Archive for the 'NJ – Lawyer’s-Attorney’s Fees' Category

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 (Unpublished)

OCTOBER 2015 BAD FAITH CASES: COURT DOES NOT DISMISS CLAIMS FOR ATTORNEY’S FEES IN BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING CLAIM AS POTENTIALLY BEING A FORM OF CONSEQUENTIAL DAMAGES (New Jersey Federal)

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In Breitman v. National Surety Corporation, the court was faced with the question of whether an insured could request attorney’s fees as part of consequential damages to a claim of bad faith.

The case arose out of a Hurricane Sandy coverage dispute in which the insurer originally denied the insured’s claim for loss and damage to the insured’s property caused by flood, not wind, as a result of Hurricane Sandy. The insured alleged that the insurer “conducted an improper adjustment, wrongfully denied his claim, and delayed payment.” The insured filed suit and set forth claims for breach of contract, breach of the duty of good faith and fair dealing/bad faith, and violations of the New Jersey Consumer Fraud Act. The insurer moved to strike the request for attorney’s fees from the bad faith claim.

In refusing to strike the insured’s request for attorney’s fees as part of his claim for breach of the duty of good faith, the court noted that under New Jersey law, “attorney’s fees are recoverable where provided for under a court rule or statute, pursuant to a contract, or where counsel feels are a traditional element of damages in a particular cause of action.” The court acknowledged that New Jersey law does not allow for an insured to recover attorney’s fees in a direct suit against his insurer for coverage, but explained that fees may be recoverable on a bad faith claim because “consequential economic damages are part of the damages award in a cause of action for bad faith.” While the insurer urged the court to hold otherwise, the court stated that it was not necessary to conclusively decide this issue at such an early stage in the litigation. As the insured was able to plausibly show that fees may be part of the consequential damages on a claim of bad faith, the court permitted the request to remain, and reasoned that the issue of damages would be revisited if the insured later proved his claim against the insurer.

Date of Decision:  September 29, 2015

Breitman v. Nat’l Sur. Corp., CIVIL ACTION NO. 14-7843, 2015 U.S. Dist. LEXIS 130744 (D.N.J. September 29, 2015) (Simandle, 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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In Torres 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 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: IN FIRST PARTY ACTION, UNDER NEW JERSEY LAW, ATTORNEY’S FEES ONLY RECOVERABLE FOR BAD FAITH, NOT FOR SIMPLE BREACH OF CONTRACT (New Jersey Federal)

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In 213-15 76th Street Condominium Association v. Scottsdale Insurance Company, the insured sought attorney’s fees for a first party claim against its insurer.  Attorneys’ fees are only permitted in such circumstances, if the insured pleads a claim for bad faith.  However, where the claim is only for breach of the insurance contract, attorney’s fee awards are prohibited.  In this case, the plaintiff did not set out a bad faith claim, but at most asserted that future discovery may elucidate such a claim exists.  Thus, there was no basis for attorney’s fees, though the court dismissed the attorney’s fee claim without prejudice.

Date of Decision:  July 31, 2015

213-15 76th St. Condo Ass’n v. Scottsdale Ins. Co., Civil No. 14-7695 (NLH/JS),  2015 U.S. Dist. LEXIS 100212 (D.N.J. July 31, 2015) (Hillman, 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: INSURER ENTITLED TO ATTORNEY’S FEES AGAINST OTHER INSURER IN DECLARATORY JUDGMENT ACTION; CLAIM OF UNCLEAN HANDS REJECTED (New Jersey Federal)

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In Carolina Casualty Insurance Company v. Travelers Property Casualty Company, the plaintiff insurer brought a declaratory judgment action against two other insurers.  It sought a judgment that it owed no defense or coverage obligations in connection with an underlying claim.  The defendant insurers were successful in finding plaintiff owed coverage.  The plaintiff insurer was required to pay reimbursement toward a prior settlement, paid fully by defendant insurers.

The defendant insurers sought attorney’s fees and costs under R. 4:42(9)(a)(6), as the prevailing parties in the coverage action.  The parties agreed a successful carrier could recover under the rule, however, the plaintiff insurer argued the defendant insurers should not be allowed to recover, under the doctrine of unclean hands.  It claimed that the defendant insurers were precluded from recovery for deliberate delays and failures to settle, and by bringing a claim against another insurer which they later abandoned; all of which allegedly increased the legal fees.

The court rejected this argument, finding that there was “no conduct so inequitable as to bar an otherwise appropriate recovery.” Rather, the defendant insurers had a “right to assert their case against a potentially liable insurer…, [and] [t]hat they subsequently chose to release their claims (which turned out to be worth $15,000) is not blameworthy.”  Thus, they could still recover fees and costs under Rule 4:42-9(a)(6).

Moreover, even if these carriers were somehow “dilatory, these acts are not ‘directly related’ in the sense that they are inconsistent with the basic entitlement to costs.” The court analogized this to the recovery of attorney’s fees in insurance bad faith cases, such as breaching a fiduciary duty to settle claims, noting that the mere failure to settle a debatable claim does not give rise to bad faith.  In this case, the defendant insurer’s position was not only debatable, it was correct; and its failure to accept the plaintiff insurer’s settlement offer was not inequitable.

Date of Decision: February 25, 2015

Carolina Casualty Insurance Company v. Travelers Property Casualty Company, Civ. No. 09-4871, 2015 U.S. Dist. LEXIS 22674 (D.N.J. February 25, 2015) (McNulty, 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 claim for attorneys’ fees, on the basis that Rule 4:42-9(a)(6) does not apply to first party claims, an issue which 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.)

 

MARCH 2015 BAD FAITH CASES: NEW JERSEY SUPREME COURT FINDS UM BAD FAITH CLAIM BARRED BY RES JUDICATA, BUT REFERS THE FOLLOWING ISSUES TO THE CIVIL PRACTICE COMMITTEE IN CONNECTION WITH THE SCOPE AND APPLICABILITY OF NEW JERSEY’S RULES TO UM CLAIMS: (1) THE APPLICABILITY OF THE ENTIRE CONTROVERSY DOCTRINE TO ALLOWING THE BAD FAITH CLAIM TO BE RAISED AFTER THE UNDERLYING UM CASE IS LITIGATED; (2) WHETHER THE SANCTIONS UNDER AN OFFER OF JUDGMENT SHOULD BE MEASURED AGAINST A VERDICT MOLDED TO FIT POLICY LIMITS OR THE JURY VERDICT; AND (3) WHETHER R. 4:42-9(a)(6)’s EXCLUSION OF DIRECT CLAIMS BY INSUREDS SHOULD BE CHANGED (New Jersey Supreme Court)

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In Wadeer v. New Jersey Manufacturers Insurance Company, New Jersey’s Supreme Court took the opportunity to address potential changes in the Rules of Civil Procedure in the context of first party bad faith claims. In this uninsured motorist case, the plaintiff insured was injured by a driver who was never identified. The matter went to UM contractual arbitration, and the insurer appealed an award favorable to the insured.

The matter then went to arbitration in the Superior Court, and the insurer again appealed an unfavorable result, demanding a trial de novo.  At trial, the insured obtained its largest award yet, from a jury, of over $200,000.  The UM limit was $100,000 and the trial judge molded the award to $100,000, finding no bad faith under the “fairly debatable” standard.  The insured had argued that the insurer’s bad faith should have permitted an award of the full $200,000.

The insured then filed a new, second, action in Superior Court, alleging breach of the duty of good faith and fair dealing. The insured asserted that the insurer acted in bad faith by failing to make a settlement offer and by failing to timely settle the claim. The insurer obtained summary judgment under the entire controversy doctrine and principles of res judicata. The Appellate Division affirmed the entire controversy doctrine ruling.

On appeal to the Supreme Court, the Court affirmed the res judicata ruling, but took steps toward clarifying the law on application of the entire controversy doctrine, the offer of judgment rule, and the rule governing awards of attorney’s to a successful first party claimant in a declaratory judgment action.

First, the court restated the law governing first party bad faith claims:

“[I]t is well-settled that, in New Jersey, ‘every insurance contract contains an implied covenant of good faith and fair dealing.'” …. As an extension, “an insurance company owes a duty of good faith to its insured in processing a first-party claim.” ….  In order to make a showing of bad faith in a first-party claim based on a denial of benefits[fn2] “[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.”

….

[Fn2]. The test is “essentially the same” when showing bad faith based on “inattention to payment of a valid, uncontested claim.” ….

Under the ‘fairly debatable’ standard, a claimant who could not have established 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 applied the doctrine of res judicata in ruling for the insurer. It found that the first action was substantially similar to the second action; and that the insured was seeking to re-litigate an issue that was before the trial court in the first action which had already been fully litigated and determined by that court.  The second case sought damages for the insurer’s alleged bad faith in handling the UM claim, and it alleged the same wrongs and same legal theories, and included the same evidence and material facts, as in the first case.

However, the Court gave distinct treatment to the entire controversy doctrine (“ECD”) when applied to UM cases. Agreeing that the ECD was equitable in nature, “its application was unfair because [the insurer’s] bad faith, for the most part, came to light during the course of the underlying litigation surrounding plaintiff’s UM claim, …. [and that] barring such bad faith claims on the basis of the entire controversy doctrine is inappropriate in the UM context.” Thus, the Court stated “that the nature of first-party bad faith claims warrants exemption from a harsh application of this rigid doctrine.”

The Court reasoned: “Acts of first-party bad faith in the UM context can, and often will, continue throughout the course of the underlying legal proceedings; that is, an insurance carrier’s acts of bad faith may often not cease until a verdict is returned, and this is only after the plaintiff has been forced to fully litigate the matter through arbitration and trial. Rather than forcing a plaintiff to amend the initial complaint to add and reflect each incident of bad faith, we believe that viewing bad faith claims as separate and distinct actions promotes judicial efficiency and economy. We also note the difficulties that will be encountered in the discovery process by seeking information as to bad faith acts which may be prohibited in the UM cause of action.”

This did not end the discussion, because there remained questions of “whether fairness requires that our court rules be modified to permit an insured to bring a bad faith cause of action against an insurer after the underlying UM claim is resolved. In [the Court’s] view, the goals of the entire controversy doctrine are not served by mandating that the plaintiff simultaneously file a first-party bad faith claim with the underlying breach of contract/UM lawsuit. However, to foster debate about whether our courts should allow first-party bad faith claims to be asserted and decided after resolution of the underlying, interrelated UM action, we refer Rule 4:30A to our Civil Practice Committee for review.”

The Court’s directing Committee review for potential Rule revisions did not stop there, as it next addressed the Offer of Judgment Rule (R.4:58-2) and the Rule governing the award of attorneys’ fees (R.4:42-9(a)(6)) and whether that should apply in first party insurance cases.

As to the Offer of Judgment Rule, the current rule does not explicitly provide whether the jury’s verdict is the trigger for the sanctions and remedies available, or whether the molded judgment controls. The Court found generally that the molded verdict “is appropriate when done to conform with and reflect allocation of liability. However, in the UM/UIM context, where reduction is based not on a tortfeasor’s comparative negligence but instead on the policy limits of a given carrier,” the Court found there would be no incentive “for such carriers to settle …  [because] carriers are prone to take their chances at trial where the offer of judgment is somewhat near their policy limits because they have relatively little to lose in doing so.” “Thus, the rule’s required reduction of a monetary jury award artificially to the policy limits renders moot any reasonable offer of settlement by the insured below the 120% threshold; unless an insured makes an offer of judgment that is unreasonably below its policy limits, it is unlikely that an insurance carrier will choose to settle the respective claim.” Therefore, the Court concluded that “the aims of Rule 4:58-2, ‘to encourage, promote and stimulate early out-of-court settlement,’ …  are ill-achieved in the UM/UIM context under the rule’s current construction.” It then referred Rule 4:58-2 to the Civil Practice Committee “to consider and recommend an appropriate amendment addressing this infirmity.”

Finally, the Court addressed R.4:42-9(a)(6) which allows “for counsel fees to be awarded ‘in an action upon a liability or indemnity policy of insurance, in favor of a successful claimant.’” The Court observed that this Rule, as it now stands, does not apply to first part claims against insurers, where the insured brings a direct claim against the insurer. The Court likewise referred “this issue to the Civil Practice Committee for comments and recommendations addressing the issue.”

Date of Decision:  February 18, 2015

Wadeer v. New Jersey Mfrs. Ins. Co., A-54 September Term 2012, 2015 N.J. LEXIS 132 (N.J.  February 18, 2015) (Fernandez-Vina)

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.)