JUNE 2018 BAD FAITH CASES: WHEN INSURER PROPERLY PAYS WHAT IS DUE UNDER POLICY LANGUAGE, BAD FAITH CLAIM NOT PLAUSIBLE (District of New Jersey)

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The insureds’ water heater leaked resulting in $8,654 in water damage and $66,415 in mold damage. The insurer paid the $8,654, but only paid $10,000 for the mold damage, per the policy’s mold exclusion and sublimit. The insureds claimed that the refusal to pay the entire $66,415 violated the insurance policy.

In arguing for coverage beyond the $10,000 sublimit, the insureds argued “that their loss was caused by water, not mold, and that Defendants therefore are obligated to pay for the entire amount of the loss.” They focused on the allegation “that the mold growth was a result of the broken valve on the hot water heater, and argue that the mold is the ‘loss,’ rather than the ‘cause.’”

The court, however, recognized that the policy contained an anti-sequential provision: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.” It found there is no public policy violation “when parties to an insurance contract agree that there will be no coverage for loss due to sequential causes even where the first or the last cause is an included cause of loss.”

The court concluded that because the anti-sequential clause applied to the mold exclusion, the policy limited mold recovery to $10,000, regardless of whether the mold resulted from the valve leak. Therefore, the court ruled that the insurer did not breach the insurance contract.

As to the bad faith claim, under New Jersey law, an insurance company is required to act in good faith to the insured with respect to a first-party claim. However, an insurance company is not liable if a decision with respect to a claim is “fairly debatable.” Further, “[a] claimant who cannot establish a substantive claim that the policy was breached, however, cannot prevail on a claim for an insurer’s alleged bad faith refusal to pay the claim.”

Applying these principles, the court found no actionable bad faith claim: “[A] claim for bad faith is not plausible because Defendants responded to Plaintiffs’ claims, paid the amounts they determined were owed under the contract, and did not disregard any obligations or unreasonably fail to investigate or settle Plaintiffs’ claims.” Thus, the bad faith claim was “at a minimum, fairly debatable” and was dismissed.

Date of Decision: May 23, 2018

Hobbs v. US Coastal Ins. Co., U. S. District Court, District of New Jersey Civil Action No. 17-3673, 2018 U.S. Dist. LEXIS 86484 (D.N.J. May 23, 2018) (Rodriguez, J.)

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