Archive for the 'NJ – Bifurcate/Sever & Stays' Category

TWO BAD FAITH OPINIONS BY NEW JERSEY DISTRICT JUDGE HILLMAN: (CASE 1) CLAIM ADEQUATELY PLEADED, MOTION TO SEVER AND STAY DENIED (CASE 2) NO COVID-19 COVERAGE DUE = NO BAD FAITH (New Jersey Federal)

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This post summarizes two bad faith opinions issued by New Jersey District Judge Hillman in September.

CASE 1 – FIRST PARTY PROPERTY BAD FAITH CLAIM CAN PROCEED

In this first party property damage case, the insurer offered one-ninth of what the insured claim was due.  The insured brought breach of contract, breach of the implied covenant of good faith and fair dealing, and bad faith claims.  The insurer moved to dismiss the latter two claims, and if unsuccessful, moved to sever and stay the bad faith claim.

Breach of implied contractual covenant good faith and fair dealing subsumed in bad faith claim

Judge Hillman first found that the bad faith claim and breach of the implied covenant of good faith and fair dealing claim were redundant.  “[T] requirement to act in ‘good faith’ in processing a claim under an insurance contract is simply the flip-side of the requirement that an insurer may not act in ‘bad faith; in processing that claim. As such, Plaintiff’s claim for the breach of the implied covenant of good faith and fair dealing contained in both of Plaintiff’s counts is redundant of, and subsumed by, Plaintiff’s bad faith claim and must be dismissed as a stand-alone claim, if Plaintiff had intended it to be as such.”

Bad faith claim adequately pleaded

Judge Hillman then found the insured adequately pleaded its bad faith claim.  “[A]n insurance company may be liable to a policyholder for bad faith in the context of paying benefits under a policy. The scope of that duty is not to be equated with simple negligence. In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits.”

To meet this standard:

  1. “[A] plaintiff must show the absence of a reasonable basis for denying benefits of the policy.”

  2. “If a plaintiff demonstrates the absence of a reasonable basis, he must then prove that the defendant knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”

  3. In other words, an insurance company does not act in bad faith if a plaintiff’s insurance claim was “reasonably debatable.”

  4. A claim is “reasonably debatable” if a plaintiff cannot establish as a matter of law a right to summary judgment on the underlying breach of contract claim.

The court agreed some of the plaintiff’s complaint made conclusory allegations, but sufficient facts were pleaded to make out a plausible bad faith claim.  These include factual allegations that the insurer:

  • made misrepresentations concerning the lack of documentation for “abatement and appraisal,”

  • failed to indicate what ongoing investigation was being pursued in violation of the New Jersey Unfair Claims Settlement Practices,

  • determined that Plaintiff was improperly claiming damage for a pre-existing loss of 2013 in the absence of any evidence that there was pre-existing damage in the building from a loss in 2013,

  • made false statements concerning the extent of damage to [building] units 403, 407, 300 and 301,

  • threatened [the insured] with prosecution for “concealment, misrepresentation or fraud” when it knew that the only misrepresentation and fraud committed in connection with this claim had been committed by Great American, and

  • did all these things with the intentional purpose to deny its $267,429.73 claim, which is supported by the estimate of an actual building contractor, and not by a company … that provides services as “independent adjusters” for numerous insurance companies including Great American, and instead pay a fraction of that claim.

Motion to Sever and Stay Denied Without Prejudice

The court applied the four factor test for apply Federal Rule of Civil Procedure 21.  These four factors include:

“(1) whether the issues sought to be tried separately are significantly different from one another,

(2) whether the separable issues require the testimony of different witnesses and different documentary proof,

(3) whether the party opposing the severance will be prejudiced if it is granted, and (4) whether the party requesting severance will be prejudiced if it is not granted.”

Judge Hillman observed the tension at issue: “As a general principle it makes sense to hold off discovery on an insurer’s alleged bad faith when such claim is premised on the insured’s success in proving its breach of contract claim. If it is determined that the insurance company did not breach the parties’ contract, then it cannot be found that it acted in bad faith, and, thus, discovery on a claim that may never be considered would tend to be a wasteful expenditure of the parties’ and the Court’s resources. At the same time, however … if an insured is successful on its breach of contract claim and discovery on the insured’s bad faith had been stayed, parties and witnesses may need to be re-deposed and documents re-scanned for relevancy, privilege and other concerns, which would also tend to be wasteful.”

He then observed: “These competing concerns are the reason why the four-factor test is employed to determine whether severance and stay is proper in the particular circumstances of an individual case. In this case, [the insurer] has failed to demonstrate how the general principles of severance and stay of a bad faith claim are specifically applicable here. Unlike [the situation] where the plaintiff had propounded extensive interrogatories relating to the production of voluminous documents not directly related to the plaintiff’s individual dispute, [the insurer] has not indicated that Plaintiff has demanded documents and other information separate from what Plaintiff would demand for its breach of contract claim. Thus, even accepting that the first factor has been met, at this time the Court cannot assess the second factor regarding “whether the separable issues require the testimony of different witnesses and different documentary proof,” and the subsequent third and fourth factors of the Rule 21 test.”

Thus, Judge Hillman denied the request to sever the insured’s bad faith claim and stay discovery on that claim, without prejudice. He added, however, that the insurer could “renew its motion, if appropriate, before the magistrate judge after discovery has commenced.”

Date of Decision:  September 1, 2021

801 Asbury Avenue, LLC v. Great American Insurance Company, U.S. District Court District of New Jersey No. 1:20CV16522NLHAMD, 2021 WL 3910147 (D.N.J. Sept. 1, 2021) (Hillman, J.)

CASE 2 – NO COVID-19 COVERAGE DUE = NO BAD FAITH

This Covid-19 business loss coverage case follows the logic in the Pennsylvania and New Jersey decisions summarized in yesterday’s (September 27, 2021) posts; and in an earlier August 2021 ruling by Judge Hillman.  Like those decisions, Judge Hillman first finds no coverage due for Covid-19 business closure losses. As to bad faith, he then states:

“Here, Plaintiff’s bad faith claim is based on Defendant’s denial of coverage, but as detailed above, that denial of coverage was proper as a matter of law. Accordingly, a bad faith claim based on these facts would not survive dismissal.”

Judge Hillman cited his own August 2021 Covid-19 decision in  Z Business Prototypes LLC v. Twin City Fire Insurance Co., summarized here, “dismissing with prejudice plaintiff’s bad faith claim based on denial of coverage where the virus exclusion applied and barred coverage….”

Date of Decision: September 21, 2021

ABC Children’s Dentistry, LLC v. The Hartford Insurance Company, U.S. District Court District of New Jersey No. CV 20-10044, 2021 WL 4272767 (D.N.J. Sept. 21, 2021) (Hillman, J.)

NEW JERSEY FEDERAL COURT SEVERS AND STAYS BAD FAITH CLAIM (New Jersey Federal)

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New Jersey Magistrate Judge Edward Kiehl recently severed and stay a bad faith claim, from the underlying coverage claim.

Quoting precedent, he applied the following principles:

  1. ““Given that the ‘fairly debatable’ standard necessitates a ruling on coverage prior to the adjudication of a bad faith claim, … it is ‘[n]o surprise, then, that severance and stay of bad faith claims has been called the ‘prevailing practice’ in both the state and federal courts of New Jersey.’”

  2. Whereas “‘breach of insurance contract claims concern policy coverage[,]’” claims for bad faith “‘concern the insurer’s general claims handling procedures, its claims conduct in the case at issue, and its knowledge and state of mind about the grounds for denial of coverage.’”

  3. “Because discovery on a bad faith claim would be rendered needless if the insurer prevails on the coverage claim, ‘proof [that] an insured is entitled to coverage as a matter of law is a necessary prerequisite to pursuing discovery regarding a bad faith claim.’”

  4. In other words, “the insured who alleges bad faith by the insurer must establish the merits of his or her claim for benefits.”

Magistrate Judge Kiehl’s detailed Rule 21 four-factor analysis, as applied to the facts, can be found in his opinion, linked here.

Date of Decision:  June 29, 2021

AIG Specialty Insurance Company v. Thermo Fisher Scientific, Inc., No. 20-CV-13046-CCC-ESK, 2021 WL 2680013 (D.N.J. June 29, 2021) (Kiehl, M.J.)

NEW JERSEY FEDERAL COURT GIVES OVERVIEW OF THE LAW IN GRANTING MOTION TO SEVER AND STAY BAD FAITH CLAIM (New Jersey Federal)

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This New Jersey federal case involved breach of contract and bad faith claims. The carrier successfully moved to sever and stay the bad faith claims.

General Bad Faith Principles

The court first stated general principles of New Jersey bad faith law.

  1. “A breach of the implied covenant of good faith and fair dealing, which is synonymous with a bad faith claim, focuses on the conduct of the insurer in its review and processing of a claim under an existing policy.”

  2. “It is a distinct cause of action from a policyholder’s breach of contract claim against an insurer.”

  3. “The breach of insurance contract claims concern policy coverage while bad faith claims concern the insurer’s general claims handling procedures, its claims conduct in the case at issue, and its knowledge and state of mind about the grounds for denial of coverage.”

  4. “Coverage is a necessary precondition to maintaining a bad faith claim predicated on a denial of benefits.”

  5. If the insured is unable to establish a right to the coverage claimed, the bad faith claim must be dismissed.”

  6. “Beyond the mere existence of coverage, ‘the plaintiff must show that no debatable reasons existed for denial of the benefits.’”

  7. “Under the ‘fairly debatable’ standard, ‘a claimant who [cannot] establish[] as a matter of law a right to summary judgment on the substantive claim [cannot] . . . assert a claim for an insurer’s bad faith refusal to pay the claim.’”

  8. “In other words, ‘a question of fact permits an insurer to ‘fairly debate’ an insured’s claim.’”

  9. “If factual issues exist as to the underlying claim (i.e., questions of fact as to whether plaintiff is entitled to insurance benefits—plaintiff’s first cause of action), the Court must dismiss plaintiff’s second cause of action—the ‘bad faith’ claim.”

  10. To ultimately prevail, the plaintiff must also establish ‘the defendant’s knowledge or reckless disregard of the lack of a reasonable basis in denying the claim.’”

  11. “Bad faith can take the form of more than just improper denial of benefits.”

  12. “In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.”

  13. “Although the ‘fairly debatable’ and ‘unreasonable delay’ tests apply in different circumstances, the analysis under both formulations is essentially the same.”

General Principles Concerning Severing and Staying Claims

  1. “Severing claims under Rule 21 is appropriate where the claims to be severed are discrete and separate in that one claim is capable of resolution despite the outcome of the other claim.”

  2. “The effect of ordering severance is to separate the claims into ‘independent actions with separate judgments entered in each.’”

  3. “On the other hand, this Court can bifurcate claims for discovery and trial pursuant to Rule 42(b).”

  4. “Courts consider the same factors in deciding a motion to sever under Rule 21 as they do in resolving a motion to bifurcate under Rule 42(b).”

  5. “Courts consider the following prior to making this discretionary determination:

(1) whether the issues sought to be tried separately are significantly different from one another,

(2) whether the separable issues require the testimony of different witnesses and different documentary proof,

(3) whether the party opposing the severance will be prejudiced if it is granted, and

(4) whether the party requesting severance will be prejudiced if it is not granted.”

Applying Law to the Facts in a Bad Faith Case

The court observed “that [because] the ‘fairly debatable’ standard necessitates a ruling on coverage prior to the adjudication of a bad faith claim, courts in this district have opined that it is ‘[n]o surprise, then, that severance and stay of bad faith claims has been called the ‘prevailing practice’ in both the state and federal courts of New Jersey.’” Anticipating the outcome here, the court added that “[i]t is common practice in both state and federal court to sever breach of insurance contract claims from bad faith claims . . . and . . . [to] proceed[] with the bad faith claims [only] if necessary following the adjudication of the contract claim.” (internal quotation marks omitted).

Specifically, in this case, the court found:

The bad faith claim was significantly different than the contract claim.

  1. The bad faith claim goes to the carrier’s state of mind.

  2. By contrast, the carrier’s “intent is wholly irrelevant to the otherwise straight-forward questions” concerning payments due from the carrier under the contract.

  3.  Bad faith discovery will distract from, and “undoubtedly delay, the resolution of the primary focus of the case, i.e., whether plaintiff’s . . . claim should be paid.”

  4. Here, the court first has to resolve coverage, and even if there is coverage, it “can only reach the bad faith claim if it finds that there are no factual issues pertaining to Plaintiffs’ entitlement to coverage ….”

Thus, “[d]iscovery on the bad faith claim should therefore wait until the question of coverage is resolved.”

The bad faith claim and contract claim involve different discovery.

  1. First, the court agreed with the majority of prior precedent that “bad faith claims regularly demand different witnesses and documentary proof from breach of contract claims.”

  2. For example, “’[d]iscovery relating to claims personnel, claims handling procedures and guidelines, and best practices is not directly relevant to the contract claims …, [e.g.,] ‘classic bad faith discovery such as information concerning defendant’s claims handling policies and procedures, and the experience and work evaluations of its claims personnel . . . is irrelevant to plaintiff’s . . . breach of contract claims’”

  3. In this case, the insureds wanted discovery of the insurer’s: entire underwriting file; claims manuals concerning the coverage subject at issue; information and documents regarding policy underwriting, drafting, selling, pricing, issuing, preparing, delivering or assembling the policy; and information and documents regarding the carrier’s decisionmaking in not making certain payments under the policy.

  4. The court found these “categories of documents … largely irrelevant to the breach of contract claims, which hinge on whether the parties abided by the terms of the Policy.”

There is no prejudice in granting a stay and severance.

  1. The prejudice issue is “ultimately one of judicial economy.”

  2. In this case, “the expedient resolution of the breach of contract claim best serves the interests of both parties as the expansive and contentious discovery necessitated by the bad faith claim may distract from the coverage questions at the foundation of this case.”

  3. Thus, the coverage claim should be the initial focus.

  4. Defendant would suffer significant expenditures of time and money, which could be rendered unnecessary if it prevails on coverage.

  5. Further, “[i]t promotes judicial economy and efficiency by holding in abeyance expensive, time-consuming, and potentially wasteful discovery on a bad faith claim that may be rendered moot….”

Date of Decision:  June 2, 2020

J. Fletcher Creamer & Son, Inc. v. Hiscox Insurance Co., U.S. District Court District of New Jersey Civil Action No. 19-21638 (ES) (MAH), 2020 U.S. Dist. LEXIS 96986 (D.N.J. June 2, 2020) (Hammer, J.)

 

 

 

COURT GRANTS SUMMARY JUDGMENT ON STAYED BAD FAITH CLAIM ONCE IT WAS DETERMINED COVERAGE WAS NOT DUE (New Jersey Federal)

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Today’s post gives insurers some practical guidance on how to address dismissal of a stayed bad faith claim, upon the court’s determining no coverage is due.

This New Jersey federal decision puts an interesting twist on yesterday’s post summarizing a New Jersey federal ruling staying a bad faith claim pending the outcome of the insured’s coverage case. In yesterday’s post, the court severed and stayed the bad faith claim, awaiting the outcome of the coverage case. In today’s post, the court had already severed and stayed the bad faith claim awaiting the outcome of the coverage case.

The case had now reached the summary judgment stage. The insurer not only moved for summary judgment on coverage, however, but also moved for summary judgment on the severed and stayed bad faith claim. The court granted the insurer summary judgment on coverage, and on the otherwise stayed bad faith claim.

The insured purchased homeowners insurance that only covered claims if the property was owner occupied. Here, the insured rented out the property, and a fire loss occurred while the property was tenant occupied. The court ruled the policy language precluded coverage. It also rejected an equitable estoppel argument, because the insurer was unaware the property was tenant-occupied until after the fire. Thus, the court granted summary judgment on coverage.

The carrier had also moved for summary judgment on the severed and stayed bad faith claim. The insured argued that because the bad faith claim was severed and stayed, no discovery had been taken and the motion was premature. The court disagreed, finding the record sufficient to rule on the bad faith issue.

New Jersey law requires the bad faith plaintiff to “show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis in denying the claim.” Further, “’[a] plaintiff can only succeed on a bad faith claim against his insurer if he can establish that he would be entitled to summary judgment on the underlying claim—that there are no factual issues over whether the plaintiff is entitled to insurance coverage under his policy.’”

In finding no coverage due on the breach of contract claim, the court necessarily also found the carrier had a reasonable basis to deny coverage. Thus, because the insured could not succeed on the underlying coverage claim, “the claim for bad faith cannot stand.”

Date of Decision: April 29, 2020

Rodriguez v. United Property & Casualty Insurance Co., U.S. District Court District of New Jersey Civ. No. 18-16939, 2020 U.S. Dist. LEXIS 78082 (D.N.J. April 29, 2020) (Thompson, J.)

ALL FACTORS FAVORED SEVERANCE AND STAY OF BAD FAITH CLAIM UNDER FEDERAL RULE 21 (New Jersey Federal)

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In this first party coverage and bad faith case, the court granted the insurer’s motion to sever and stay the bad faith claim.

The insured brought three claims: (1) declaratory judgment for coverage, (2) breach of contract for damages, and (3) punitive damages based on the insurer’s bad faith. Per Federal Rule 21, the insurer moved to sever and stay the bad faith claim until the coverage claim was resolved, including a stay of discovery on the bad faith claim.

The court observed that “with requests to sever bad faith claims from first-party coverage claims, ‘this Court has refused to adopt a blanket rule that a plaintiff’s bad faith claim should be severed in every coverage case.[…] Every case is different and must be decided on its own facts.’” The court has broad discretion in rendering such decisions.

  1. The court found that the contract/coverage issues were different from the bad faith issues. On the bad faith claim, the insured alleged the carrier made misrepresentations about the policy, failed to act reasonably and promptly concerning the insurance claim, “failed to conduct a meaningful and timely investigation, failed to advise of available coverage, and compelled plaintiff to start this lawsuit to obtain coverage under the Policy.” The court held “[t]hese alleged wrongdoing acts, however, are not relevant to whether there is coverage under the Policy.”

  2. The court next found the bad faith and contract counts require two different sets of evidence, with different witnesses and different documents necessary to prove each claim. Thus, the court found that “[d]iscovery relating to claims personnel, claims handling procedures and guidelines, and best practices is not directly relevant to the contract claims….”

  3. The court further ruled that bad faith discovery “’distracts from, and will undoubtedly delay, the resolution of the primary focus of the case, i.e., whether plaintiff’s . . . claim should be paid.’” The court cited earlier case law for the proposition that “’it just makes good common sense to resolve the declaratory judgment claims first because . . . [these] are the only claims that are susceptible to judicial resolution as a matter of law and with little or no discovery necessary.’”

  4. The court also found the insured would not be prejudiced by severance. “Plaintiff argues it would be prejudiced because a stay would prolong resolution of the case. This may be true. But the bad faith claim will be moot if defendant defeats plaintiff’s breach of contract claim. Thus, the bad faith claim should necessarily abide the resolution of the insurance coverage claim.”

  5. Finally, the court found the insurer would be prejudiced. “Defendant, on the other hand, will be prejudiced if it is required to litigate the bad faith claim before plaintiff’s insurance coverage claim is resolved. Judicial economy and efficiency will be promoted by avoiding potentially expensive and time-consuming discovery on the bad faith claim. Plaintiff’s coverage claim should be the focus of the case at this time. If the coverage claim is resolved in plaintiff’s favor, then the parties can promptly turn to plaintiff’s bad faith claim.”

Thus, all factors favored severance and a stay of the bad faith claim.

Date of Decision: April 27, 2020

Bayshore Recycling Corp. v. Ace American Insurance Co., U.S. District Court for the District of New Jersey Case No. 19-cv-21618-MCA-ESK, 2020 U.S. Dist. LEXIS 73168 (D.N.J. April 27, 2020) (Kiel, M.J.)

(1) BAD FAITH CLAIM SURVIVES MOTION TO DISMISS WHERE CLAIM “HAS BEEN PRESENTED” IN THE COMPLAINT; (2) MOTION TO SEVER AND STAY DENIED WITH LEAVE TO SEEK LATER CASE MANAGEMENT ON DISCOVERY TIMING (New Jersey Federal)

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The defendant excess insurer was not notified of the claim and suit until after a jury verdict had been rendered. It denied coverage. The insured’s primary insurer paid the full verdict, and, as subrogee and assignee, brought breach of contract and bad faith claims against the excess insurer. (The complaint also brings breach of fiduciary duty claims against the insured’s broker, which are not addressed below.)

The excess insurer moved to dismiss the bad faith claim, arguing it could not be liable for bad faith because it had a reasonable basis to deny coverage. The court disagreed. It drew a distinction between adequately pleading a claim sufficient to survive a motion to dismiss, vs. adducing sufficient facts to defeat summary judgment. On a motion to dismiss, the issue is whether a “claim has been presented.” (Emphasis in original). Here, a claim had been presented in the pleadings.

The excess insurer alternatively moved to sever and stay the bad faith count. The court rejected this argument as well.

Judge Shipp ruled the bad faith claim was “not so ‘significantly different’ from the other claims … that it must be severed.” He added that the relief [the insurer] seeks—avoiding discovery into the bad faith claim—if appropriate, can be accomplished by staged discovery without severing the claim entirely.” Thus, while not severed or stayed, the insurer could raise discovery related requested to the assigned magistrate judge at the proper time.

Date of Decision: March 31, 2020

Mercury Indemnity Co. of America v. Great Northern Insurance Co., U.S. District Court District of New Jersey Civil Action No. 19-14278 (MAS) (LUG), 2020 U.S. Dist. LEXIS 56396 (D.N.J. Mar. 31, 2020) (Shipp, J.)

COURT DISTINGUISHES BAD FAITH CLAIM FROM BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING, AND REFUSES TO SEVER AND STAY THE LATTER CLAIM (New Jersey Federal)

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The insurer brought a declaratory judgment action seeking a finding of no coverage and to void the policy. The insured counterclaimed for declaratory judgment, breach of contract, and breach of the covenant of good faith and fair dealing. The insurer labeled this final count a bad faith claim, and argued such claims are routinely severed and stay. The insured argued this was not a bad faith claim, and that proving the covenant of good faith and fair dealing breach overlapped with proving the other two counts.

The court denied the motion to sever and stay the good faith and fair dealing count.

First, the court accepted that if the insured stated its claim was not a bad faith claim, then it was not a bad faith claim. It then went on to analyze the carrier’s argument that bad faith and the breach of the covenant of good faith and fair dealing were functionally equivalent, and should be treated in the same manner; again arguing bad faith claims are routinely severed and stay.

The court steadfastly disagreed for the following reasons:

(1) The insurer offered no argument opposing the insured’s position that there were no significant differences in the proofs for the “breach of fiduciary duty” claim and the other counterclaims.

(2) Because the implied covenant of good faith and fair dealing is inherent in every contract, it is intertwined with the contact claim, and these claims are not significantly different.

(3) Severing the claims might limit the insured’s ability to take discovery on the meaning of a particular phrase in the policy, and the insurer’s intent as to the meaning of that phrase. This would prejudice the insured, and could create procedural issues for the court if the insured opposed summary judgment on the ground that facts were unavailable per Rule 56(d). The court found no real prejudice to the insurer.

Lastly, if the case did go to trial, the court observed the insurer “can seek severance or bifurcation of some part of the case, although it is difficult to imagine the basis. However, at this stage, there is absolutely no basis for severance or stay, which would be unfair and grossly inefficient.”

Date of Decision: April 3, 2019

Progressive Garden State Insurance Co. v. Metius, U.S. District Court District of New Jersey Civil Action No. 18-2893 (WJM), 2019 U.S. Dist. LEXIS 57242 (D.N.J. April 3, 2019) (Falk, M.J.)

 

NEW JERSEY FEDERAL COURT OBSERVES ORDERS TO SEVER AND STAY BAD FAITH CLAIMS ARE COMMON IN NEW JERSEY STATE AND FEDERAL COURTS (New Jersey Federal)

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The carrier successfully moved to sever and stay plaintiff’s bad faith claim. The case involved a CGL policy, and the carrier’s refusal to defend and indemnify a breach of loyalty suit against the insured. The case is of some extra interest because it does not involve an underinsured motorist claim as the basis of a bad faith claim.

Magistrate Judge Mannion observed that it is common practice in New Jersey’s state and federal courts to sever and stay bad faith insurance claims, awaiting a decision on the breach of contract claim.

The court applied a four factor test: “(1) whether the issues sought to be tried separately are significantly different from one another[;] (2) whether the separable issues require the testimony of different witnesses and different documentary proof[] (3) whether the party opposing the severance will be prejudiced if it is granted[;] and (4) whether the party requesting severance will be prejudiced if it is not granted.”

Magistrate Judge Mannion referenced his earlier decision in the Legends case in support of his decision to sever and stay in this action.

First, the breach of contract claim concerns policy coverage, and the bad faith claim concerns claims handling, thus making them significantly difference.

Second, the bad faith claims call for discovery that is unnecessary to resolve the breach of contract claim, and different witnesses and documentary evidence to prove the bad faith case.

Third, where relatively little discovery has taken place, the insured is not prejudiced or denied an opportunity to pursue the bad faith claim, if successful on the breach of contract claim.

Fourth, the insurer is prejudiced if forced to litigate the bad faith claim because “the insurer would ‘suffer significant expenditure of time and money, [which would be] rendered needless if’ it were to prevail on the breach of insurance contract claim.”
Date of Decision: January 18, 2019

Spectrum Data Systems, LLC v. State Farm Insurance Co., U. S. District Court for the District of New Jersey, Civil Action No. 18-CV-10318-ES-SCM, 2019 U.S. Dist. LEXIS 9109 (D.N.J. Jan. 18, 2019) (Mannion, M.J.)

NOVEMBER 2018 BAD FAITH CASES: BAD FAITH CLAIM SEVERED AND STAYED UNDER FEDERAL RULES; BUT CONTRACT CLAIM FOR CONSEQUENTIAL DAMAGES FROM DELAY IN PAYMENT NOT STAYED (New Jersey Federal)

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Plaintiff was the beneficiary of a $1 Million life insurance policy. The carrier declined to pay benefits, and she brought 3 claims: (1) a declaration that the policy was valid and she was entitled to the proceeds; (2) breach of contract for damages resulting from delay in payment; and (3) bad faith. The carrier sought to sever the last two claims, and stay discovery, characterizing them both as bad faith claims.

The court found the delay in payment claim simply to be a contract claim for consequential damages, not bad faith in claims handling, and denied the motion on that count. The court also did not expect damage discovery to be extensive or complicated, and there would be no material benefit, or prejudice avoided, by severance and stay.

On the bad faith claim, the court recognized that stay and severance were common in bad faith cases; however, there was no automatic rule to that effect. Rather, each case is determined on its own merits. It cited to the Beachfront case for this proposition, though a stay was granted in that case due to prejudice in allowing the discovery to proceed. Similarly, in this case, plaintiff’s bad faith discovery requests were irrelevant to the underlying claims, and disproportional to those declaratory relief and contract claims.

Further, the focus of the underlying claims was whether the insured made misrepresentations when applying for insurance, whereas the focus of the bad faith case is claims handling and processes. Thus, the two types of claims and are best treated as distinct. Moreover, proof would involve different witnesses and documents. Further, there is also no prejudicial delay, as the bad faith claim could proceed promptly if plaintiff prevails on her contract claims.

Finally, the insurer would be prejudice by continuing with the bad faith discovery. It would have to undergo significant expenditure of time and money, which would be needless if it prevailed on the underlying claims.

Thus, the court severed and stayed the bad faith claim until resolution of those underlying claims.

Date of Decision: October 31, 2018

Ames v. USAA Life Ins. Co., U. S. District Court for the District of New Jersey Civil No. 18-9865 (RMB/JS), 2018 U.S. Dist. LEXIS 186315 (D.N.J. Oct. 31, 2018) (Schneider, M. J.)

 

OCTOBER 2018 BAD FAITH CASES: BIFURCATION OF BAD FAITH COUNT DENIED UNDER FEDERAL RULES WHERE CASE WAS OVER TWO YEARS OLD, ISSUES WOULD NOT BE DECIDED ON THE PLEADINGS, AND ADDITIONAL DISCOVERY REQUIRED TO MOVE TO NEXT STAGE OF LITIGATION (New Jersey Federal)

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In this complex federal case, the carrier sought to bifurcate trial and discovery on coverage and bad faith, asking the court to hold discovery in abeyance pending the coverage determination. The court declined.

“In determining whether bifurcation under Rule 42(b) is proper, ‘courts should consider whether bifurcation will avoid prejudice, conserve judicial resources, and enhance juror comprehension of the issues presented in the case.’” Applying this standard, the court found that “such considerations are not advanced by bifurcation, as this case: (1) was filed over two-and-a-half years ago; (2) will not be disposed of on the pleadings…; and (3) requires additional discovery to move on to the next stage of the litigation.”

The court found it exceedingly clear that this procedurally and substantively complex case was not going to be simplified or expedited “by holding bad faith discovery in abeyance pending a determination of coverage….” The court relied upon Magistrate Judge Clark’s opinion in National Union Fire Ins. Co. v. Becton, observing, “bifurcation of coverage and bad faith claims was not appropriate where case was pending for over three years, the case would not be disposed of on the pleadings, and discovery remained.”

Date of Decision: October 2, 2018

Ventrice v. Lexington Insurance Co., U.S. District Court District of New Jersey Civil Action No.: 2:16-cv-00660, 2018 U.S. Dist. LEXIS 169789 (D.N.J. Oct. 2, 2018) (Cecchi, J.)