BAD FAITH CLAIM SURVIVES WHERE INSUREDS ALLEGE CARRIER MISINTERPRETED THE POLICY, FAILED TO INQUIRE WITH THEIR OWN UNDERWRITERS ABOUT THE POLICY, AND FAILED TO ASSESS THE POLICY LANGUAGE IN ACCORDANCE WITH ESTABLISHED LEGAL PRINCIPLES (New Jersey Federal)
Self-insured public entities sued their excess insurer for breach of contract and bad faith, claiming sums due for attorney’s fees and damages in sexual abuse suits. The excess insurer claimed nothing was due, under its interpretation of the policy language applied to the facts at issue. The self-insureds survived a motion to dismiss the breach of contract claim and bad faith claims.
First, the court found coverage might be due, and the excess insurers could be liable to reimburse the self-insureds for sizable legal fees and for indemnification under the excess policies on the sexual abuse claims.
Next, the court observed that “[u]nder New Jersey law, in order to bring a successful bad faith claim against an insurer, an insured must show: ‘(1) the insurer lacked a ‘fairly debatable’ reason for its failure to pay a claim, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.’”
In this case, the self-insureds alleged the excess carrier “failed to ‘act in good faith in their assessment of the terms and conditions of [the Policies]’ and failed to reasonably ‘assess communications exchanged during the course of negotiations between representatives of the parties, assess the statements of their own underwriters, assess the underwriting documentation, or assess principles of law and accepted construction of the terms of art within the [Policies].” The court found these allegations sufficiently factual in nature to allow the bad faith claim to proceed.