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OCTOBER 2015 BAD FAITH CASES: INSURER DID NOT ACT IN BAD FAITH BY EXHAUSTING POLICY LIMITS IN SETTLING SOME, BUT NOT ALL CLAIMS, WHERE SETTLEMENT AVOIDED MILLIONS OF DOLLARS IN EXPOSURE TO INSURED, AND INSURED WAS FULLY APPRISED THAT REMAINING CLAIM WOULD NOT BE COVERED (New Jersey Appellate Division)

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In Doitch v. Khatri, a third-party action for insurance coverage, the insureds filed a breach of contract and fiduciary duty complaint against an insurer refusing to settle a claim on behalf of the insureds. Summary judgment was granted to the insurer, and the insureds appealed.

The underlying claims arose from a fire damaging the insured’s home, a multi-family dwelling, as well as surrounding properties.  There were also serious bodily injuries to an upstairs tenant and a firefighter responding to the fire. The insured had a homeowners’ policy with the insurer with a $300,000 coverage limit per incident.

Multiple claims and lawsuits were filed against the insureds after the fire. The insurer ended up paying one claim in full as part of an arbitrated property damage decision. Three other claims, which exceeded $7.5 million, were consolidated and scheduled to proceed to trial. Meanwhile, a tenant of the insureds notified the insurer through a letter from her attorney that, “we are in the process of conducting an investigation to obtain the cause and origin of the fire.” The letter requested, “photos of the area where the fire began,” but made no mention of a claim for damages. The tenant’s insurer asserted a property damage subrogation on behalf of the tenant, alleging that many of her belongings were destroyed by the fire. The homeowner’s insurer denied the claim, and stated that after an investigation, the insured was not legally responsible for the tenant’s damages.

One month before the three other claims were set for trial, the insurer notified the insured that the three other claimants were willing to settle their claims “for the amount of money remaining available under [the insured’s] $300,000.00 liability policy.” The insurer advised that it would be best to settle the three claims currently in suit, as the insurer believed there were valid defenses to all the claims, but that a possible recovery would likely exceed the amount of money available under the policy. The insurer acknowledged that the remaining claim would not be resolved by this settlement. The insureds agreed to settle the three claims in suit at that time, exhausting the remainder of the policy.

Nearly three months later, the insureds received notice of a complaint filed by the remaining claimant. In response, the insured filed a third-party complaint against the insurer demanding that the insurer indemnify and defend against the claim, and argued that the insurer’s failure to do so was a breach of contract and fiduciary duty.

The Law Division granted the insurer summary judgment on the bad faith claim.  Further, the court found that the insurer had no duty to initiate and engage in settlement negotiations with the remaining claimant.  Rather, the insurer “negotiated and obtained very favorable settlements… in the face of claims seeking in excess of $7.5 million.” Moreover, the settlements were executed with the insured’s consent “and only after explan[ing to the insured that] the settlement would not resolve the ongoing property damage claim.”

On appeal, the Appellate Division observed that “absent bad faith, an insurer may settle with one or more claimants, notwithstanding that the settlements may exhaust the policy limits.” There was no evidence that the insurer acted in bad faith or breached its fiduciary duty, and the appellate court agreed with the reasoning of the Law Division.

Date of Decision: September 3, 2015

Doitch v. Khatri, Docket No. A-3513-13T1, 2015 N.J. Super. Unpub. LEXIS 2134 (App. Div. September 3, 2015) (Kennedy, J. and Hoffman, J.)