MARCH 2014 BAD FAITH CASES: INSURED’S CONCEALMENT OF FACT THAT MANUFACTURER PAID FOR LOSS DESPITE MAKING CLAIM AND RECEIVING FUNDS FROM CARRIER COULD NOT CREATE BAD FAITH IN CARRIER, BUT DID STATE A COLORABLE CLAIM AGAINST INSURED’S UNDER FRAUD PREVENTION ACTION (New Jersey Appellate Division)
In AIG Casualty Company of New York v. Walsh, AIG’s policy required it to pay for losses to a damage yacht engine, less a deductible, and it did so. However, the manufacturer replaced the engine at no cost. The carrier sought return of the funds paid, as there was no loss, and the insureds refused on the basis that they could keep money because the amount they received from the carrier and the manufacturer did not “exceed” their loss.
The court disagreed, finding that the insureds essentially received two payments for the loss.
Therefore, the insureds did not sustain any monetary loss as a result of the damage to the yacht’s engine, and the motion judge correctly determined that defendants were not entitled to retain the carrier’s payment.
The court also rejected the insured’s bad faith claim, for the insurer’s “excessively badgering” them for the return of funds.
An insurer owes its insured a duty of good faith and fair dealing in processing a first-party claim and an insured may assert a claim for breach of that duty. However, the insured must establish that the insurer did not have a reasonable basis to deny the claim. The insured also must establish that the insurer knew of or recklessly disregarded the lack of a reasonable basis for denying the claim. In this case, the bad faith claim failed as a matter of law because the carrier had an absolute right to demand the return of the funds paid, and the insureds wrongfully refused to return the monies. Thus, whether the carrier’s demands for repayment amounted to “excessive badgering” is irrelevant because the carrier demanded the return of the monies in good faith.
However, the appellate court did reverse the trial court’s dismissal of the carrier’s fraud claim against the insureds under the Fraud Prevention Act. A person or practitioner violates the Act if he or she “[c]onceals or knowingly fails to disclose the occurrence of an event which affects any person’s initial or continued right or entitlement to (a) any insurance benefit or payment or (b) the amount of any benefit or payment to which the person is entitled[.]” N.J.S.A. 17:33A-4(a)(3). In addition, a person or practitioner violates the Act if he or she “knowingly assists, conspires with, or urges any person or practitioner to violate any of the provisions of this act.” N.J.S.A. 17:33A-4(b).
The carrier alleged that the insureds submitted repair estimates upon which the insurer paid the claim based, without disclosing that the manufacturer paid for the repair and replacement of the engine. The carrier also claimed that the insureds tried, by various means, to conceal the fact that they had been compensated twice for the loss, alleging that defendants did not disclose that they had received payment from the manufacturer until they filed their answer to the amended complaint.
The insureds argued that the manufacturer paid for the repair and/or replacement of the engine after the insurer paid the claim, and the policy does not specifically require them to return the monies that the insurer paid on the claim; and claimed that under the circumstances, they had a good faith basis to refuse to return the insurance payment until that issue was resolved by a court.
The appellate court found that the carrier established a prima facie case under the Act, as the record showed that the insureds were paid on their claim for repair and/or replacement of the yacht’s engine, and the manufacturer thereafter paid these costs. The insureds did not inform the carrier about this within a reasonable time, and the carrier only learned about it via its own investigation. Thus, the facts as alleged supported a claim that the insureds acted to conceal facts material to their right to retain the insurance benefits paid to them.
Date of Decision: February 12, 2014
AIG Cas. Co. of N.Y. v. Walsh, DOCKET NO. A-1784-12T1, SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2014 N.J. Super. Unpub. LEXIS 283 (N.J. App. Div. February 12, 2014) (Per Curiam)