NO BAD FAITH WHERE COVERAGE AND CLAIM HANDLING CONDUCT WERE “FAIRLY DEBATABLE”; CFA INAPPLICABLE TO COVERAGE CLAIMS (New Jersey Federal)

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This case involves a fire damage claim to plaintiffs’ home.  This was the seventh fire in plaintiffs’ home.  The carrier denied coverage based on various theories, such as fraud in the application and during the investigation process, failure to cooperate, and alleged arson against plaintiffs.  Plaintiffs sued for breach of contract, violation of New Jersey’s Consumer Fraud Act (CFA) and bad faith.  The carrier moved for summary judgment on all claims.

Philadelphia Federal Judge Joel Slomsky was sitting by designation in this New Jersey Federal Action.  He denied summary judgment on the breach of contract claim, as disputes of fact remained for the jury on the above-referenced issues concerning the fire and insurance application; but he granted summary judgment on the CFA and bad faith claims.

Consumer Fraud Act Inapplicable

The CFA claim failed as a matter of law. Judge Slomsky observed, “New Jersey courts have consistently held that the Consumer Fraud Act does not apply to initial coverage.”  Here, the “case involves an initial coverage dispute based on Defendant’s denial of Plaintiffs’ fire loss claim. … Moreover, the record is devoid of any evidence of fraud by Defendant.”

Conduct in Coverage Denial and Claim Handling Fairly Debatable

New Jersey recognizes actionable insurance bad faith for both claim handling and coverage denial.  Coverage denial requires predicate proof that the claim denial was unreasonable.  Plaintiffs bad faith claims based on coverage denial and claim handling were fairly debatable as to their reasonableness, and thus bad faith could not exist.

Judge Slomsky observed, “if determining whether the insurer lacked a reasonable basis for denying a claim is ‘fairly debatable,’ then the insured cannot prevail on a bad faith claim. … In other words, if an insured cannot succeed on their substantive claim at summary judgment, then they cannot succeed on a bad faith claim premised on an insurer’s denial of coverage.”

The same “fairly debatable” standard applies to delays in claim handling.  “The insured must show that there was ‘no valid reason to delay and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.’ … But if the insured cannot succeed on summary judgment for its substantive claim, then it cannot prevail on a bad faith claim based on delay.”

Judge Slomsky already held that the breach of contract/coverage denial claim could not be decided on summary judgment because there were factual disputes.  “As a result, Plaintiffs “cannot establish as a matter of law a right to summary judgment” on their substantive claim, and ‘cannot succeed on [their] claim for bad faith[.]’”

Date of Decision:  August 9, 2021

Bui v. Mid-Century Insurance Company, U.S. District Court District of New Jersey No. CV 19-20053, 2021 WL 3486896 (D.N.J. Aug. 9, 2021) (Slomsky, J.)

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