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PRIMARY INSURER’S ALLEGED BAD FAITH FAILURE TO SETTLE RAISED BY EXCESS CARRIER COULD NOT BE DECIDED ON SUMMARY JUDGMENT; BAD FAITH IS DETERMINED FROM FACTS AT THE TIMES DECISIONS WERE MADE, NOT BY USING HINDSIGHT AFTER THE FINAL OUTCOME IS KNOWN (New Jersey Federal)

Published on April 8, 2021 in NJ - Claims Handling (general), NJ - Claims Handling (reasonable), NJ - Claims Handling (unreasonable), NJ - Estimates, Valuation or Appraisal and NJ - Settlement related issues. Closed
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The plaintiff-excess insurer sued a primary auto insurance carrier for failing to settle within its $1,000,000 policy limits. The case went to trial against the insured driver, and the jury verdict exceeded the $1,000,000 primary policy limit. Thus, the excess insurer wound up paying over $600,000, and it brought suit to recover those funds from the primary carrier.

The detailed history between the injured claimant and the primary insurer shows ongoing negotiations, a mediation, case assessments, and a suggested settlement by the trial judge. Almost none of these valuations or negotiations placed the case value in excess of $1,000,000.  In fact, the injured claimant and their counsel valued the case for settlement in the $600,000 to $750,000 range, though the claimant would not accept less than $750,000. (Claimant’s counsel would have agreed to a settlement in the $600,000 range.)  The primary carrier would not settle at $750,000, but did offer $600,000 at one time.

The case went to trial, resulting in a $1,400,000 verdict.

The umbrella carrier’s complaint alleged liability for the primary insurer’s breach of a duty to negotiate in good faith and settle, along with asserting it was equitably subrogated to the insured concerning the excess payments above the $1,000,000 limit.

Both sides moved for summary judgment, and both motions were denied. New Jersey District Judge Cecchi found material issues of fact remained to be decided.

Rova Farms analysis

Judge Cecchi set out the following standard:

Under the seminal case of Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474 (1974), a primary insurer is liable to an excess insurer for an excess verdict where the primary insurer failed to settle with a third-party claimant within the primary policy limit prior to trial, and where, prior to trial, (1) a jury could have potentially found liability for the third-party claimant and the potential verdict could have exceeded the primary policy limit, (2) the third-party claimant was willing to settle within the primary policy limit, and (3) the primary insurer did not negotiate in “good faith.”

The only disputed issue was whether the primary insurer did not negotiate in good faith.  The relevant legal principles applicable include:

  1. The primary insurer “has a positive fiduciary duty” to act in “good faith,” i.e., “to take the initiative and attempt to negotiate a settlement within the [primary] policy coverage.”

  2. Thus, a primary insurer’s “negotiation strategy” with the third-party claimant must have a “reasonable prospect for a successful outcome” for both itself and the excess insurer … such that the strategy is not infected with “dishonest[y]” or “negligence.”

  3. Moreover, consideration of “all the factors bearing upon the advisability of a settlement,” including the primary insurer’s “experience, expertise and judgment,” is required to assess this “good faith” inquiry.

  4. Finally, evaluating whether a primary insurer negotiated in “good faith” must not be done in “[h]indsight,” e.g., a “mere failure to settle within the [primary] policy limit when there was an opportunity to do so before or during trial is not a per se demonstration of bad faith.”

Disputes of material facts remain open

Disputes of fact remained open concerning the settlement value the primary carrier placed on the case at the mediation, and whether that value, once determined, was reasonably calculated.  Judge Cecchi was particularly interested in the factual question of whether the settlement authority given at the mediation differed significantly from the primary insurer’s internal valuation numbers.

Judge Cecchi further noted that while the excess carrier adduced facts that the primary insurer placed a much higher value on the case than it offered in settlement, the primary carrier argued that the “full value” it may have placed on the case, or how it determines reserves, were materially different kinds of evaluations from determining a settlement value.

There were also disputes of facts over the primary carrier’s alleged “hard ball” negotiation tactics at the mediation.  Again, the excess carrier drew on facts that made the primary carrier seem unreasonable, but the primary carrier argued it was willing to be more flexible than the picture plaintiff painted.  This factual dispute could not be resolved at the summary judgment stage.

Hindsight cannot be used to argue the presence or absence of bad faith

Judge Cecchi lastly observed that courts, and presumably the ultimate triers of fact, could not use hindsight to advance or defend their positions. She states:

For instance, Plaintiff argues that the trial verdict of over $1,000,000 awarded to Claimant demonstrates that Defendant’s limited extension of settlement authority and subsequent settlement offer at the Mediation were unreasonably low and thus made in “bad faith.” … Alternatively, Defendant argues that, irrespective of whether its settlement offer to Claimant was too low, it did not negotiate in “bad faith” at the Mediation because it was not reasonable at that time to settle with Claimant for $750,000, a figure which Defendant later learned Claimant would not have “move[d] below” …. Nevertheless, “the perfect vision of hindsight is not the lens through which our courts assess compliance with good-faith obligations.” …. Rather, whether Defendant negotiated in “good faith” at the Mediation depends only on the facts known to it at that time.  (Emphasis added)

Date of Decision: March 30, 2021

Hartford Casualty Insurance v. Liberty Mutual Fire Insurance Company, U.S. District Court District of New Jersey No. 18-CV-0444, 2021 WL 1186759 (D.N.J. Mar. 30, 2021) (Cecchi, J.)

NEW JERSEY COURT DISMISSES BREACH OF CONTRACT, BAD FAITH, FRAUD, AND UNFAIR CLAIM SETTLEMENT PRACTICES ACT COUNTS WITHOUT PREJUDICE, AND GIVES AN OPPORTUNITY TO AMEND (New Jersey Federal)

Published on September 10, 2020 in NJ - Claims Handling (general), NJ - Coverage Issues, NJ - Federal Pleading Inadequate, NJ - Law unsettled, NJ - No covereage duty, possible bad faith and NJ -ITPA and UCSPA. Closed
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A pro se plaintiff brought a barrage of claims against its commercial general liability insurer, among others. He alleges water damage to the insured’s work on a retaining wall the insured was engaged to build. However, there was no third party claim for damages against the insured relating to water damaged wall. The insurer denied the claim, i.e., a claim for damages to a wall built for a third party on which the third party asserted no claim.

First, the court found there was no breach of contract, and dismissed a number of counts on those grounds. However, dismissal was without prejudice and plaintiff could amend if it he could plead specific facts showing a breach.

Next, the court dismissed counts alleging violations of New Jersey’s Unfair Claim Settlement Practices Act (UCSPA). The court stated the “UCSPA does not apply to general liability and property insurance.” Thus, “[b]ecause the Policy is a general liability policy … and not a life or health insurance policy or annuity, the UCSPA Counts … are dismissed without prejudice.” The court specifically declined to address the argument that there is no UCSPA private right of action, saying the law was unclear on that point. The court gave leave to amend, but the plaintiff “must provide additional factual allegations detailing how the Policy falls under the UCSPA.”

Third, plaintiff asserted bad faith claims based upon an inadequate investigation. The court recited New Jersey’s bad faith standards:

  1. “To state a claim for bad faith denial of insurance coverage, Plaintiff must show: (1) the insurer lacked a reasonable basis for its denying benefits, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”

  2. Bad faith claims should be “analyzed in light of a ‘fairly debatable’ standard, which posits that ‘[i]f a claim is “fairly debatable,” no liability in tort will arise.’”

  3. “[T]o establish a first-party bad faith claim for denial of benefits in New Jersey, a plaintiff must show ‘that no debatable reasons existed for denial of the benefits.’”

  4. “Thus, when the insured’s complaint presents issues of material fact as to the underlying claim, dismissal of a related bad faith claim is proper.”

The court found no bad faith claim stated because the plaintiff did not “allege that Defendants lacked a fairly debatable reason for its denial of coverage. Rather, the Policy illustrates that Defendants did possess a reasonable basis for its denying benefits.” Again, however, the bad faith claims were dismissed without prejudice, with leave to amend given, but only if the plaintiff can provide “additional factual allegations detailing how Defendants lacked a reasonable basis for denying Plaintiff’s insurance claim.”

Lastly, plaintiff alleged fraudulent misrepresentation in the policy’s sale to plaintiff, concerning the scope of coverage. Again, the court dismissed without prejudice, but would only consider amendment proper the plaintiff could plead actual facts supporting a fraud claim.

Date of Decision: August 31, 2020

Gage v. Preferred Contractors Ins. Co., U.S. District Court for the District of New Jersey No. 19-cv-20396 MAS ZNQ, 2020 WL 5107351 (D.N.J. Aug. 31, 2020) (Shipp, J.)

NO BAD FAITH POSSIBLE WHERE DISPUTE OF FACT EXISTS OVER CAUSE OF LOSS; CFA DOES NOT APPLY TO BENEFIT DENIALS (New Jersey Federal)

Published on July 31, 2020 in NJ - Claims Handling (general), NJ - Consumer Fraud Act, NJ - Discovery and Evidence and NJ - Experts. Closed
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The insureds wanted coverage for a fire loss. The carrier’s investigator concluded the fire was set intentionally, but the insureds offered the fire marshal’s conclusion that the fire was of undetermined origin and still under investigation. The carrier denied the claim, and the insured sued. The suit included bad faith and Consumer Fraud Act (CFA) claims, among other causes of action. The insurer successfully moved for summary judgment on the bad faith and CFA claims.

Bad Faith Claim

The court observed generally, “Under New Jersey law, an insurer owes a duty of good faith to an insured when processing first-party claims under an insurance policy. … This good faith obligation is greater than that owed under a typical commercial contract because of the fiduciary obligation an insurer owes its insureds. … A plaintiff seeking to recover for the bad faith conduct of an insurer is not required to prove bad motive or intention. … However, a bad faith claim cannot succeed where the insurer’s conduct amounts to mere negligence.”

Further, “[t]o succeed on a claim against an insurer for the denial in bad faith of benefits under an insurance policy, the insured must demonstrate that no debatable reasons existed for the denial. … A plaintiff who cannot establish as a matter of law a right to summary judgment on the issue of coverage cannot succeed on a claim for bad faith denial.”

The court granted summary judgment on the bad faith claim. It reviewed the conflicting fire reports, and found that “[b]ased on conflicting evidence in the record, it is genuinely disputed whether [the insured] caused or did not cause the fire to plaintiffs’ home. A reasonable juror could find that he intentionally set the fire. It follows that plaintiffs could not prevail on a motion for summary judgment that coverage under the policy exists.”

CFA Claim

The Court then addressed the CFA claim. “To prevail on a CFA claim, a plaintiff must establish: (1) the defendant engaged in conduct which violates the CFA; (2) the plaintiff suffered an ascertainable loss; and (3) a causal relationship exists between the unlawful conduct and the loss.” The court also granted the insurer summary judgment on this claim.

“Fraudulently selling or inducing the sale of an insurance policy is a violation of the CFA. … However, ‘while the CFA encompasses the sale of insurance policies as goods and services that are marketed to consumers, it was not intended as a vehicle to recover damages for an insurance company’s refusal to pay benefits.’” Date of Decision: July 16, 2020

Watson v. Liberty Mutual Fire Ins. Co., U.S. District Court for the District of New Jersey CIVIL ACTION NO. 19-11994, 2020 U.S. Dist. LEXIS 125361 (D.N.J. July 16, 2020) (Bartle, J.)

 

SANCTIONS AGAINST INSURED REVERSED WHERE INSURER DID NOT SHOW INSURED’S BAD FAITH IN BRINGING FAILED LITIGATION AGAINST INSURER (New Jersey Appellate Division) (Unpublished)

Published on October 10, 2019 in NJ - Agents and Administrators, NJ - Claims Handling (general), NJ - Coverage Issues, NJ - Discovery and Evidence, NJ - Experts, NJ - Reverse Bad Faith and NJ - Settlement related issues. Closed
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In this case, New Jersey’s Appellate Division affirmed the dismissal and grant of summary judgment to the insurer on all claims, but reversed the trial court’s award of frivolous litigation sanctions against the insured because there was no finding the insured acted in bad faith in bringing the claims.

Factual Background

The insurer provided the eighth layer of excess insurance in this Superstorm Sandy case. The primary and lower layers provided $75 Million, and the eighth layer provided another $50 Million above that.

In 2012, the insured hired a contractor to do repair and restoration work. The contractor allocated $950,000 to specific building repair and restoration work. The excess carriers all determined repair and restoration work was not covered. In 2014, the insured reached a global settlement with all insurers for $93.5 Million. The eighth layer insurance contributed $16 Million. The insured executed a release for any and all claims and demands for Superstorm Sandy property damage and business income losses, discharging the eighth layer insurer.

In 2015, however, the insured asked the eighth layer insurer to reconsider paying the contractor’s repair and restoration costs, after another anticipated source for this loss did not pan out. The eighth layer carrier refused. The insured brought suit in 2015.

The Litigation

The insured alleged it relied on the advice of the excess insurers’ adjuster and experts in how the repair and restoration costs were allocated, which resulted in it obtaining no sum to settle that out-of-pocket payment. The insured alleges that it only agreed to the 2014 settlement based on this bad advice, and would otherwise have included these repair and replacement costs in its negotiations and settlement with the insured, beyond the sum actually paid.

The insured brought various claims against the adjusters and experts, and claimed the eighth layer insurance was liable for their acts and omissions on an agency theory. The insured also claimed the eighth layer insurer was liable for breach of contract, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and bad faith in denying the claim for the repair and restoration costs. Defendants moved to dismiss all claims, which the trial court granted in part, including the unjust enrichment claim and some of the agency theory claims. The remaining claims were later dismissed on summary judgment.

The eighth layer insurer filed a motion against the insured for frivolous litigation sanctions. The trial court granted that motion, and ruled the insurer was entitled to the attorney’s fees and costs.

The insured appealed the grant of summary judgment and the sanctions.

The Appellate Division Affirms for the Insurer on the Merits

First, the Appellate Division found no support in the record that the release was only executed as the result of fraud. The insured was well aware it was settling all Superstorm Sandy related claims, that the repair and restoration costs were not part of the settlement, and that the release would bar Superstorm Sandy related claims against all insurers. The insured was also aware that the repair and restoration costs were subject to recovery regarding another entity and its insurers, and that the settling excess insurance companies would not agree to make their settlement contingent on the outcome of that separate matter.

Next, the Appellate Division affirmed the trial court’s findings that there was no common law fraud or negligent misrepresentation by the agent or the insurer. It likewise affirmed judgment on the negligence claim on the basis that no expert testimony was proffered regarding the conduct of the independent insurance adjuster (which plaintiff was trying to bootstrap into a claim against the insurer as well).

The Appellate Division Reverses Sanctions Because there was no Finding of Bad Faith

The Appellate Division addressed the sanction award against the insured for frivolous litigation. [There were no sanctions against counsel.] The insurer’s attorneys had sent the insured’s counsel a letter stating the “complaint was frivolous because the release precluded … asserting any causes of action against [the eighth layer insurer].” The letter “also stated that [the] fraud claims were unsustainable because [the insured’s] representatives had acknowledged the [repair and restoration costs at issue] were not recoverable….” Despite this letter, the insured’s “counsel did not withdraw the complaint.”

A motion for attorneys’ fees and costs ensued. The insured and its counsel both asserted that they believed the claims had merit.

The trial judge found the claims frivolous on the basis that the insured’s claims had no reasonable basis in the law or equity, and there was no good faith argument for the extension, modification or reversal of existing law. Further, the trial judge found the insured knew that the repair and restoration costs would have to come from another source, and that the excess insurers would not make their settlement contingent on recovery of those costs from another source.

The Appellate Division reversed the frivolous litigation sanctions, finding the trial court relied upon the wrong standards. The frivolous litigation statute, N.J.S.A. 2A:15-59.1, which applies only to represented parties, requires a finding of bad faith on the plaintiff’s part. Here, there was no such finding. Thus, the claim failed.

The Appellate Division laid out these bad faith standards:

Where ‘a prevailing defendant’s allegation is based on the absence of a ‘reasonable basis in law or equity’ for the plaintiff’s claim and the plaintiff is represented by an attorney, an award cannot be sustained if the ‘plaintiff did not act in bad faith in asserting’ or pursuing the claim.” …. A finding of bad faith is essential because “clients generally rely on their attorneys ‘to evaluate the basis in law or equity of a claim or defenses,’ and ‘a client who relies in good faith on the advice of counsel cannot be found to have known that his or her claim or defense was baseless.’” …. Furthermore, under the FLS, the party seeking the imposition of sanctions “bears the burden of proving that the non-prevailing party acted in bad faith.” …. We have held that “a grant of a motion for summary judgment in favor of a [prevailing party], without more, does not support a finding that the [non-prevailing party] filed or pursued the claim in bad faith.”

The trial court did reference Rule 1:48, which only applies to attorneys and pro se parties, and thus had no application in this matter.

Date of Decision: October 4, 2019

Fedway Assocs. v. Engle Martin & Assocs., Superior Court of New Jersey Appellate Division DOCKET NO. A-0297-18T4, 2019 N.J. Super. Unpub. LEXIS 2048 (N.J. App. Div. Oct. 4, 2019) (Currier, Hoffman, Yannotti, JJ.) (Unpublished)

TRIAL COURT ERRED GRANTING JUDGMENT ON FRAUD CLAIM TO VOID THE POLICY AT THE END OF PLAINTIFF’S CASE (New Jersey Appellate Division)

Published on August 15, 2019 in NJ - Claims Handling (general), NJ - Procedural Issues and NJ - Reverse Bad Faith. Closed
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This case focuses on procedural issues and burdens of proof at trial, concerning whether the insured’s alleged fraud during an investigation was grounds to void a policy. At trial, the insured put on her case, and the carrier moved for involuntary dismissal (directed verdict) at the end of plaintiff’s case. The trial court granted judgment to the insurer, and the Appellate Division reversed.

The insured’s claim revolved around a fire loss. In the years before that loss, the insured had a relatively small roof claim, and a large water damage claim. During her testimony at trial, the insured described a meeting with the carrier’s investigator during the fire loss claim. The investigator was not merely a claim adjuster, but was actually a fraud unit investigator – unknown to the insured.

The insured admitted she denied there was any prior damage claim on the water loss, knowing this was not true. She felt it was not the investigator’s business and had nothing to do with the fire loss. The investigator had the insured’s application, which did not include either prior loss. This was part of the investigation, again unknown to the insured. The application itself, however, was never introduced into evidence at trial.

This interview during the claim process was not taken under oath. At her subsequent examination under oath, the insured did admit the two prior loss claims.

Both courts’ focus was on the misleading statement to the investigator about the water damage claim, rather than on the application’s not including the two losses. The two key elements were misrepresentation and materiality. The trial court found a material misrepresentation and voided the policy after plaintiff put on her case.

The Appellate Division disagreed, looking closely at the procedural setting and burdens of proof, in finding that the materiality element was not proved. The court especially noted the different burdens placed on defendant when dismissal is sought at the end of plaintiff’s case, rather than at the end of all parties’ cases.

Plaintiff’s case-in-chief did not include the original application, and the Appellate Division found there was insufficient evidence within plaintiff’s case itself to demonstrate how the water loss was relevant to the fire loss claim, or important in determining the insurer’s course of action. Moreover, the misrepresentation claim was an affirmative defense, with the insurer bearing the burden of proof. As the court stated:

“Accordingly, regardless of whether the information in an application not introduced at trial came from plaintiff or someone else, there was no factual basis for the [trial] judge to find that [the insured] ‘clearly tried to mislead [the investigator] as to something that seemed to justify what looked like misstatements in the application.’ Without the original insurance application or testimony from anyone at [the insurer] as to the nature of the investigation, the trial court clearly erred when it involuntary dismissed [the] suit based on her willful misrepresentation of material facts following her fire loss.”

Finally, the court observed that even though its ruling was based on a fundamental failure to prove materiality in the procedural circumstances at trial below, the insured would not be precluded from arguing at re-trial “a fact-finder could also consider whether [she] corrected her misstatements promptly in her examination under oath in considering their materiality.” July 30, 2019

Pokhan v. State Farm Fire & Cas. Co., New Jersey Superior Court Appellate Division DOCKET NO. A-3336-17T3, 2019 N.J. Super. Unpub. LEXIS 1699, 2019 WL 3425917 (App. Div. July 30, 2019) (Accurso, Fuentes, JJ.)

NO BAD FAITH WHERE SCOPE OF DAMAGES IS FAIRLY DEBATABLE; NO CFA CLAIMS FOR DENIAL OF INSURANCE BENEFITS (New Jersey Federal)

Published on March 27, 2019 in NJ - Claims Handling (general), NJ - Consumer Fraud Act, NJ - Estimates, Valuation or Appraisal and NJ - Negligence not bad faith. Closed
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This Superstorm Sandy case involved a $400,000 discrepancy in damage estimates between the insured’s and insurer’s adjustors. The court found a material issue of fact existed on these damage claims, and thus summary judgment could not be granted on a breach of insurance contract claim. (Some categories of damages were barred as resulting from water damage under an anti-concurrent cause provision in the policy).

Under New Jersey law, a bad faith plaintiff must show the insurer acted unreasonably in denying a claim, and did so knowingly or with reckless disregard. Even negligence, standing alone, cannot constitute bad faith. Under these standards, an insurer cannot act in bad faith if the claim was fairly debatable, i.e., if the insured “could not have established as a matter of law a right to summary judgment on the substantive claim [the insured] would not be entitled to assert a claim for an insurer’s bad faith refusal to pay the claim.”

As summary judgment could not be granted on the basic coverage claim, the insurer’s position remained “fairly debatable”. Thus, the insured’s bad faith claim failed, and summary judgment was granted to the insurer.

The court also granted summary judgment to the insurer on plaintiff’s Consumer Fraud Act (CFA) claim. New Jersey’s “courts are clear the CFA does not provide a remedy for failure to pay benefits….”

Date of Decision: March 18, 2019

Zero Barnegat Bay, LLC v. Lexington Insurance Co., U. S. District Court District of New Jersey Civil Action Nos: 14-cv-1716 (PGS) (DEA), 2019 U.S. Dist. LEXIS 43625 (D.N.J. Mar. 18, 2019) (Sheridan, J.)

AUGUST 2018 BAD FAITH CASES: OVERVIEW OF NEW JERSEY STANDARDS ON FAILURE TO SETTLE BAD FAITH AND FAIRLY DEBATABLE STANDARD; REQUIREMENT OF EXPERT TESTIMONY ON BAD FAITH; INSURED’S SETTLEMENT CONDUCT WHERE INSURER HAS DECLINED COVERAGE; SEVERANCE OF BAD FAITH CLAIMS (New Jersey Appellate Division) (Unpublished)

Published on August 28, 2018 in NJ - Attorney's Fees, NJ - Bifurcate/Sever & Stays, NJ - Claims Handling (general), NJ - Coverage Issues, NJ - Experts, NJ - Procedural Issues, NJ - Reservation of Rights and NJ - Settlement related issues. Closed
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This case addresses a wide array of New Jersey bad faith issues. The underlying facts involve disputed coverage and defense obligations in a suit against the insured based on the Telephone Consumer Protection Act (TCPA).

The insurer withdrew its defense based on trial court finding no coverage, which was later reversed on appeal

The insurer had been defending under a reservation of rights, but withdrew the defense when the trial court ruled no coverage was due. The underlying case proceeded. A $19 million judgment was entered on an unopposed summary judgment motion against the insured.

Subsequently, the appellate division reversed the trial court’s coverage ruling, and remanded to explore further factual issues before determining the coverage question.

The insured assigned it claims to the underlying plaintiffs, who counterclaimed for bad faith and failure to settle within policy limits, and who also intervened in the coverage dispute again alleging bad faith. Before reaching a jury in the declaratory judgment action, the court dismissed the bad faith claims “except for the count in its counterclaim that alleged [the insurer] acted in bad faith by failing to settle the underlying action at a time when it controlled that litigation and could have settled the claim within …  policy limits.”

The jury found for the insured on coverage, and the court further awarded attorney’s fees under R. 4:42-9(a)(6). The total award exceeded $5 million.

On appeal, the court went through the relevant policy language and exclusions in great detail. Among other issues addressed, it found the verdict should have been reversed on the issue of what constituted “property damage,” with a single exception, that was also the sole actionable occurrence. Thus, the judgment was significantly undermined on appeal.

Bad faith issues

The court then addressed a variety of bad faith issues. This was triggered by the insurer’s late effort on the eve of trial to renew an attempt to dismiss the bad faith failure to settle claims for failure to bring forth expert testimony to support the failure to settle claim.

The insured “objected to the untimeliness of the motion and requested an adjournment if the court was inclined to dismiss for lack of an expert.” The judge found that there was no actionable bad faith claim under the “fairly debatable standard”, and that the insured had failed to negotiate a reasonable settlement once the defense was withdrawn.

“Alternatively, the judge found that any assessment of [the insurer’s] conduct in this complex case was beyond the ken of the average juror and dismissed the bad faith failure to settle claim because [the insured] had no expert. Noting the case management order required [the insured] to furnish an expert report nearly one year earlier, she denied any adjournment and dismissed the bad faith failure to settle counterclaim.”

The Appellate Division agreed an expert was necessary, but reversed the trial court’s ruling. It found that the motion in limine was functionally a summary judgment motion that was untimely and prejudicial.

The Court then addressed the nature of New Jersey bad faith claims, and the standards applicable in first and third party contexts.

Standards for failure to settle within policy limits

The failure to settle a third party claim within policy limits is governed by the New Jersey Supreme Court’s Rova Farms decision. Because the insurer controls the settlement, it has a fiduciary obligation to exercise good faith in considering settlement. The decision not to settle within policy limits “must be a thoroughly honest, intelligent and objective” decision.

“It must be a realistic one when tested by the necessarily assumed expertise of the company. This expertise must be applied, in a given case, to a consideration of all the factors bearing upon the advisability of a settlement for the protection of the insured. While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.”

Expert needed on bad faith claim to assist jury

Rejecting a settlement by itself does not constitute bad faith. There must be “an assessment of the reasonableness of an insurer’s settlement negotiations in the underlying action” and this assessment “will likely hinge upon the credibility of fact witnesses, as well as expert testimony as to what went wrong on the settlement front and why.”

In this case, the factors were varied and complicated, and expert testimony was necessary to assist the jury in making a bad faith decision under Rova Farms and its progeny. Thus, the trial court was right on the issue that an expert was needed.

Some advice of how to handle late raised issues that will be allowed to go to trial, and the ability to sever bad faith claims

In reversing the dismissal, the appellate judges gave some practical advice to trial courts under these circumstances. Either the trial court have been adjourned to allow time to obtain the expert testimony and response, or the bad faith claim could have been severed and tried after the coverage case. The case was remanded for the trial judge to address the bad faith claim.

Some advice of using “fairly debatable” standard (Pickett) in failure to settle cases (Rova Farms)

The appellate judges then stated they would not address the issue of whether the trial judge’s fairly debatable ruling as a basis for dismissal was proper. The court then went on to discuss the interplay of Rova Farms and the Pickett fairly debatable standard at some length. It observed that the fairly debatable standard arose in the first party context, and that Rova Farms addressed failure to settle third party claims.

The Appellate Division had previously ruled that the fiduciary duty implicated in the third party failure to settle context does not exist in the first party context. However, another Appellate Division panel had ruled that the fairly debatable standard did apply in third party coverage cases (as differentiated from failure to settle cases). Thus, “[n]o reported New Jersey decision has addressed whether Pickett‘s ‘reasonably debatable’ standard applies to an insured’s bad faith refusal to settle claim.”

The Third Circuit has addressed the issue, and found that the Rova Farms’ standards, rather than the Pickett fairly debatable standards should control third party failure to settle claims.

“Whether [the insured] would be held liable for [the third-party’s] injuries was “fairly debatable,” but in the context of a third-party claim with a possibility of an excess verdict, Pickett supplies only part of the equation. The “fairly debatable” standard is analogous to the probability liability will attach in a third-party claim, but it does not consider the likelihood of an excess verdict.

A third-party claim that may exceed the policy limit creates a conflict of interest in that the limit can embolden the insurer to contest liability while the insured is indifferent to any settlement within the limit. This conflict is not implicated when the insured is a first-party beneficiary, where the claimant and the insurer are in an adversarial posture and the possibility of an excess verdict is absent.

Rova Farms, not Pickett, protects insureds who are relegated to the sidelines in third-party litigation from the danger that insurers will not internalize the full expected value of a claim due to a policy cap.”

The present panel chose to decide the issue, though (no pun intended), it acknowledged “the appeal of the Third Circuit’s rationale. An insurer who, while exclusively controlling the litigation, acts in bad faith and refuses to settle a third-party claim within its insured’s policy limits exposes the insured to personal liability. The situation therefore presents different concerns from those posed by a suit where the insurer acts in bad faith and wrongfully denies contractual benefits to the insured under its policy of insurance.”

Failure to negotiate a settlement after coverage denial may not preclude a later bad faith claim

Finally, the panel rejected the trial court’s finding that the insured’s failure to negotiate a settlement once coverage was denied precluded the possibility of a later bad faith claim.

The court looked generally to case law concerning insured’s conduct in settling, or not settling, cases where the insurer has declined involvement on the basis it does not believe coverage is due. Insured are not required as a matter of law to settle at their own expense. Rather, “under certain circumstances, insureds could do so without violating policy terms where there has been a breach by the insurer.”

In sum, the panel reversed the bad faith claim dismissal and remanded the matter to proceed on the bad faith claim.

Date of Decision: July 31, 2018

Penn National Insurance Co. v. Group C Communications, Inc., New Jersey Superior Court Appellate Division, DOCKET NOS. A-0754-15T1 A-0808-15T1, 2018 N.J. Super. Unpub. LEXIS 1833 (N.J. App. Div. July 31, 2018) (O’Connor, Messano and Vernoia, JJ.)

 

MAY 2018 BAD FAITH CASES: ALLEGED POST-CLAIM MISREPRESENTATIONS BY INSURER NOT RELEVANT TO ISSUE OF REASONABLE BASIS TO DENY CLAIM (New Jersey Federal)

Published on May 18, 2018 in NJ - Claims Handling (general) and NJ - Coverage Issues. Closed
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The insured commenced this coverage action after the insurer denied coverage for property damage. The insurer argued no coverage was owed because the water damage derived from either freezing pipes or wear and tear. The insured argued the insurer acted in bad faith by “willfully and intentionally” misrepresenting the communications between the parties, and by falsely accusing the insured of failing to preserve evidence relevant to the claim. The insurer moved for judgment on the pleadings as to the bad faith claim.

The Court held the bad faith claim “may only be supported by factual allegations concerning whether [the insurer] lacked a reasonable basis for denying coverage[,]” not whether insurer deliberately misrepresented communications between the parties months after coverage had already been denied. The Court reasoned, “[i]t is of no moment what alleged mischaracterizations or misrepresentations [the insurer] made . . . because such allegations have no bearing on whether [the] policy . . . covered the water damage from the accident.”

As such, the Court granted the insurer’s motion for judgment on the pleadings, but also granted the insured leave to amend the complaint.

Date of Decision: May 10, 2018

Olirei Investments, LLC v. Liberty Mutual Insurance Co., United States District Court, District of New Jersey, Civil Action No. 18-524, 2018 U.S. Dist. LEXIS 78949 (D.N.J. May 10, 2018) (Chesler, J.)

 

SEPTEMBER 2017 BAD FAITH CASES: NO BAD FAITH WHERE DENIAL OF PIP BENEFITS STEMMED FROM EXHAUSTION OF THE POLICY LIMITS (New Jersey Appellate Division)

Published on September 21, 2017 in NJ - Attorney's Fees, NJ - Claims Handling (general) and NJ - No coverage due, no bad faith. Closed
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The insured received medical treatment from several providers after sustaining injuries in a May 2013 auto accident. The policy provided up to $15,000 in PIP benefits per accident. The insurer denied a request for an $8,527.07 payment to Hackensack Surgery Center (“HSC”), as subrogee of the insured, because it determined that the treatment was not medically necessary. HSC then filed a demand for arbitration.

Prior to the arbitration hearing, the insurer advised that only a balance of $2,132.74 remained in available PIP benefits due to prior payments totaling $12,867.26. During the pendency of HSC’s claim, Thermocare Plus, LLC (“Thermocare”), another medical provider of the insured, utilized the insurer’s internal appeals process to seek a reversal of insurer’s earlier denial of its bill totaling $2,032.74. On August 21, 2015, the insurer advised Thermocare that its previous denial was overturned, and that it would process Thermocare’s bill.

On the same day, the insurer received the HSC arbitration award that the HSC treatment was medically necessary, and awarded $8,438.58, plus interest, attorney’s fees, and costs to HSC. However, the arbitration panel stated that the award “was subject to ‘the policy limits for medical payments, still available to [HSC] at the time of the award.’”

Seven days later, the insured paid Thermocare $2,032.74. The insurer then complied with the arbitration award, and processed a payment of $100 to HSC, which reflected the amount of remaining PIP benefits. HSC then filed an order to show cause, arguing that its payment had priority. HSC sought an additional payment of $2,036.99 and attorney’s fees and costs.

The trial judge ordered the insurer to pay HSC an additional $2,036.99, which represented the amount remaining on the arbitration award. The judge reasoned that the insurer did not “engage[] in any sort of bad faith. . .”, but the insurer’s payment decisions did not achieve an equitable outcome. The trial judge denied HSC’s request for attorney’s fees.

On appeal, the insurer argued that the trial judge’s decision ran counter to existing state law because it had already exhausted the PIP policy limits. Furthermore, the insurer argued that it had 35 days to challenge the arbitration award, and thus was under no obligation to comply with the award because it already approved Thermocare’s payment.

In articulating the collateral source rule, which governs the payment of PIP benefits under New Jersey law, the Appellate Division stated that the insurer is required “to pay PIP benefits immediately upon [a] determination that the loss is due and owing, without consideration that the loss may also be covered by another source. . . .”

The Appellate Division held that HSC is entitled to the additional $2,036.99 payment, because HSC’s bill predated Thermocare’s; HSC rendered services prior to Thermocare; the insurer received HSC’s bill prior to Thermocare’s; and because Thermocare’s bill remained unpaid as of the date of the arbitration award. Citing the “broad discretion” given to trial judges when deciding whether to award attorney’s fees, and finding no abuse of discretion, the Appellate Division declined to overrule the judge’s decision to deny HSC its requested attorney’s fees and costs.

Date of Decision: September 5, 2017

Hackensack Surgery Ctr. V. Allstate Ins. Co., No. A-3896-15T3, 2017 N.J. Super. Unpub. LEXIS 2200 (N.J. App. Div. Sept. 5, 2017) (Reisner and Sumners, JJ.)

SEPTEMBER 2017 BAD FAITH CASES: NO BAD FAITH WHERE CLAIM DENIAL DEBATABLE, AND NO PUNITIVE DAMAGES CLAIM POSSIBLE (District of New Jersey)

Published on September 7, 2017 in NJ - Claims Handling (general) and NJ - Punitive Damages. Closed
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The insureds purchased a property in 2004. Initially, the insureds did not know that the property contained an underground heating oil tank. In May of 2014, the insureds had the tank removed. During removal, a municipal inspector detected a fuel oil discharge on the property. The discharge resulted in soil and groundwater contamination, and the insureds incurred significant remediation costs.

The insureds submitted claims for the remediation under their homeowners policies, to two insurers. The insurers rejected the claim because the loss was not a sudden and accidental occurrence. Insurer I’s expert report stated that the loss was not “a result from a quick, abrupt, or catastrophic event.”

The insureds filed a coverage action against Insurers I and II, and asserted claims of bad faith. The insurers moved for summary judgment on the bad faith claims, arguing that the insureds failed to show the absence of a reasonable basis for denial of the claim. The insureds did not contest insurers’ argument that its position was debatable, and as such, the Court deemed the issue conceded. Thus, the Court granted Insurer I and II’s motion for summary judgment as to the bad faith claim.

Insurer II also moved for summary judgment as to the insureds’ claim for punitive damages. Because the standard for punitive damages “is a showing by clear and convincing evidence of some egregious circumstances or wantonly reckless or malicious conduct by the insurer[,]” an even more exacting standard than the one used for bad faith, the Court struck this claim.

Date of Decision: August 17, 2017

Benjamin v. State Farm Ins. Co., No. 15-4123, 2017 U.S. Dist. LEXIS 131078 (D. N.J. Aug. 17, 2017) (Simandle, J.)