NOVEMBER 2012 BAD FAITH CASES: NO BAD FAITH UNDER REASONABLY DEBATABLE STANDARD OR REASONABLE MINDS STANDARD IN UM FAILURE TO SETTLE CASE (New Jersey Appellate Division)

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In Williams v. State Farm Indem. Co., the insured driver was injured. Four months after the accident, he reported to the police there was another driver that had caused the accident and fled the scene. He sought uninsured motorist coverage from his carrier. The carrier refused to settle the claim, questioning whether there was another driver at all. An arbitration panel found damages in the sum of $250,000 and attributed 50% to the insured and 50% to the phantom driver. The insured took his case to a jury, was awarded over $3,000,000, which was reduced to $1,400,000 by the judge and then molded to the $100,000 policy limit. The trial judge rejected a bad faith claim for the insurer’s original refusal to settle for the same policy limit of $100,000.

On appeal, the court observed that an insurance company owes a duty of good faith to its insured in processing a first-party claim, and that it may be liable to a policyholder for its bad faith failure to pay benefits. The court also cited N.J.S.A. 17:29B-4(9)(f), “prohibiting unfair insurance practices, including, ‘Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.’”

The court cited the basic rule that if the claim is “fairly debatable” then bad faith cannot be established; which cannot be established if the claimant is not entitled to summary judgment on the claim as a matter of law; and “the insurer must have no valid reason to deny benefits or delay processing of the claim, and must have known or recklessly disregarded the fact that no reasonable basis existed for denying the claim.”

However, the court then looked to its earlier decision in In Taddei v. State Farm Indem. Co., 401 N.J. Super. 449, 451, 951 A.2d 1041 (App. Div. 2008), another phantom driver case that did not settle in the UM context, with a refusal to settle at policy limits and a subsequent multi-million dollar award. That court expressed its reservation as to whether the fairly debatable/summary judgment standard “should apply when evaluating good faith in failing to settle an unliquidated bodily injury claim, as opposed to an undisputed property damage claim….”

The Taddei Court “suggested that the question should not simply be whether the claim is ‘fairly debatable,’ but rather, “’whether there is sufficient evidence from which reasonable minds could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable.’”

In the case at hand, neither standard was met. There was a material issue as to the existence of the phantom driver which defeated the fairly debatable standard. And under the “standard contemplated by the Taddei court, that is, whether there is sufficient evidence from which reasonable minds could conclude that [the insurer] acted unreasonably in the investigation, evaluation and processing of plaintiff’s claim, plaintiff cannot establish a bad faith claim.” There was a police report and accident reconstruction report that provided sufficient evidence for the insurer not to have paid the policy limits; thus its rejection of plaintiff’s settlement offers was not unreasonable.

The court further rejected the claim for punitive damages under Rova Farms Resort, Inc. v. Investors Insurance Company, 65 N.J. 474, 323 A.2d 495 (1974), because that was a third-party bad faith case, not a first-party claim as is the instant case. Rova Farms and its progeny do not apply in the UM context, where “the insured is the claimant and, therefore, not exposed to an award in excess of the policy limits.”

Date of Decision: January 20, 2009

Williams v. State Farm Indem. Co., DOCKET NO. A-4460-06T1, 2009 N.J. Super. Unpub. LEXIS 326 (App. Div. Jan. 20, 2009) (Winkelstein, Fuentes, Gilroy JJ.)

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