Monthly Archive for June, 2018
COULD THE PROPOSED LAW ONLY REQUIRE PROOF OF NEGLIGENCE FOR DELAY OR DENIAL OF A BENEFIT?
By contrast with current common law bad faith, the IFCA does not clearly state any additional requirement that an unreasonable delay or denial be accompanied by some form of bad faith, intentional conduct or reckless indifference, or whether the word “unreasonable” itself means more than negligence. Defining common law bad faith, New Jersey’s Supreme Court stated in the Badiali case that: “A finding of bad faith against an insurer in denying an insurance claim cannot be established through simple negligence. … Moreover, mere failure to settle a debatable claim does not constitute bad faith. … Rather, to establish a first-party bad faith claim for denial of benefits in New Jersey, a plaintiff must show that no debatable reasons existed for denial of the benefits.” New Jersey’s federal courts have frequently interpreted the fairly debatable bad faith standard as requiring proof the insurer knew its conduct was unreasonable or recklessly disregarded that fact. This includes both pre and post Badiali cases, including recent decisions.
Thus, without further explanation, it is not wholly clear whether the IFCA is subject to a negligence standard, or if IFCA unreasonableness is meant to include the additional common law elements that go beyond mere negligence. If the standard is negligence, then it would be a misnomer to call this a bad faith statute at all.
The statute proposes including treble damages and attorneys’ fees, and legal costs within its remedies, which some may argue are atypical punishments for merely negligent conduct. By comparison, however, the Consumer Fraud Act (CFA) provides for treble damages and attorney’s fees to address a wide range of conduct and mental states. Thus, the CFA punishes affirmative statements that constitute misrepresentations, irrespective of an intent to mislead; knowing material omissions, which do require proof of intent; or strict liability for regulatory violations.
WHAT STANDARDS APPLY TO UCSPA VIOLATIONS?
On this last point, the proposed IFCA encompasses the UCSPA, among other portions of section 17:29B-4. Within the UCSPA’s 14 subsections, reasonableness is often the express standard, however, some subsections simply describe the conduct constituting whether an insurer has acted improperly, or, in some instances it describes conduct beyond mere negligence. The UCSPA’s language includes, e.g.: “misrepresenting pertinent facts”, “failing to acknowledge and act reasonably promptly”, “failing to adopt and implement reasonable standards”, “refusing to pay claims without conducting a reasonable investigation based upon all available information”, “failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed”, “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear”, “making claims payments to insureds or beneficiaries not accompanied by a statement setting forth the coverage under which the payments are being made”, “compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds”.
Despite using reasonableness standards in many instances, the UCSPA is underpinned by the notion that the misconduct is frequent enough to indicate a general business practice. This frequency requirement would seem to indicate that an element of intentionality or purposefulness is the fundamental reason that it is necessary to address the misconduct listed in all 14 subparts. In eliminating the frequency requirement, is the IFCA overlooking the idea that the UCSPA was designed to punish ongoing and continuous bad behavior because of its purposeful, intentional or reckless repetition, and not merely individual instances of negligent or unintentional behavior?
It is also interesting to compare subsection 17:29B-4(9)(f) and the new delay or denial IFCA cause of action. Under UCSPA subsection (9)(f): “Committing or performing with such frequency as to indicate a general business practice any of the following: … (f) ‘Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear….” This statutory language includes two concepts to make out misconduct: (1) a lack of good faith effort to settle when (2) it is unreasonable not to make a fair settlement. Under the proposed new law, the failure to pay a benefit due is actionable if it unreasonable, with no mention of any failure to act in good faith as an additional element.
THERE IS NO STATEMENT ON THE STANDARD OF PROOF
In addition, there is no explanation of what burden of proof applies, i.e., preponderance of the evidence or clear and convincing evidence. It should be noted that the preponderance of evidence standard applies to the Consumer Fraud Act and Insurance Fraud Prevention Act. Moreover, while statutory UCSPA violations require that the acts at issue be committed or performed “with such frequency as to indicate a general business practice,” that is not the proposed standard under the new law. Neither unreasonable delay or denial claims, nor actions for UCSPA violations, require “the claimant … to prove that the insurer’s actions were of such a frequency as to indicate a general business practice.”
IS THE PROPOSED LAW ONLY APPLICABLE TO FIRST PARTY BENEFIT PAYMENTS?
The “Statement” accompanying the bill begins: “This bill, the ‘New Jersey Insurance Fair Conduct Act,’ establishes a private cause of action for first-party claimants regarding certain unfair or unreasonable practices by their insurer.”
The bill defines: “’First-party claimant’” or ‘claimant’ means an individual, corporation, association, partnership or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy.” Under this definition, it certainly appears that a claimant must be an insured who has been denied an entitlement to a benefit. In unreasonable delay or denial cases, there must be a delay or denial “for payment of benefits under an insurance policy….” Thus, if no monetary benefit is due, the statute should not apply.
As to UCSPA cases, claims may be asserted “for any violation of the provisions of” the UCSPA’s sections. Based on the definition of claimant, one would assume that there must be some actual denial of a monetary benefit due to the insured for a claimant to raise a UCSPA based IFCA action. Regulatory oversight should apply where no benefit is denied, but the UCSPA has been violated. The statute could be clearer on this point.
In practice, first party claims are often contrasted with third party claims to mean that first party claims are direct claims by an insured to a carrier to indemnify losses suffered by the insured. Third party claims involve instances where an insured is subject to another’s claim for loss caused by the insured, or where the insured has been sued and is seeking a defense and indemnification for losses suffered by others attributable to the insured. Following these uses, and looking solely to the bill’s text, it is not perfectly clear whether the proposed new law covers third party claims, though it would seem not to cover such claims.
The definition of claimant includes “asserting an entitlement to benefits owed [1] directly to or [2] on behalf of an insured under an insurance policy.” A benefit “owned directly to” an insured clearly addresses first party claims. Some may try to argue that the phrasing, a benefit owed “on behalf of an insured,” could be interpreted to mean owed on behalf of an insured to those making claims against the insured. Moreover, is the duty to pay for the insured’s defense in a third party action a benefit owned directly to the insured?
This language could use some clarification in the statute’s text itself in the first instance if it is to become law, rather than going through years or decades of case law to answer these questions in the courts, as issues of statutory interpretation. One only need look at the effusion of statutory bad faith case law in neighboring Pennsylvania over the last 29 years to see the benefits of writing a clear statute in the first instance. If, as seemingly set forth in the “Statement,” the new law is only to cover traditional first party claims, then make that clear in the text. If it is to cover something more, then make that clear.
REMEDIES AND NEED FOR FURTHER CLARIFICATION
The proposed law provides that “upon establishing that a violation of the provisions of this act has occurred,” plaintiffs “shall be entitled to: (1) actual damages caused by the violation of this act; (2) prejudgment interest, reasonable attorney’s fees, and all reasonable litigation expenses; and (3) treble damages.”
The new law uses the phrase “upon establishing”, which again points out (1) the absence of what the burden of proof is to establish a cause of action under this statute; (2) whether the statute requires negligence, some form, intent, recklessness or bad faith; (3) whether the unreasonableness must be subjective or objective; and/or (4) whether there could be instances of strict liability.
Moreover, these remedies are mandatory and not discretionary because plaintiffs “shall be entitled” to the listed relief. Again, it arguably would be out of the ordinary to award mandatory treble damages and attorney’s fees upon proof of negligence only.
As to the meaning of “actual damages”, this relief would appear to be redundant with an ordinary breach of contract claim if limited to benefits due and not paid under the policy. However, the meaning of the term is not defined in the proposed new law. Does the term “actual damages” also encompass consequential damages? Does it encompass emotional distress damages? Again, the lack of definition opens the door to years of litigation over such issues.
Some other loose ends: Looking at issues arising in other state’s interpreting bad faith statutes, it may be useful to include an express statute of limitations and what portions of the statute go to the jury or not.
We will be following the legislative process and reporting on the proposed IFCA as it develops.
In May 2016, the trial court granted the insurer summary judgment on coverage because faulty construction work did not constitute an occurrence, ultimately relying on the Pennsylvania Supreme Court’s Kvaerner opinion. Absent any duty to defend or indemnify, the insurer’s policy interpretation could not have been a knowing or reckless disregard of a reasonable basis to provide coverage, and accordingly the trial court held there was no bad faith. The Third Circuit affirmed.
Among other things, the appeals court rejected the argument that damages flowing from faulty workmanship were an occurrence, even if the faulty workmanship was not an occurrence. The court observed there was no Pennsylvania Supreme Court case law to support this limitation on defining occurrence. Moreover, Third Circuit precedent (Specialty Surfaces International v. Continental Casualty) held that reasonably foreseeable damages resulting from faulty workmanship are “not covered, even when such damage occurs to areas outside the work provided by the insured.” The Third Circuit follows the Pennsylvania Superior Court’s reasoning in Millers Capital v. Gambone on this point. (This 2013 post describes the interplay of Kvaerner, Millers Capital and Specialty Surfaces).
The Third Circuit likewise affirmed the bad faith dismissal: “Because the duty to defend is broader than the duty to indemnify, [the insured’s] claim for indemnification also fails. … Its argument that [the insurer] acted in bad faith fails because it has presented no evidence that [the insurer] ‘did not have a reasonable basis for denying benefits under the policy and that [it] knew of or recklessly disregarded its lack of reasonable basis.’” The Third Circuit cites the Superior Court’s 2013 Grossi v. Traveler’s decision on this point.
Date of Decision: June 6, 2018
Lenick Construction, Inc. v. Selective Way Insurance Co., U.S. Court of Appeals Third Circuit, No. 16-1891, 2018 U.S. App. LEXIS 15197 (3d Cir. June 6, 2018) (Hardiman, Roth, Smith, JJ.)
The insured alleged that she “purchased an ‘all risk insurance policy’ from [the insurer], which covered [the insured’s] home and personal property, including coverage for water damages and for ‘loss of use’ from water damage.” The insured’s pipe broke inside the residence resulting in significant damage. After submitting her claim, she pleaded the insurer “paid for only a ‘small portion’ of the damages covered by the policy.” Subsequently, “it was discovered that the damages greatly exceeded the original amount paid by Defendant.” The insured alleged that her insurer refused “to perform a further inspection,” and refused to pay for contractually obligated living expenses of $28,225.62.
Under New Jersey law, “insurers are required to act in good faith and can be held liable for ‘bad-faith refusal to pay first-party claims or benefits.’ However, as to a bad faith claim, the New Jersey Supreme Court “adopted the ‘fairly debatable’ standard for tort recovery under insurance contracts.” Consequently, “if a claim is fairly debatable, no liability in tort will arise.” On the other hand, “if no debatable reasons existed for the denial of benefits, bad faith can be established.”
The court observed that an insurer’s “mere negligent inattention to a claim is not sufficient” to constitute bad faith. Moreover, an insured “must show that the insurer’s ‘conduct is unreasonable,’ or ‘the insurer knows the conduct is unreasonable or recklessly disregards the fact that the conduct is unreasonable.’”
Applying this law, the court determined that there is no “binding authority to support” the insurer’s argument that “as a matter of law, it cannot be liable because it first paid a claim but then refused to inspect (much less pay) later discovered-damage.” The court concluded that the insured’s allegations that the insurer “refused to reinspect the property once further damage was discovered” and “refused to pay an appraisal award despite its legal obligation” are sufficient facts to support a bad faith claim.
Date of Decision: June 6, 2018
Johnson v. Encompass Insurance Co., U. S. District Court, District of New Jersey Civil Action No. 17-3527, 2018 U.S. Dist. LEXIS 94775 (D.N.J. June 6, 2018) (Vazquez, J.)
Federal District Judge Wolfson recently issued two opinions in which the court reiterates that ERISA pre-empts New Jersey common law insurance bad faith claims.
Dates of Decision: May 31, 2018 and June 7, 2018
Atlantic Shore Surgical Assocs. v. Horizon Blue Cross Blue Shield of N.J., U. S. District Court, District of New Jersey Civil Action No.17-cv-07534 (FLW) (DEA), 2018 U.S. Dist. LEXIS 90734 (D.N.J. May 31, 2018) (Wolfson, J.)
Advanced Orthopedics & Sports Med. Inst. v. Empire Blue Cross Blue Shield, U.S. District Court New Jersey Civil Action No. 17-cv-08697 (FLW) (LHG), 2018 U.S. Dist. LEXIS 96814 (D.N.J. June 7, 2018) (Wolfson, J.)
The insureds’ water heater leaked resulting in $8,654 in water damage and $66,415 in mold damage. The insurer paid the $8,654, but only paid $10,000 for the mold damage, per the policy’s mold exclusion and sublimit. The insureds claimed that the refusal to pay the entire $66,415 violated the insurance policy.
In arguing for coverage beyond the $10,000 sublimit, the insureds argued “that their loss was caused by water, not mold, and that Defendants therefore are obligated to pay for the entire amount of the loss.” They focused on the allegation “that the mold growth was a result of the broken valve on the hot water heater, and argue that the mold is the ‘loss,’ rather than the ‘cause.’”
The court, however, recognized that the policy contained an anti-sequential provision: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.” It found there is no public policy violation “when parties to an insurance contract agree that there will be no coverage for loss due to sequential causes even where the first or the last cause is an included cause of loss.”
The court concluded that because the anti-sequential clause applied to the mold exclusion, the policy limited mold recovery to $10,000, regardless of whether the mold resulted from the valve leak. Therefore, the court ruled that the insurer did not breach the insurance contract.
As to the bad faith claim, under New Jersey law, an insurance company is required to act in good faith to the insured with respect to a first-party claim. However, an insurance company is not liable if a decision with respect to a claim is “fairly debatable.” Further, “[a] claimant who cannot establish a substantive claim that the policy was breached, however, cannot prevail on a claim for an insurer’s alleged bad faith refusal to pay the claim.”
Applying these principles, the court found no actionable bad faith claim: “[A] claim for bad faith is not plausible because Defendants responded to Plaintiffs’ claims, paid the amounts they determined were owed under the contract, and did not disregard any obligations or unreasonably fail to investigate or settle Plaintiffs’ claims.” Thus, the bad faith claim was “at a minimum, fairly debatable” and was dismissed.
Date of Decision: May 23, 2018
Hobbs v. US Coastal Ins. Co., U. S. District Court, District of New Jersey Civil Action No. 17-3673, 2018 U.S. Dist. LEXIS 86484 (D.N.J. May 23, 2018) (Rodriguez, J.)
The analysis of the April 9th majority and dissent can be found here.
As noted in the Court’s May 31st Order, the plaintiffs are not precluded from seeking en banc reconsideration of the panel’s June 5th Opinion.
We’ve recently posted summaries of five federal district court bad faith opinions, issued between May 15 and May 23, 2018. These opinions all include some discussion of what kind of conduct could constitute the basis for statutory bad faith under Pennsylvania law.
There is no question that denying benefits due may form the basis of a bad faith claim. Similarly, the strong consensus is that a delay in paying benefits due may lead to actionable bad faith claims. The interesting question is whether bad faith can exist when no benefit is due.
Take this example. The insured sues for breach of contract and bad faith. The bad faith claim is based on two theories: (1) the insurer unreasonably denied coverage based on a misinterpreted policy exclusion, and (2) unreasonable claim handling. The court finds the exclusion applies and dismisses the contract claim, as well as the bad faith claim based on benefit denial. Can the bad faith claim still proceed solely on the basis of poor claim handling, absent any indemnification or defense obligation? Or, in those circumstances, should any claim handling misconduct solely be subject to review by the Insurance Commissioner under the Unfair Insurance Practices Act or Unfair Claims Settlement Practices regulations?
We have posted on this subject in the past, but case law indicates that some courts will find actionable statutory bad faith for poor claim handling even in the absence of any benefit being due.
These five very recent cases, issued within 8 days of each other, appear to show that the range of bad faith standards currently used by courts includes viable bad faith actions where no benefit is due, along with claims for denial or delay in providing benefits. Whether or not these cases be reconciled into a single theory will have to be clarified by Pennsylvania’s Supreme Court, though it has been argued the Supreme Court already did so in the Toy case.
Here are links to our summaries of these five cases.
In this case, a Middle District Judge found a section 8371 claim handling bad faith case viable, even though no coverage was due.
In this case, an Eastern District Judge found no bad faith because no benefit had been denied.
In this case, another Middle District Judge found there could be no bad faith where there was no coverage due.
In these two opinions, issued on consecutive days by another Eastern District Judge, the court set out criteria for actionable statutory bad faith based on either (1) benefit denial (2) poor claims handling or (3) unreasonable delay.
