Archive for the 'NJ – Coverage Issues' Category


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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.

Date of Decision: November 19, 2020

Parko Properties, LLC v. Mercer Ins. Co. of New Jersey, Superior Court of New Jersey Appellate Division No. A-4137-17T2, 2020 WL 6799137 (N.J. Super. Ct. App. Div. Nov. 19, 2020) (Oster, Vernola, JJ.)


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This long ongoing litigation involved a dispute over whether a subcontractor’s poor workmanship could be a covered “occurrence”. During the pendency of this litigation, the matter went up to New Jersey’s Supreme Court in separate lengthy litigation. The Supreme Court ultimately established law in plaintiff’s favor. In the interim before that decision, however, faced with the uncertainly of coverage, the present insured itself settled with a number of plaintiffs who sued for faulty workmanship.

The case involved multiple insurers and different policy periods.  The insured sought reimbursement in connection with the litigation and settlement sums paid.  The insured also asserted every policy was triggered by an “occurrence” during each policy period. The plaintiff moved for summary judgment on the bases that the insurers were estopped and that there were covered occurrences. The Law Division denied this motion in significant part.

The trial judge did find the policies were implicated and coverage was triggered. However, that judge also “concluded there were material factual disputes as to the reasonableness of the settlements, both as to the ‘various liabilities of the insurers[,]’ and whether defendants were ‘entitled to a diminution of’ their share of the settlements ‘based on covered claims as opposed to uncovered claims.’” Thus, the trial court denied plaintiff summary judgment.

Plaintiff and defendants then entered a “high-low” settlement. This involved a consent order for judgment, where plaintiff reserved the right to appeal the summary judgment denial, to address the insurers’ indemnification obligations. Per the consent judgment, if the Appellate Division affirmed the trial judge, the insurers would pay the low settlement sum; however, if the Appellate Division reversed the Law Division in its entirety, then the insurers would pay the high settlement sum.

On appeal, “plaintiff contended that because defendants ‘wrongfully refused coverage[,]’ causing plaintiff to defend itself against claims covered by the policy and ultimately settle those claims, defendants were liable for the entire settlement amounts if they were ‘reasonable and … made in good faith[.]’” Plaintiff relied on the seminal case of Griggs v. Bertram.

The Appellate Division framed the issue as, “having denied coverage, must defendants pay the full settlement amounts if reasonable and entered in good faith? Or, despite their denial of coverage under the policies, are defendants entitled to an allocation determination, both temporally and substantively, i.e., whether the homeowners’ claims were for ‘property damage’ covered under the policies?”

The court denied plaintiff relief, distinguishing Griggs. It then affirmed the trial court’s decision, thus resulting in the low settlement sum being due.

Unlike Griggs, in this case the defendant insurers had issued timely coverage denials. Their arguments proved successful during the very early stages of the litigation in the Law Division, and even the Appellate Division left the coverage issue open.

Thus, the court found “no basis to apply equitable principles of estoppel to bar defendants’ challenge to coverage, including a temporal and substantive allocation of covered and uncovered claims.” Rather, “a good-faith challenge to coverage is not a breach of an obligation to defend.” Further, the defendant insurers “were entitled ‘to dispute coverage based upon the language’ of the policies.”

Thus, there was no equitable basis, under Griggs, to prohibit the carriers from asserting contractual coverage defenses.  It then fell on plaintiff prove that coverage was due, and the insurers were wrong to deny coverage.  “[I]f there is a factual dispute that, once resolved, may indicate that an occurrence is not covered, and it is unlikely to be resolved at trial, an insurer may deny coverage and await judicial resolution.”  If the insured can ultimately make out its case, the carrier would have to reimburse “plaintiff for its costs and the settlement amounts, assuming they were reasonable and entered in good faith.”

The court again observed, however, “defendants were well within their rights to contest the coverage issues.” It found there were disputed issues of fact over “the nature, extent and timing of the damages” at issue. This could not be decided on summary judgment, and these factual issues “were properly left for a factfinder to conclusively resolve.”

Thus, “[r]esolution of those factual issues was necessary to determine coverage under the policies, and as a result, whether defendants’ denial of coverage was wrongful. Under controlling precedent and the facts of this case, only defendants’ wrongful denial of coverage would translate into a duty to reimburse plaintiff for reasonable settlements it entered into with the homeowners in good faith.” As there was no unequivocal reversal, plaintiff was left with the low settlement sum at the end of the day.

Date of Decision: October 5, 2020

Bob Meyer Communities, Inc. v. Ohio Casualty Insurance Company, New Jersey Superior Court Appellate Division No. A-4526-18T3, 2020 WL 5887025 (N.J. Super. Ct. App. Div. Oct. 5, 2020) (Messano, Smith, JJ.)


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This case involved a professional errors and omissions policy, with a bodily injury exclusion. The carrier denied a defense and indemnification based on this exclusion, but the insured asserted in its complaint that there was an applicable policy exception to this exclusion, bringing claims for breach of contract and bad faith.

On a motion to dismiss, the court found the exclusion applied, and the exception to the exclusion did not apply, and dismissed the breach of contract claim.

Addressing the insured’s bad faith claim, the court observed that, “In order to state a claim for bad faith denial of insurance coverage, a plaintiff must allege the following: (1) the insurer lacked a reasonable basis for denying benefits, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”  Further, “if ‘a claim is fairly debatable, no liability in tort will arise.’”

Interestingly, the court cited Third Circuit precedent on Pennsylvania’s bad faith statute for the proposition that “there can be no bad faith claim for denial of coverage if the insurer was correct as a matter of law in denying coverage.”

“Because the Court has found [the insurer] was not obligated to provide coverage under the terms of the Policy, the bad faith claim similarly fails.”

Date of Decision: September 21, 2020

Shore Options Inc. d/b/a Remax v. Great American Insurance Group, U.S. District Court District of New Jersey No. CV 20-03835 (RBK/JS), 2020 WL 5627211 (D.N.J. Sept. 21, 2020) (Kugler, J.)


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The insured successfully defeated a summary judgment motion on the issue of coverage, but lost on bad faith.

The policy excluded coverage for burst radiator pipes unless the insured took reasonable steps to maintain heat at the property to avoid the problem. Here, the 76-year old insured temporarily moved from his home so family could take care of him after double knee surgery. The record showed a detailed history of the insured’s considerable efforts to maintain heating in his absence, and a somewhat unpredictable set of circumstances leading to the local utility turning off his heat for a short time, which unfortunately led to burst pipes and flood damage in the home.

The record showed a jury could find the insured had taken reasonable steps to maintain the heat, and denied the insurer’s summary judgment motion seeking a ruling that no coverage was due.  Thus, the breach of contract claim proceeded.

However, the court did grant the insurer’s motion on bad faith under the fairly debatable standard.

The court first observed New Jersey recognizes two forms of bad faith, either in denying or processing claims. As to the latter, processing focuses on delay in claim handling.

These two types of bad faith claims are subject to “’essentially the same’ test under New Jersey law, namely, the ‘fairly debatable’ standard.” “A bad faith denial claim succeeds when ‘no debatable reasons existed for denial of the benefits.’” “For a processing claim, bad faith is established when there is ‘no valid reason to delay and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.’” Merely mishandling a claim, however, is insufficient; rather there must be “knowledge that no reason [for denying the claim] existed’”.

In this case, the insured first argued bad faith denial. The court rejected that claim, observing:

“The policy at issue specifically precludes coverage for damage resulting from frozen pipes unless the insured maintained heat or shut off the water. Plaintiff admits to not shutting off the water. Moreover, the interruption of gas service to the house did result in heat not being maintained. Plaintiff left his house unattended for over a year, with no one checking in on the property, and the gas bills did show no gas usage, even though the bills also charged Plaintiff every month. Thus, while the question of reasonable care will be submitted to the jury, a reasonable factfinder could only find on this record that coverage was, indeed, fairly debatable.”

On the delay in processing theory, “Plaintiff claims that Defendants impermissibly focused on ‘the result’ rather than the ‘reasonable care’ exercised to ensure the house was heated. … However, bad faith process claims are typically grounded in an excessive delay, not the nature of the process itself … and it is undisputed that Defendants promptly responded to and investigated the claim. Indeed, the record shows that an investigation took place within days of the loss, and a final determination was issued exactly one month after the discovery of the loss.”

Date of Decision: September 2, 2020

Titley v. Hanover Insurance Company, U.S. District Court District of New Jersey No. 1:18-CV-13388 (RMB), 2020 WL 5229387 (D.N.J. Sept. 2, 2020) (Bumb, J.)


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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.)


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The insured’s home was damaged by a sump pump failure. The policy did not cover sump pump failures. Years before the loss, the carrier sent the insured notice that his policy did not cover sump pump failures and offered an endorsement for additional sump pump protection. The insured saw the notice, but took no action. The insurer did not send the same notice in the ensuing years.

The insured brought negligence and bad faith claims because the insurer did not send the notice for sump pump coverage every year.

The trial court granted summary judgment to the insurer, and the Appellate Division affirmed.

The Appellate Division observed that, absent a special relationship, “there is no common law duty of a carrier or its agents to advise an insured concerning the possible need for higher policy limits upon renewal of the policy.” Further, “to establish a special relationship creating a duty to advise about adequacy of insurance, ‘there must be a long-standing relationship between the parties, some type of interaction on the question of coverage, and reliance by the insured on representations of the insurance agent to the insured’s detriment….’”

In this case, the insured did not establish “a basis for finding a special relationship … that would give rise to a duty to inform him of the need to buy sump pump coverage, or to inform him annually of the option to do so.” Simply providing notice years earlier that there was no coverage and insureds needed to purchase an endorsement to obtain sump pump coverage did not create that relationship. Rather, the notice clearly told the insured that he had no coverage, and the policy itself unambiguously excluded coverage.

In sum, the insured put on no evidence that he could rightly “assume his policy included coverage in subsequent years without purchasing the endorsement.”

Date of Decision: June 22, 2020

Yew v. FMI Insurance Co., Superior Court of New Jersey Appellate Division DOCKET NO. A-4947-18T3, 2020 N.J. Super. Unpub. LEXIS 1200 (N.J. App. Div. June 22, 2020) (Messano, Ostrer, JJ.)


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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.)





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This case involved multiple coverage disputes with different carriers over the same events. New Jersey District Court Judge Michael A. Shipp issued three opinions in this action on the same date (as well as a fourth opinion in a related action). This summary addresses the three coverage/bad faith opinions.

The insured provided services to a Medicare/Medicaid drug plan provider. The plan provider was sanctioned for improprieties with its plan, and was suspended from the program. In turn, the provider brought breach of contract and fraud claims against the insured for its alleged failures in providing services, and its misrepresentations in hiding its failures, all of which caused the sanctions and suspension. The insured ultimately settled the case with the Medicare provider and sought recovery from its various insurers for defense costs and/or indemnification.

The first opinion involves coverage claims against Travelers and ACE (the excess insurer to Travelers), and a bad faith claim against ACE. The court found that no coverage was due from Travelers or ACE under their polices, and thus no defense obligation existed.

On the issue of bad faith, the court applied the “fairly debatable” standard set out in Pickett v. Lloyd’s. If a bad faith plaintiff “could not have established as a matter of law a right to summary judgment on the substantive claim [it] would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.”

The court then set out the more detailed criteria to determine the issue.

Judge Shipp observed that “’[a] more difficult application of the standard arises when the issue involves not a denial or refusal to pay a claim but … inattention to payment of a valid, uncontested claim.” (Court’s emphasis). “’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.’”

“’In either case (denial or delay), liability may be imposed for consequential economic losses that are fairly within the contemplation of the insurance company.’” “Whether arising under a denial of coverage or a delay in processing a claim, ‘the test appears to be essentially the same.’”

In the first opinion, the court found the insured was not entitled to coverage from Travelers or ACE under commercial general liability and umbrella policies. Thus, the insured could not “assert a claim for bad faith against ACE.”

The second opinion involved breach of contract and bad faith claims against Allied World Specialty Insurance Company, which had issued a D&O policy. Again, the court found no coverage due, and so no bad faith.

The third opinion addresses claims against Atlantic Specialty Insurance Company and RSUI Indemnity Company (the excess carrier). Breach of contract claims were raised against both carriers, involving D&O defense or coverage, as well as a bad faith claim against Atlantic Specialty. As in the other two opinions Judge Shipp found no coverage due under the Atlantic Specialty policy. Thus, “[b]ecause Atlantic Specialty’s Policy does not provide coverage for the [underlying] action, [the insured] cannot recover consequential damages for Atlantic Specialty’s alleged bad faith delay.”

Dates of Decision: May 31, 2020

Benecard Services, Inc. v. Allied World Specialty Insurance Co., U.S. District Court District of New Jersey Civil Action No. 15-8593 (MAS) (TJB), 2020 U.S. Dist. LEXIS 94806 (D.N.J. May 31, 2020) (Shipp, J.)

The opinion involving Travelers and ACE can be found here.

The opinion involving Allied can be found here.

The opinion involving Atlantic Specialty can be found here.


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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.)

Some Important Insurance Coverage Issues for COVID-19 Business Loss Claims

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COVID-19 is a potential $1,000,000,000,000+ catastrophe for businesses. Insurance coverage demands for COVID-19 business interruption losses are exploding. Many insurers are denying coverage, and insureds’ lawsuits for coverage and bad faith have begun.  Questions of what business interruption losses should be covered by insurance even reached the COVID-19 daily briefing this past Friday.

Various states, including, e.g., Pennsylvania (Pennsylvania House Bill 2372) and New Jersey (Assembly, No. 3844), are seeing proposed legislation that would require insurers to pay for billions or trillions of dollars in business interruption losses, even if the insurance policies otherwise would not provide such coverage. These proposals usually have a plan tying insurer payments to a fund that would at least partially reimburse insurers for such payments, so they are not bankrupted. On the federal level, the idea is circulating for a “Pandemic Risk Insurance Act” that “would create a reinsurance program similar to the Terrorism Risk Insurance act for pandemics, by capping the total insurance losses that insurance companies would face.”

While these efforts may ultimately overwrite disputes that would otherwise wind up before every state and federal court, we are only discussing the law as it currently stands on a few COVID-19 coverage issues.

The “Loss Due to Virus or Bacteria” Exclusion

A central starting point is whether policies have a “Loss Due To Virus Or Bacteria” exclusion. This ISO drafted exclusion was originally promulgated in 2006, and is typically numbered CP 01 40 07 06. A copy of the exclusion can be found here.

Paragraph B of the exclusion states, “[w]e will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” Paragraph A provides, “[t]he exclusion set forth in Paragraph B applies to all coverage under all forms and endorsements that comprise this Coverage Part or Policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.” The exclusion’s language makes clear, however, it does not displace other exclusions addressing claims not subject to the virus and bacteria exclusion. Foley v. Wisconsin Mutual Insurance Co., 915 N.W.2d 455 (Wis. App. 2018).

ISO issued a July 6, 2006 circular entitled, “New Endorsements Filed To Address Exclusion Of Loss Due To Virus Or Bacteria,” explaining the exclusion. The drafters write, “[t]he exclusion … applies to property damage, time element and all other coverages….” The circular’s introduction gives three specific examples of excluded viruses, “rotavirus, SARS, [and] influenza (such as avian flu).” The drafters further observe that “[t]he universe of disease-causing organisms is always in evolution.” As we all now know, the original SARS virus and COVID-19 are part of the same virus family.

The introduction adds, “[d]isease-causing agents may render a product impure (change its quality or substance), or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property. When disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property … cost of decontamination … and business interruption (time element) losses.”

Under the heading “Current Concerns,” the circular states, “[a]lthough building and personal property could arguably become contaminated (often temporarily) by such viruses and bacteria, the nature of the property itself would have a bearing on whether there is actual property damage. An allegation of property damage may be a point of disagreement in a particular case.” Exclusions addressing “specific exposures relating to contaminating or harmful substances … enable elaboration of the specific exposure and thereby can reduce the likelihood of claim disputes and litigation.”

The authors clearly were thinking of pandemics in drafting this exclusion. They state, “[w]hile property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent.” To address these concerns, ISO is “presenting [the Loss Due to Virus or Bacteria] exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.”

In one recently filed COVID-19 case from the District of Columbia, Washington’s mayor had issued an order forbidding table seating at restaurants. The restaurant-plaintiff suffered business losses. The insurer denied coverage, and the owner filed a declaratory judgment complaint seeking coverage. A copy of the Complaint in Proper Ventures, LLC v. Seneca Insurance Co., can be found here.

Among other grounds for denial, the insurer relied on the “Exclusion of Loss Due to Virus or Bacteria.” The complaint alleges, however, this exclusion does not apply. While this seems implausible per the above discussion, the plaintiff asserts that the “loss of Business Income is not otherwise excluded under the Policy. … [because the] loss of Business Income was not ‘caused by or resulting from’ a virus as its loss occurred as a result of the Mayor’s Order.” The plaintiff essentially argues for coverage solely based on a civil authority closure, by contending that the government action in closing the premises cuts off the virus as a causal factor. Once civil authority causation supersedes virus causation, so the argument goes, the exclusion falls by the wayside.

As set forth above, the exclusion’s Paragraph A specifically provides that “[t]he exclusion set forth in Paragraph B applies to all coverage under … forms or endorsements that cover business income, extra expense or action of civil authority.” The insured will have to overcome this express policy language in the first instance to be able to proceed on its argument.

If insureds making this superseding cause argument can get past the language in Paragraph A on “action of civil authority,” courts addressing the intervening cause issue would look to the governing law on interpreting the exclusion’s “caused by or resulting from” language. E.g., in various jurisdictions, some courts may measure this by a proximate cause standard, others by a “but for” standard, and others by a substantial cause standard (somewhere between “but for” and proximate cause). Under any causation standard, however, insureds making this argument are still depending on courts eliminating the “why” in the chain of events leading civil authorities to issue closure orders.

General Comments on the Property Damage, Business Interruption, and Civil Authority Closures

The 2006 ISO circular foresaw that in the absence of the virus and bacteria exclusion (i) “the nature of the property itself would have a bearing on whether there is actual property damage: and (ii) “[a]n allegation of property damage may be a point of disagreement in a particular case.”

The property damage issue includes two basic prongs: business interruption coverage and coverage for the acts of civil authorities. In the former, there must be “direct physical loss or damage”; and in the later, there must be damage to other property within a specified distance from the insured’s property, or in the “immediate area” of the insured’s property.

There is some case law, in other fact scenarios, addressing the concept of whether unseen or gaseous substances contaminating property can constitute direct physical damage or loss. For example, a 2014 New Jersey federal case, Gregory Packaging, Inc. v. Travelers Property Casualty Co., addressed ammonia contamination, and a 2016 Oregon federal case, Oregon Shakespeare Co. v. Great American Ins. Co. (later vacated by the parties’ agreement), addressed smoke from forest fires closing down plaintiff’s business operations. In a 2015 case involving an odor of cat urine permeating a condominium, New Hampshire’s Supreme Court gathered cases on both sides of the issue in evaluating what degree of physical alteration is needed to find a direct physical loss. Mellin v. Northern Security Ins. Co. That court held an alteration affecting the sense of smell was a physical alteration. This contrasted with a 2010 Michigan federal court decision finding strong odors and the presence of mold insufficient to constitute direct physical loss. Universal Image Prods. v. Chubb Corp.

The reality is that the decision concerning direct physical damage or loss, and property damage, may well ride on the judge’s own intellectual framework for addressing the physical nature of real, but invisible, phenomena. We can expect courts to address issues as to whether the presence of the virus on a surface is sufficiently intermingled with the surface material as to alter that property, or whether it is separate from the surface. For example, if the virus is on all the tables in a restaurant, and successfully can be cleared off with a disinfectant in an hour, was there direct physical damage or loss? If so, did it only exist for an hour?

What if the virus has reached more difficult to clean parts of the same restaurant, the owner-insured cannot be certain all potentially exposed areas have been sanitized, and the restaurant stays closed because of the risk? Moreover, how does the insured prove the virus is actually present on any surface in the restaurant at all, or how long that presence persisted? Imagine that proof issue in a much larger scenario, like a warehouse, where one employee out of hundreds develops COVID-19, and the entire warehouse might have to be closed and sanitized. It is unlikely that there is going to be testing to determine where the virus actually might be located before sanitizing takes place. There may not even be testing to determine whether the virus is even present at all on any surfaces inside the facility, but only fast action to eliminate potential risk.

The experts required to answer questions of what is physical, or whether matter has been altered on a microscopic level, may well be biochemists or physicists in addition to virology experts, though some of these concepts appear to verge on metaphysics.

Another issue is the duration of any direct physical damage or loss, or any property damage. Even in cases of demonstrable physical loss or damage through viral presence on the premises, those damages can likely be remediated through sanitizing the insured’s property. While the sanitized premises may be cleaned and the damage cured, the remediation might mean very little if the same pattern of contamination will regularly repeat itself every time people are allowed back on the premises, as employees or customers.

More significantly, greater economic business losses may well be based upon contamination events that have not happened. Such losses arise only because the insured, public, and government are trying to prevent that contamination from ever occurring in the first instance, i.e., much of the real economic business loss is the consequence of prophylactic action to avoid risk, rather than the virus’ actual presence on an insured’s premises.

What if there is no Arguable Property Damage, and a Business is Closed because of Fear or as a Prophylactic Measure?

Thus, the broader economic question may involve those circumstances where the virus is not actually on or in the insured’s property, or on or in any property within the distance necessary to invoke civil authority coverage. Rather, the insured’s business is closed, either voluntarily or by government order, out of fear the premises might become contaminated, or that the business premises might simply act as a meeting ground for spreading infection among employees and customers independent of whether any part of the premises is contaminated. The prevention rationale may reach even further outside a concern for direct physical loss or damage, e.g., reasoning that if businesses are closed people will not be taking public transportation to visit the business, or milling about on the streets to walk to a busines

In one New York federal case dealing with the “direct physical loss or damage” language, the court found that “[t]he words ‘direct’ and ‘physical,’ which modify the phrase ‘loss or damage,’ ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure.” Newman Myers Kreines Gross, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014). (Emphasis added)

Another New York federal case addressed coverage in a dispute involving purely economic damages resulting from the events of 9/11. Philadelphia Parking Authority v. Federal Insurance Co., 385 F. Supp. 2d 280 (S.D.N.Y. 2005) (interpreting Pennsylvania law). In that case, the plaintiff parking garage operator lost business at the Philadelphia airport due to diminished air travel after the 9/11 tragedy. It sought coverage from its insurer for these economic losses. The court found that the business impacts flowing from 9/11 could not serve as the source of a covered loss. These economic business losses lacked the predicate of direct physical loss or damage to the insured’s property. Rather, the insured’s loss of business itself was the only damage to the insured. Similarly, an Iowa federal court ruled that a putative loss of use in business operations occasioned solely by the “threat” of a flood was not physical loss or damage. Phoenix Insurance Co. v. Infogroup, Inc. 147 F. Supp. 3d 815 (S.D. Ia. 2015).

Was Insurance Available to Cover Business Losses before the Current Outbreak?

Another issue will likely be whether insurance coverage was available for viral pandemics before the COVID-19 outbreak. For example, an insured may argue that its reasonable expectations require reading business interruption or civil authority coverage to include pandemics, as there is no other means to obtain insurance coverage for these potential epidemics, making the policy’s coverage somehow illusory. Among other things, insurers may respond that insureds could have purchased coverage for pandemics before the COVID-19 crisis; therefore, the policy language should not be read beyond its ordinary meaning to provide coverage where coverage does not reasonably exist under the policy’s plain language.

In an April 3, 2020 declaratory judgment filing in Texas, the plaintiff theater and restaurant owner seeks coverage under a “Pandemic Event Endorsement.” A copy of the complaint in SCGM, Inc. v. Lloyds of London, U.S. District Court Southern District of Texas, No. 4:20-cv-01199, can be found here. The complaint alleges “[f]ollowing the 2014 Ebola crisis, many insurance carriers made specific exclusions for Ebola and other communicable diseases and viruses. Lloyds sought to take advantage of the exclusions in coverage by rolling out a Pandemic Event Endorsement that claimed to ‘fill in the gaps that [other insurers] creatively exclude or do not address’ that may relate to future pandemics.”

The endorsement, attached as an exhibit to the complaint, defines “pandemic event” to include either “(a) the actual presence of an Infected Person within a Covered Location; or, (b) the announcement by a Public Health Authority that a specific Covered Location is being closed as a result of an Epidemic declared by the CDC or WHO.” The endorsement limits “covered disease” to 25 specifically listed “pathogens, their mutations or variations” and a 26th category for other diseases designated by Lloyds. The complaint alleges Lloyds took the initial position that COVID-19 “is not covered under the Pandemic Event Endorsement as it is not a named disease on that endorsement.” Plaintiff counters that “Severe Acute Respiratory Syndrome associated Coronavirus (SARS-CoV) disease” is specifically named, that SARS-CoV-2 is the virus causing COVID-19, and that SARS-CoV-2 is a variant of SARS-CoV-1, i.e., a named pathogen.

[We note here that the World Health Organization has stated the International Committee on the Taxonomy of Viruses “announced ‘severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2)’ as the name of the new virus on 11 February 2020.  This name was chosen because the virus is genetically related to the coronavirus responsible for the SARS outbreak of 2003. While related, the two viruses are different.” Thus, this litigation may also involve whether the relationship constitutes a mutation or variation sufficient to come within the list.]

Even assuming some level of coverage on any of the above discussed grounds, there will likely be additional issues arising in COVID-19 cases that will require analyzing a wider range of a policy’s terms, conditions, sublimits, etc. In evaluating whether to fight the above-described battles, both insureds and insurers should look at the practical consequences of each and every particular policy language battle. The meaning of success should be measured against how things could stand at the end of the war, and not just any one battle.

For any additional information on these issues, you can contact S. David Fineman, or Lee Applebaum,