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The carrier denied long-term health benefits to the insured, based on its investigation that revealed two facts indicating the insured was not as incapacitated as claimed.  The carrier additionally pursued insurance fraud claims with county prosecutors, who presented those fraud claims to a grand jury.  The grand jury dismissed the bill the same day the claims were presented.  The insured sued for coverage, bad faith, and violation of the Consumer Fraud Act (CFA).

The carrier moved to dismiss all claims.

First, the court found a breach of contract claim pleaded. The court then addressed bad faith, and allowed those claims to proceed.

Plaintiff argued two bases for bad faith: (1) knowing or reckless coverage denial after an improper investigation; and (2) reporting the insured to the county prosecutor for alleged violation of New Jersey’s Insurance Fraud Prevention Act (IFPA).

As to the bad faith investigation claim, the court emphasized it was bound by the pleadings at the motion to dismiss stage. While conceptually possible to rule on bad faith at that stage, the “fairly debatable” standard for bad faith often precludes granting a motion to dismiss because it must be determined whether there are disputes of material facts making the coverage denial fairly debatable.  This is more suited to determination at the summary judgment stage.

Here, the court looked at the facts alleged, and found that the insurer relied on two facts in denying coverage.  These two facts, however, did not create a fairly debatable reason for denying coverage.  Rather, standing alone, the denial on these facts alone could support a finding of bad faith.  Moreover, that the county prosecutor decided to bring those facts to a grand jury in pursuing an insurance fraud criminal claim did not create a fairly debatable basis to deny coverage; especially when the grand jury rejected those charges the same day they were presented.

The court likewise found a bad faith claim stated for the act of bringing the alleged IFPA violation to the county prosecutors. Having already held that plaintiffs adequately alleged the insurer did not have a good faith basis to deny benefits, this necessarily lead to the conclusion that the insurer “similarly did not have a good faith basis to report Plaintiffs for insurance fraud based on that claim.”

Finally, the court did dismiss plaintiffs’ Consumer Fraud Act claim based upon denial of insurance coverage, as beyond the CFA’s scope.  However, the court did permit the CFA claim to proceed for the insurer’s making an insurance fraud claim to the county prosecutors.

Date of Decision:  June 21, 2021

Spina v. Metropolitan Life Insurance Company, U. S. District Court District of New Jersey No. 1:20CV14129NLHKMW, 2021 WL 2525713 (D.N.J. June 21, 2021) (Hillman, J.)