BAD FAITH NOT POSSIBLE WHERE THERE IS SPLIT IN LEGAL AUTHORITY ON INTERPRETING POLICY LANGUAGE (New Jersey Appellate Division)
The central issue in this Superstorm Sandy case was whether coverage was due for a “collapse.” Collapse was a defined term, but the defining language itself opened the door to multiple disputes over the meaning of individual words and concepts. For example, the court had to determine possible meanings of “caving in” and whether “abrupt” meant a matter of seconds or some longer period. The parties argued the fine details of both the policy language and the facts, including competing expert reports, and the court went through a step-by-step analysis addressing the meaning of each relevant sub-term.
While the insurer made some plausible arguments, the court ultimately had to follow the principle that where the policy language reasonably could be interpreted in more than one way, the interpretation that favors coverage must be applied. Thus, at the end of the day, the trial court and Appellate Division found coverage was due.
On the other hand, the insured’s bad faith claim failed on the same record.
The court observed generally that in first party property damage cases, “the insured must demonstrate that coverage was so clear it was not ‘fairly debatable.’” If a claim is fairly debatable, there can be no bad faith. Thus, “a plaintiff must show the lack of a reasonable basis for denying the claim or unreasonably delaying its processing, and the insurer’s knowledge or reckless disregard that it was acting unreasonably.”
Relevant to this case, “[a]n insurer’s denial of coverage may be fairly debatable if the insurer was ‘not acting in derogation of well settled New Jersey law’ and there was a split among other jurisdictions on a legal question pertaining to coverage.” Here, there was no clear New Jersey law interpreting the multiple disputes over policy language the insurer raised in denying coverage. “On that basis, [the] decision to deny coverage was fairly debatable, as there was no binding New Jersey precedent interpreting [the insurer’s] policy form.”
Moreover, there was a split in the case law among other jurisdictions concerning the scope of coverage under this same policy language. The Appellate Division favored one line of case law interpreting the policy form at issue, resulting in coverage. This did not change the reality that there was a split of authority and other courts would find no coverage. This lack of clear consensus likewise precluded a finding of bad faith.