OCTOBER 2014 BAD FAITH CASES: NO BAD FAITH CLAIM STATED FOR DENIAL OR DELAY ON DISABILITY POLICY WHERE MATERIAL ISSUES OF FACT CONCERNING RELIANCE ON CONSULTANTS AND CAUSES OF DELAY MADE OUTCOME “FAIRLY DEBATABLE”; NO STATUTORY ATTORNEY'S FEES AVAILABLE ON FIRST PARTY CLAIMS (New Jersey Federal)

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In Onex Credit v. Atrium 5 Ltd., a company has purchased a disability policy on its CEO.  The policy provided that if the terms were met, the company could receive a large lump sum payment.  There were numerous conditions and exclusions, and after a lengthy investigation by the carrier’s representative coverage was denied.  The company brought suit for breach of contract, bad faith (breach of the implied covenant of good faith and fair dealing), and also sought statutory attorney’s fees.

As to the bad faith claim, the company argued that there was a bad faith delay, and a bad faith refusal to pay.  To show a bad faith denial of payment, an insured must show that the insurer lacked a “fairly debatable” reason for denying coverage and that it knew or recklessly disregarded the absence of a reasonable basis to deny the claim.

To establish an unreasonable delay case, the delay must be shown to be lacking any valid reason, and that the insurer knew or recklessly disregarded the fact that there was no valid reason justifying the delay.  These tests are essentially the same. Thus, to make out a case, the insured has to show that it would be entitled to summary judgment on the bad faith claim, i.e., there can be no material issues of disputed facts that would favor the insurer in precluding summary judgment on the bad faith issue.

In this case, there were disputed issues of material fact as to the reasonableness of the insurer’s denial, specifically concerning its reliance on third party consultants in reaching a conclusion as to their qualifications and findings.

On the delay claim, the court found that the insured overstated the delay by one year and that its objection to producing certain documents resulted in another 6 month delay.  The insurer had promised at one point a decision in 30 days, and had not requested the belatedly produced documents until a year after the original claim.  The court indicated that a jury could find that, at most, this was the result negligence or mistake, which do not constitute bad faith.

The court rejected the argument that there was a need for more discovery concerning the consultants, as this simply circled back to establishing the presence of disputed facts that would not permit a grant of summary judgment in the insured’s favor.

Thus, the company could not overcome the fairly debatable obstacle to relief.  The same result applied to the delay issue, as the reasons for the delay were fairly debatable, and neither negligence nor mistake could make out bad faith. Finally, the court would not entertain the statutory attorney’s fee claim under Rule 4:42-9(a)(6), in connection with having to bring suit to enforce coverage.  This court found that this rule did not apply in the first party context.

Date of Decision:  September 26, 2014

Onex Credit v. Atrium 5, Civil Action No. 13-5629 (ES),  2014 U.S. Dist. LEXIS 135778 (D.N.J. September 26, 2014) (Salas, J.)

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