JUNE 2016 BAD FAITH CASES: COURT RECOMMENDS ALLOWING INSURED TO REPLEAD ITS BAD FAITH CLAIM FOR UNREASONABLE POLICY INTERPRETATION, WHICH INTERPRETATION WAS LATER ABANDONED BY INSURER (Middle District)

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In Long v. New Jersey Manufacturers Insurance Company, the insured brought a bad faith claim based upon the insurer’s allegedly unreasonable interpretation of the policy. The insurer did originally take the position complained of, limiting coverage to $100,000, but eventually dropped that position and came to agreement with the insured on there being greater coverage, $500,000. The insurer brought a motion to dismiss the bad faith claim based upon the insurer’s original position.

The pleadings showed the parties’ agreement that the insurer did for a period of time assert the more restrictive view, but later abandoned this interpretation. The bad faith case “involved an inquiry into the nature, magnitude, and reasonableness of this initial, and admittedly erroneous, interpretation of the policy….”

The court recognized “that an unreasonable, unwarranted, and unjustified interpretation of policy language may form the basis for a bad faith claim, but [there are] particularly exacting standards for such claims.” “Thus, an insurance company’s reliance on an incorrect interpretation of the law will not necessarily yield a finding of bad faith. If that interpretation of the law and policy language was erroneous, but reasonable, a bad faith may still claim fail. …. Likewise, if the insurance company had a number of bases for a legal position, some of which are objectively unreasonable, it may nonetheless defeat a bad faith claim by citing to any reasonable rationale for its action.”

The complaint itself was “spare” in its allegations of bad faith, and in the motion to dismiss process, both parties pointed to facts beyond the pleading in disputing whether the insurer’s position was reasonable. The court recognized that such factual disputes were properly addressed via a summary judgment motion. However, citing Rule 12(e), which allows a defendant to move for a more definite statement of facts in the complaint, the magistrate judge recommended dismissing the complaint without prejudice to allow plaintiff to set out a more definite statement in support of the bad faith claim in the complaint.

Date of Decision: May 17, 2016

Long v. N.J. Mfrs. Ins. Co., Civil No. 3:14-CV-2428, 2016 U.S. Dist. LEXIS 65575 (M.D. Pa. May 17, 2016) (Carlson, U.S.M.J.)

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