NEW JERSEY FEDERAL COURT OBSERVES ORDERS TO SEVER AND STAY BAD FAITH CLAIMS ARE COMMON IN NEW JERSEY STATE AND FEDERAL COURTS (New Jersey Federal)

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The carrier successfully moved to sever and stay plaintiff’s bad faith claim. The case involved a CGL policy, and the carrier’s refusal to defend and indemnify a breach of loyalty suit against the insured. The case is of some extra interest because it does not involve an underinsured motorist claim as the basis of a bad faith claim.

Magistrate Judge Mannion observed that it is common practice in New Jersey’s state and federal courts to sever and stay bad faith insurance claims, awaiting a decision on the breach of contract claim.

The court applied a four factor test: “(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.”

Magistrate Judge Mannion referenced his earlier decision in the Legends case in support of his decision to sever and stay in this action.

First, the breach of contract claim concerns policy coverage, and the bad faith claim concerns claims handling, thus making them significantly difference.

Second, the bad faith claims call for discovery that is unnecessary to resolve the breach of contract claim, and different witnesses and documentary evidence to prove the bad faith case.

Third, where relatively little discovery has taken place, the insured is not prejudiced or denied an opportunity to pursue the bad faith claim, if successful on the breach of contract claim.

Fourth, the insurer is prejudiced if forced to litigate the bad faith claim because “the insurer would ‘suffer significant expenditure of time and money, [which would be] rendered needless if’ it were to prevail on the breach of insurance contract claim.”
Date of Decision: January 18, 2019

Spectrum Data Systems, LLC v. State Farm Insurance Co., U. S. District Court for the District of New Jersey, Civil Action No. 18-CV-10318-ES-SCM, 2019 U.S. Dist. LEXIS 9109 (D.N.J. Jan. 18, 2019) (Mannion, M.J.)

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