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This case involves a water loss coverage dispute. The factual issue is whether the cause of loss was from a specific event or a leak over time damaging the insured’s property.

The insurer denied coverage and the insured sued for breach of contract, bad faith, violation of the Consumer Fraud Act (CFA) and unconscionability. The court found a legitimate dispute of fact over the actual cause of the insured’s damages, but dismissed the bad faith and CFA claims.

As to the bad faith claim, the court set out the following standards:

  1. “A claim for bad faith on a first-party insurance claim in New Jersey requires that the plaintiff show that the insurer (1) had no “reasonable basis for denying benefits of the policy and … [had] knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.”

  2. “Under this ‘fairly debatable’ standard, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.”

  3. “In other words, if there are material issues of disputed fact which would preclude summary judgment as a matter of law, an insured cannot maintain a cause of action for bad faith.”

  4. Therefore, even at the motion to dismiss stage, the existence of genuine issues of material fact will require the dismissal of a bad faith claim.”

The bad faith claim in this case, however, could not survive. There was a genuine issue of fact directly relating to coverage, as to whether the water loss arose from a single event or a leak over time.  The insured herself had conceded that “certain facts that, if true, would provide at the very least a ‘fairly debatable’ and ‘reasonable basis’ for Defendant’s denial of coverage.”

The court also dismissed the CFA claim. The court observed that the CFA does not apply to denying insurance benefits, and found that the claim at issue was for denial of benefits and not some sort of fraud.

Date of Decision: November 25, 2020

Smith v. State Farm Fire and Casualty Company, U.S. District Court District of New Jersey No. CV1910319RMBAMD, 2020 WL 6938432 (D.N.J. Nov. 25, 2020) (Bumb, J.)