirmed that rainfall/surface water contributed to the opening of the sinkholes.

As to the bad faith claim, the Court observed the heightened evidentiary standard “to provide evidence so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the [insurer] acted in bad faith.” The Court ruled that the undisputed facts showed that the insurer had a reasonable basis for its coverage denial, and that the insured failed to produce evidence that a reasonable jury could use to find bad faith by a clear and convincing standard.

The Court granted the insurer’s motion for summary judgment in its entirety.

Date of Decision: September 18, 2017

Heller’s Gas, Inc. v. International Insurance Co. of Hannover Ltd., No. 4:15-CV-01350, 2017 U.S. Dist. LEXIS 151072 (M.D. Pa. Sept. 18, 2017) (Brann, J.)

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.)

 

IMPORTANT NEW JERSEY SUPREME COURT OPINION ON INSURANCE COVERAGE ANALYSIS PRINCIPLES AND SURPLUS LINES INSURANCE

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On May 25, 2017, the New Jersey Supreme Court issued its opinion in Oxford Realty Group Cedar v. Travelers Excess & Surplus Lines Co., setting out a number of principles on interpreting commercial insurance policies, application of the reasonable expectations doctrine and the doctrine of contra proferentem, and the nature of surplus lines insurance. A list of these principles, as quoted from the majority Opinion, is set out below.

  1. Surplus lines insurance and party sophistication.

“Surplus lines insurance policies, governed by N.J.S.A. 17:22-6.40 to -6.84, offer coverage in specialized situations. Surplus lines policies insure ‘risks which insurance companies authorized or admitted to do business in [New Jersey] have refused to cover by reason of the nature of the risk.’ …. These policies are unique in that the insured parties ‘engage[] in high risk enterprises for which insurance could only be obtained from a surplus lines carrier’ through a broker.’ …. Insureds procure surplus lines policies covering commercial risk through insurance brokers, thus involving parties on both sides of the bargaining table who are sophisticated regarding matters of insurance.”

  1. The role of the Property Coverage Form in shaping policy interpretation.     

“The Property Coverage Form constitutes the insuring agreement and proceeds to delineate the boundaries of coverage under the Policy. It thus establishes the structure for analyzing how the Policy’s parts work together.”

  1. The first step in determining the meaning of policy language and plain language.

“In assessing the meaning of provisions in an insurance contract, courts first look to the plain meaning of the language at issue. ….   ‘If the language is clear, that is the end of the inquiry.’”

  1. How to look at “ambiguity”.

(a)        “[I]n the absence of an ambiguity, a court should not ‘engage in a strained construction to support the imposition of liability’ or write a better policy for the insured than the one purchased.”

(b)        “The presence of an ambiguity is key because ‘if an ambiguity exists, the court will resort to tools and rules of construction beyond the corners of the policy.’”

(c)        “But our courts will not manufacture an ambiguity where none exists.”

(d)       “An ‘insurance policy is not ambiguous merely because two conflicting interpretations of it are suggested by the litigants.’”

(e)        “Nor does the separate presentation of an insurance policy’s declarations sheet, definition section, and exclusion section necessarily give rise to an ambiguity.”

  1. Ambiguity and the doctrine of contra proferentem; sophisticated and unsophisticated insureds.

(a)        “Ordinarily, our courts construe insurance contract ambiguities in favor of the insured via the doctrine of contra proferentem. …. In applying contra proferentem, courts‘adopt the meaning that is most favorable to the non-drafting party.’”

(b)        Sophisticated commercial insureds, however, do not receive the benefit of having contractual ambiguities construed against the insurer. …. Contra proferentem is a consumer-protective doctrine ‘only available in situations where the parties have unequal bargaining power. If both parties are equally ‘worldly-wise’ and sophisticated, contra proferentem is inappropriate.’”

  1. Ambiguity and the doctrine of reasonable expectations.

(a)        “The doctrine of reasonable expectations is a related doctrine [to contra proferetem] commonly applied in cases where an ambiguity is alleged. …. Under that doctrine, “the insured’s ‘reasonable expectations’ are brought to bear on misleading terms and conditions of insurance contracts and genuine ambiguities are resolved against the insurer.’”

(b)        “Similar to the doctrine of contra proferentem, the doctrine of reasonable expectations is less applicable to commercial contracts.”

  1. The litigants cannot themselves create ambiguity in language.

In rejecting an argument raised by the insured on the existence of ambiguity, the Court stated that the insured’s “alternative reading presents a conflicting interpretation suggested by litigants rather than a genuine ambiguity.”

Oxford Realty Group Cedar v. Travelers Excess & Surplus Lines Company, No. A-85 September Term 2015, 077617 (New Jersey Supreme Court May 25, 2017) (Opinion by Justice Fernandez-Vina, joined by Chief Justice Rabner, and Justices LaVecchia, Patterson, and Solomon)

Fineman, Krekstein & Harris, P.C.’s coverage group is headed by Hema P. Mehta, Esquire.

MAY 2017 BAD FAITH CASES: NO BAD FAITH WHERE INSURER’S INTERPRETATION OF POLICY LANGUAGE WAS FAIRLY DEBATABLE (New Jersey Federal)

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In this case, the insured was an insurer itself (the plaintiff), which was in turn insured under a Trustees Errors and Omissions Liability Insurance for Self Insured Funds by the bad faith defendant insurer (defendant). The plaintiff had settled a matter for its insured above its policy limits, expecting contribution from excess insurers. The excess insurers asserted that they had not received proper notice from plaintiff that the claim could exceed policy limits, and denied any duty to pay toward the settlement.

Without admitting any actual error, the plaintiff sought coverage from defendant for the sum over its policy limits, should that exposure remain due to plaintiff’s failure to give notice to the excess insurers. The defendant denied coverage, asserting that there was no “claim” against the plaintiff as defined in the policy because there was no demand made or threat of litigation against the plaintiff. The defendant had asked that the plaintiff keep it advised of any such developments.

The court found that the policy language was unambiguous and the defendant’s basis for denying coverage was “fairly debatable”. Thus, there could be no bad faith claims, and such claims were dismissed.

Date of Decision: May 11, 2017

New Jersey Schools Insurance Group v. Meadowbrook Insurance Group, No. 16-1199, 2017 U.S. Dist. LEXIS 71908 (D.N.J. May 11, 2017) (Bumb, J.)

glad-may-2017

MAY 2017 BAD FAITH CASES: NO BAD FAITH WHERE REASONABLE BASIS TO DENY ULTIMATELY COVERED CLAIM, AND GOVERNING LAW UNDEVELOPED AT THE TIME OF DENIAL (New Jersey Appellate Division)

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The appellate court addressed bad faith in this environmental contamination coverage case. The panel reiterated the law that “an 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. 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.”

The court then restated the “fairly debatable” standard, which mandates that an insured bad faith plaintiff must be able to establish “as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.” The court affirmed that the trial court’s summary judgment dismissing the bad faith claim was proper. Although the appellate court affirmed a finding that coverage was due, the insurer had a reasonable basis to deny the claim, “particularly considering that the governing law was not as developed at that time as it is now.”

Date of Decision: April 21, 2017

Mid-Monmouth Realty Assocs. v. Metallurgical Indus., DOCKET NO. A-0237-14T2, 2017 N.J. Super. Unpub. LEXIS 993 (App.Div. Apr. 21, 2017) (Brown, Fuentes, Simonelli, JJ.)

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Photo by M. M. Ginsberg

MAY 2017 BAD FAITH CASES: NO EVIDENCE OF BAD FAITH WHEN INSURER’S ACTS MEET POLICY TERMS AND CONDITIONS (New Jersey Appellate Division)

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In this New Jersey appellate case, after finding for the insurer on coverage, the court found no evidence of bad faith. An insured “’must establish the merits of his or her claim for benefits. If there is a valid question of coverage, i.e., the claim is “fairly debatable,” the insurer bears no liability for bad faith.’” In this case, the insurer denied claims above a specific sum consistent with the policy’s terms and conditions. For this reason, the court concluded that there was “no evidence of bad faith on behalf of defendant.”

Date of Decision: May 3, 2017

Schultz Furriers, Inc. v. Travelers Cas. Ins. Co. of Am., NO. A-0170-15T1, 2017 N.J. Super. Unpub. LEXIS 1072 (App.Div. May 3, 2017) (Fasciale, Sapp-Peterson, Yannotti, JJ.)

bill-yard

MARCH 2017 BAD FAITH CASES: NO BAD FAITH WHERE NO COVERAGE DUE (New Jersey Appellate Division)

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This case involved a denial of coverage on the basis that the insured failed to get his car physically inspected after purchase. The court affirmed a grant of summary judgment on the coverage claim, and on the bad faith claim.

As to the bad faith claim, an “insured who alleges bad faith by the insurer must establish the merits of his or her claim for benefits. If there is a valid question of coverage, i.e., the claim is ‘fairly debatable,’ the insurer bears no liability for bad faith.” The court found the claim at issue was “fairly debatable”. The insurer was entitled to deny the claim outright. It had “complied with all notice and suspension procedures provided in the regulations. It did not have discretion to provide coverage when plaintiff did not comply and have the vehicle inspected.”

Date of Decision: March 14, 2017

Gibbins v. Gov’t Emples. Ins. Co. Geico, DOCKET NO. A-1035-15T3, 2017 N.J. Super. Unpub. LEXIS 632 (App. Div. Feb. 28, 2017) (Fasciale and Gilson, JJ.)

 

FEBRUARY 2017 BAD FAITH CASES: NO BAD FAITH WHERE INSURER DID NOT SECRETLY CONCEDE COVERAGE, NOR RELY UPON A CLEAR ERROR IN ITS DENIAL LETTER (New Jersey Federal)

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The New Jersey federal court had to apply the “reasonably debatable” standard to the bad faith denial claim in this matter. The insured had two theories of bad faith liability.

The first was that the insurer’s adjuster sent an internal email conceding coverage. However, what the email actually stated was that while the damage claims may have fallen within one policy definition, it also referenced potentially applicable exclusions. “Thus, the critical email fails to support [the insured’s] repeated allegation that the email unequivocally reflects that [the insurer] believed that [its insured] had coverage. Instead, the email itself states that exclusions may apply which would negate coverage.”

Second, the insurer’s denial letter included an erroneous interpretation of the policy, affecting the exclusion. The insurer admitted it made this error. There was no bad faith, however, because the insurer never pressed forward on this position, and it “took the same position regarding denial of coverage without reference to either limitation.” By contrast: “If the facts were different, for example if [the insured] had evidence that [the insurer] denied the claims believing that they were in fact covered, but attempted to pull a sleight of hand by pointing to irrelevant policy provisions, the Court’s decision concerning bad faith could be different.” This was not the case, and summary judgment was granted to the insurer on the bad faith claim.

Date of Decision: December 30, 2016

National Manufacturing Co. v. Citizens Ins. Co. of Am., No. 13-314, 2016 U.S. Dist. LEXIS 180145 (D.N.J. Dec. 30, 2016) (Vazquez, J.)

NOVEMBER 2016 BAD FAITH CASES: COURT FINDS THAT (1) LOSSES QUALIFIED AS ACCIDENTAL OCCURRENCES AND WERE SUBJECT TO COVERAGE; AND (2) INSURED DID NOT ACT IN BAD FAITH IN SETTLING CLAIMS WITH CUSTOMERS WITHOUT INSURER’S CONSENT (New Jersey Superior Court Appellate Division)

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The insured made animal health products, and filed a complaint seeking a declaratory judgment that its insurer was required to provide coverage for economic losses suffered by three of the insured’s customers. The customers raised chickens for human consumption, and alleged that the growth of the chickens were stunted due to the chickens ingesting a drug made by the insured intended to control a common intestinal disease. The insured also alleged that the insurer had breached the implied covenant of good faith and fair dealing. Both parties moved for summary judgment.

In granting summary judgment in favor of the insurer, the trial court found that there was no coverage and that the insured waived its right to indemnification by settling customer claims without the insurer’s consent. The insured appealed.

On appeal, the Appellate Division reversed, and concluded that the losses associated with the growth-stunting effects of the insured’s product did constitute “occurrences” and “property damage” within the meaning of the provisions in the policy providing coverage. The Court reasoned that the pivotal question under the insuring clauses was whether the stunted growth of the chickens allegedly caused by the insured’s product was an “accident”, and therefore an “occurrence”. The Court found that the stunted growth was a covered occurrence, because it was not foreseeable that the additive consumed by the chickens would lead to harmful side effects.

The Appellate Division rejected the insurer’s contention that any coverage it may owe to the insured for the payments to the three customers was nullified because the insured settled with the customers without the insurer’s consent. The insurer argued that the insured did not act in good faith when it settled with one of its customers because “it did so before either the amount of damages or its liability to [the customer], if any, was even remotely clear.” However, the Court found that the insured did not act in bad faith when it settled with its customer, as two and a half months had passed after the insured submitted the claim to the insurer and had yet to receive a response. The Court reasoned that in this situation, the insured “made a reasonable business decision to settle, to ensure continued relations with an important customer and to avoid the risks and costs of litigation.”

Date of Decision: July 14, 2016

Phibro Animal Health Corp. v. Nat’l Union Fire Ins. Co., No. A-5589-13T3, 2016 N.J. Super. Unpub. LEXIS 1632 (Super. Ct. App. Div. July 14, 2016) (Accurso, O’Connor, and Sabatino, JJ.)

 

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Photograph by M. M. Ginsberg