Archive for the 'NJ – Procedural Issues' Category

MAY 2017 BAD FAITH CASES: “SEVERANCE AND STAY OF BAD FAITH CLAIMS HAS BEEN CALLED THE ‘PREVAILING PRACTICE’ IN BOTH THE STATE AND FEDERAL COURTS OF NEW JERSEY” (New Jersey Federal)

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In addressing the common practice of severance and stay in New Jersey federal insurance cases involving breach of contract and breach of the implied covenant of good faith and faith dealing (and in this case breach of fiduciary duty as well), the court stated:

This Court has the discretionary authority to sever and stay claims, for purposes of pretrial proceedings, see Fed. R. Civ. P. 26(d)(2), or for trial, see Fed. R. Civ. P. 42(b), in the interests of justice and efficiency. I find that a severance and stay of Counts 2 [breach of the implied covenant of good faith and fair dealing] and 3 [breach of fiduciary duty] makes sense, both as logic and as case management.

If, for example, there is no coverage, then denial of a claim cannot have been in bad faith, so discovery and litigation on the bad faith issue will have been wasted. Only if coverage is found need a court explore complicated issues of the insurer’s motives and the level of certainty it was required to have before denying a claim. In short, “[p]roof an insured is entitled to coverage as a matter of law is a necessary pre-requisite to pursuing discovery regarding a bad faith claim.” ….

No surprise, then, that severance and stay of bad faith claims has been called the “prevailing practice” in both the state and federal courts of New Jersey. …. The same principle applies as to fiduciary breach claims.

Nothing about the claims here suggests that a finding of bad faith or a fiduciary breach is so likely that the Court should collapse the sequence of issues and depart from the usual, sensible practice of severance.

Date of Decision: April 25, 2017

Port Liberte Homeowners Association, Inc. v. Lexington Ins. Co., No. 16-7934, 2017 U.S. Dist. LEXIS 63394 (D.N.J. Apr. 25, 2017) (McNulty, J.)

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.)

FEBRUARY 2017 BAD FAITH CASES: USE OF UMBRELLA TRADE NAME DOES NOT DEMONSTRATE BAD FAITH (New Jersey Federal)

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The insureds move to remand this New Jersey federal action back to Superior Court. The insureds argued at one point that the insurer defendants, “anticipating a lawsuit, acted in bad faith, using the name ‘Chubb Insurance’ in correspondence to mislead them into naming a defendant that is not a legal entity.” The court stated that: “An entity’s use of an umbrella trade or business name that differs from its legal name does not in itself demonstrate bad faith.”

Date of Decision: December 9, 2016

Fischer v. Chubb Ins., No. 16-8220, 2016 U.S. Dist. LEXIS 170590 (D.N.J. Dec. 9, 2016) (McNulty, J.)

AUGUST 2016 BAD FAITH CASES: PLAINTIFF GIVEN CHANCE TO AMEND BAD FAITH CLAIM, IF COUNSEL CAN DO SO WHILE MEETING RULE 11 STANDARDS (New Jersey Federal)

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In Product Source International, LLC v. Foremost Signature Insurance Co., the insured sought defense and indemnification for personal and advertising injury from a trademark infringement suit, and brought a bad faith claim. The insurer moved to dismiss. The court refused to dismiss the insured’s coverage claims, but did dismiss the bad faith claim without prejudice.

The court observed that a New Jersey bad faith plaintiff must show (1) absence of a reasonable basis to deny benefits; and (2) knowing or reckless disregard of its lack of a reasonable basis to deny that benefit. If there is a reasonable basis to deny benefits, or where coverage is “fairly debatable”, there cannot be bad faith. “Under this ‘fairly debatable’ standard, a plaintiff can only succeed on a bad faith claim against his insurer if he can establish that he would be entitled to summary judgment on the underlying claim —- that there are no factual issues over whether the plaintiff is entitled to insurance coverage under his policy.”

In its complaint, the plaintiff pleaded that there was no reasonable basis to deny defense and indemnification, referencing specific policy provisions covering trademark infringement claims. However, the court found that the plaintiff did “not adequately set forth the second element required … Defendants’ knowledge or reckless disregard for the fact that they had no reasonable basis for their denial of insurance benefits.” An allegation that the claim process was delayed with knowledge or reckless disregard that there was no valid basis is a legal conclusion, not a factual allegation under Twombly/Iqbal. Thus, the bad faith claim was dismissed without prejudice, leaving plaintiff an opportunity to re-plead; but in so ordering the court allowed the plaintiff time to cure while stating “if Plaintiff is able to do so consistent with counsel’s obligations under Rule 11….”

The plaintiff did amend, and was successful in defeating a subsequent motion to dismiss the amended bad faith claim.

Date of Decision: July 6, 2016

Prod. Source Int’l, LLC v. Foremost Signature Ins. Co., No. 15-8704, 2016 U.S. Dist. LEXIS 87030 (D.N.J. July 6, 2016) (Simandle, J.)

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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.)

NOVEMBER 2015 BAD FAITH CASES: COURT (1) SEVERS BAD FAITH CLAIM FROM BREACH OF CONTRACT CLAIM, AND (2) STAYS BAD FAITH CLAIM PENDING RESOLUTION OF BREACH OF CONTRACT CLAIM (New Jersey Federal)

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In Bridgewater Wholesalers, Inc. v. Pennsylvania Lumbermens Mutual Insurance Company, a recent Hurricane Sandy coverage case, the Court granted the insurer’s motion to sever the insured’s bad faith claim and stay that claim pending the resolution of the insured’s breach of contract claim.

The case arose out of an alleged breach of insurance contract between the insurer and the insured for claims stemming from losses sustained during Hurricane Sandy. The insured alleged that the insurer underpaid its business loss of income claim, and filed suit alleging breach of contract and breach of the implied duty of good faith.

The Court listed the following factors to consider in determining whether severance was warranted: “(1) whether the issues sought to be tried separately are significantly different from one another, (2) whether the separable issues require the testimony of different witnesses and different documentary proof, (3) whether the party opposing the severance will be prejudiced if it is granted, and (4) whether the party requesting severance will be prejudiced if it is not granted.”

In finding that the first relevant factor weighed in favor of severance, the Court stated that the breach of contract claim concerned lost sales and the insurer’s obligation under the contract, while the bad faith claim addressed the insurer’s general claims handling procedures. Accordingly, the Court found that viewing these claims as separate and distinct actions would promote judicial economy.

Second, the two claims required testimony of different witnesses and different documentary proof. Specifically, the insured sought numerous documents not directly relevant to the contract claim, which the Court found would distract from and delay the resolution of the primary focus of the case – whether the contract claim should be paid in the amount of the claim or at all.

Third, the Court found that the insured would not be prejudiced by severance because the bad faith claim may be premature and the insured would still have the ability to pursue its bad faith claim if it prevailed on its breach of contract claim.

Finally, the Court found that the insurer would be prejudiced if the claims were not severed, reasoning that in order to litigate the bad faith claim now, the insurer would suffer by engaging in expensive and time-consuming discovery that would ultimately be rendered needless if the insurer prevails. Accordingly, the claims were severed and the bad faith issues stayed pending the adjudication of the breach of contract claim.

Date of Decision: November 2, 2015

Bridgewater Wholesalers, Inc. v. Pa. Lumbermens Mut. Ins. Co., Civil Action No. 2:14-CV-3684-SDW-SCM, 2015 U.S. Dist. LEXIS 148551 (D.N.J. November 2, 2015) (Mannion, M. J.)

 

 

OCTOBER 2015 BAD FAITH CASES: STATUTE OF LIMITATIONS DID NOT BEGIN TO RUN AT THE TIME OF THE INSURER’S ALLEGED DECLINATION LETTER, BECAUSE THE LANGUAGE IN THAT LETTER WAS AMBIGUOUS ON DENIAL (New Jersey Federal)

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In Liguori v. Certain Underwriters at Lloyds London, the court held that the statute of limitations had not run on the insured’s claim for breach of the implied covenant of good faith and fair dealing, because the insurer’s declination letter was ambiguous as to whether or not the claim would be covered.

Date of Decision:  July 17, 2015

Liguori v. Certain Underwriters at Lloyds London, Civil No. 14-5898, 2015 U.S. Dist. LEXIS 93090 (D.N.J. July 17, 2015) (Kugler, J.)

JULY 2015 BAD FAITH CASES: FIRST PARTY BAD FAITH PLAINTIFF FAILED TO PLEAD FACTS MEETING STANDARDS FOR A PLAUSIBLE CAUSE OF ACTION; AND INSTEAD PLEADED FACTS THAT MADE THE INSURER’S CONDUCT REASONABLY DEBATABLE, RENDERING ANY EFFORT TO ADD A BAD FAITH CLAIM FUTILE (New Jersey Federal)

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In Mitra v. Principal Ins. Co., the insured sought to amend his complaint against his disability insurer, to add a claim for breach of the implied covenant of good faith and fair dealing.  The insurer opposed on a number of grounds, including failing to plead a plausible claim and legal futility.

The insured alleged the new claim as based upon his being “diagnosed by two (2) independent qualified physicians with a legitimate illness, which rendered [him] totally disabled and completely unable to work,” undue delay in taking longer than the “pre-established 45-day waiting period to respond to [the insured’s] request for reconsideration,” and an alleged unreasonable IME being required before rendering a decision.

The court applied the first party bad faith standard found in Pickett v. Lloyd’s: “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.”  More “specifically, in the insurance context, a bad faith claim is premised on the insurer’s failure to investigate an insured’s claim for benefits.’” A plaintiff claiming bad faith must be able to establish “a right to summary judgment on his insurance coverage claim” to prevail on the bad faith claim.

The court found that the proposed amended complaint added no new factual allegations to take the case into the realm of bad faith; and in fact, the proposed pleading “catalogue[d] the many steps that [the insurer] took to investigate his claim.” Further, the proposed amended complaint relied upon “mere ‘labels and conclusions’ leaving numerous factual issues unresolved,” contrary to the teachings of Twombly/Iqbal.  Moreover, the proposed amendment itself “evidence[d] the many material issues of disputed fact surrounding [the insurer’s] investigation into [the insured’s] claims.” Thus, “[t]he uncertainty of the facts surrounding [the] denial of [the] claim is ‘fairly debatable,’ which would preclude summary judgment as a matter of law.” The presence of these disputed facts required dismissal, as they made the bad faith claim futile.

Date of Decision:  July 7, 2015

Mitra v. Principal Ins. Co., Civil Action No. 15-1259 (CCC), 2015 U.S. Dist. LEXIS 89532 (D.N.J. July 7, 2015) (Clark, III, U.S.M.J.)

JULY 2015 BAD FAITH CASES: COURT SEVERS AND STAYS FIRST PARTY BAD FAITH CLAIM (New Jersey Federal)

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In Beachfront North Condominium Association v. Lexington Insurance Company, the New Jersey federal court granted the insurer’s motion to sever the breach of contract and bad faith actions, and to stay the bad faith claim.  The case involved a first party claim by a condominium association for Hurricane Sandy-related wind damage on its properties.

First, the court found the two claims were significantly different from each other, and that viewing them as separate “promotes judicial efficiency and economy.” Second, the two claims required the testimony of different witnesses and different documentary proof.  By way of example, the insured sought documents “concerning all of defendant’s employees, company guidelines, claims handling procedures, confidential employee salary information, and other subject areas not directly relevant to plaintiff’s first-party claim.” Such discovery “distracts from and will undoubtedly delay the resolution of the primary focus of the case, i.e., whether plaintiff’s first-party claim should be paid and if so the amount of the payment.”

Third, the insured would not be prejudiced by severing and staying the bad faith claim. The insured did “not know if upon the presentation of more evidence its coverage claim will still be denied, let alone whether [the insured] acted or will act in bad faith. As such, plaintiff’s bad faith claim could be premature.” Moreover, if the insured did win the contract claim, it could still pursue its bad faith claim, and the court expected the bad faith claim to be expeditiously resolved.

Fourth, the court found the insurer would be prejudiced under the circumstances at hand. The insured had propounded extensive written discovery on its bad faith claim, and the carrier would suffer a “significant expenditure of time and money, generally rendered needless if the insurer prevails.” Judicial economy and efficiency for all parties would be promoted by avoiding expensive and time-consuming discovery on plaintiff’s bad faith claim. The court also found that litigating the “bad faith claim, and the related discovery disputes arising therefrom, will significantly delay the final resolution of plaintiff’s breach of contract claim,” which should be the focus of the case.

Finally, the court noted that this was not a cookie cutter analysis to be applied in every case.  Rather, it made “clear that it is not ruling that in every case a plaintiff’s bad faith claim should be severed and stayed until its first-party claim is decided. Every case is different and must be decided on its own facts. Here, the balance of interests falls in [insurer’s] favor. In another case the balance could be different.”

Date of Decision: June 24, 2015

Beachfront North Condo. Ass’n v. Lexington Ins. Co., Civil No. 14-6706 (RBK/JS), 2015 U.S. Dist. LEXIS 84074 (D.N.J.  June 24, 2015) (Scheinder, U.S.M.J.)

JUNE 2015 BAD FAITH CASES: FIRST PARTY CONTRACTUAL BAD FAITH CLAIM ADEQUATELY PLEADED UNDER NEW JERSEY LAW; PENNSYLVANIA STATUTORY BAD FAITH CLAIM DISMISSED AFTER CONFLICT OF LAW ANALYSIS (New Jersey Federal)

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In Bridgewater Wholesalers, Inc. v. Pennsylvania Lumbermens Mutual Insurance Company, the Court denied a motion to dismiss an insured’s bad faith claim under New Jersey law.  However, after conducting a conflict of law analysis, it did dismiss plaintiff’s claims for relief under Pennsylvania’s bad faith statute.

In this case, the insured was a commercial supplier of goods that suffered losses in Hurricane Sandy.  It settled a property damage claim with the insurer, but alleged that the insurer failed to make full payment on the loss of business income claim. The insurer “paid a limited amount and denied further liability despite [the insured’s] requests to obtain additional payment.” The insured subsequently sued the insurer, alleging breach of contract, violations of the implied duty of good faith (Count II), and violation of Pennsylvania’s Bad Faith Statute, 42 Pa. C.S. § 8371 (Count III).

The insurer filed a motion to dismiss Counts II and III. The Court refused to dismiss Count II, holding that it was “adequately pled and cannot be dismissed at this early stage.” The Court further reasoned that “[a]dditional discovery is necessary to determine whether [the insurer] had a reasonable basis for not adjusting the insurance claim.”

The insurer argued that Count III should be dismissed because the Pennsylvania statute was inapplicable, and New Jersey law governed the bad faith claim. The Court conducted a conflict of law/choice of law analysis, applying New Jersey’s legal principles as the forum state (the “most significant relationship” test). The first step was to determine if an actual conflict between the laws of Pennsylvania and New Jersey existed. The Court found that a genuine conflict existed because the Pennsylvania and New Jersey “bad faith” standards demonstrated a clear distinction.

After the Court established that a true conflict existed, it determined which state had the most significant relationship to the claim, which it found to be New Jersey.  Hurricane Sandy caused direct physical damage to the insured’s New Jersey facility. The insurance claim was processed in New Jersey. New Jersey is the place where the insured is incorporated and has corporate headquarters, and where the insurer is an insurance carrier. Because the Court found that New Jersey’s interests prevailed, and its insurance laws applied to the bad faith claims, the court dismissed the insured’s Pennsylvania statutory claim.

Date of Decision: May 29, 2015

Bridgewater Wholesalers v. Pa. Lumbermens Mut. Ins. Co., Civil Action No. 2:14-cv-3684-SDW-SCM, 2015 U.S. Dist. LEXIS 69409 (D.N.J. May 29, 2015) (Wigenton, J.)