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UNDER NEW JERSEY LAW, NO COVERAGE DUE = NO BAD FAITH (Third Circuit) (New Jersey Law)

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This Third Circuit decision addresses New Jersey bad faith law.  The appellant argued that the trial court “erred in ruling that it could not maintain bad faith claims against the insurers absent a finding of coverage.” The District Court’s decision, including case background, is summarized here.

The Third Circuit, however, disagreed and affirmed the District Court, stating:

Under New Jersey law, “a claimant who could not have established as a matter of law a right to summary judgment on the substantive [coverage] claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.” Likewise for bad faith claims premised on alleged processing delays, “the test appears to be essentially the same.” Such bad faith claims are viable when the substantive claim for coverage is “valid” and “uncontested.” Here, however, [the insured] could not establish a right to coverage. Additionally, [the insured’s] citation to the New Jersey Unfair Claim Settlement Practices Act is unavailing, because that statute does not create a private right of action. We conclude that the District Court did not err in granting summary judgment to the insurers on [the] bad faith claims.

Benecard Services, Inc. v. Allied World Specialty Ins. Co., U.S. Court of Appeals for the Third Circuit No. 20-2359, 2021 WL 4077047 (3d Cir. Sept. 8, 2021) (Fisher, Matey, Smith, JJ.) (New Jersey Law)

 

 

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

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

CASE 1 – FIRST PARTY PROPERTY BAD FAITH CLAIM CAN PROCEED

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

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

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

Bad faith claim adequately pleaded

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

To meet this standard:

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

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

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

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

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

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

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

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

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

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

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

Motion to Sever and Stay Denied Without Prejudice

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

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

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

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

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

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

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

Date of Decision:  September 1, 2021

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

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

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

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

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

Date of Decision: September 21, 2021

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

NEW JERSEY 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)

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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.)

NEW JERSEY CONSUMER FRAUD ACT DOES NOT APPLY TO REFUSING TO PAY INSURANCE BENEFITS (New Jersey Federal)

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This New Jersey District Court decision reiterates that New Jersey’s Consumer Fraud Act “is not implicated by the payment of insurance benefits.” Denying insurance benefits that an insured believes are due is not “an unconscionable commercial practice.” Moreover, even where an insurer allegedly violates New Jersey’s Unfair Claims Act regulations, “the alleged violations do not constitute fraudulent or misleading commercial practices.”

Date of Decision: March 13, 2020

Jones-Singleton v. Illinois Mutual Life Insurance Co., U.S. District Court District of New Jersey Case No. 3:19-cv-14220 BRM ZNQ, 2020 U.S. Dist. LEXIS 44613 (D.N.J. Mar. 13, 2020) (Martinotti, J.)

 

NOVEMBER 2018 BAD FAITH CASES: NEW JERSEY CFA CLAIM CAN PROCEED WHERE NO DENIAL OF AN INSURANCE BENEFIT ALLEGED (Third Circuit – New Jersey)

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In this New Jersey action, the plaintiff alleged that the insurer’s agent deceived and defrauded her into signing a release of claims against the insurer. Specifically, the insured alleged that she was injured in an auto accident, and the insurer’s agent showed up at her home with papers to sign. The agent allegedly represented the documents were necessary to process and advance payments on her claim. However, unknown to her, the documents actually included a broad release of all her claims.

Plaintiff initiated a class action under New Jersey’s Consumer Fraud Act (CFA). The District Court found the CFA inapplicable to this fact scenario, on the basis that the CFA does not address the denial of insurance benefits, and further found the CFA conflicts with the Insurance Trade Practices Act (ITPA) or Unfair Claims Settlement Practices (UCSPA) regulations under these circumstances.

The Third Circuit reversed.

The Third Circuit found that the alleged deceptive and fraudulent conduct against a consumer did not amount to the denial of an insurance benefit. It further found that there was no conflict between allowing a statutory CFA private claim to proceed, even if regulatory relief might also be proper under the ITPA or UCSPA.

Date of Decision: November 15, 2018

Alpizar-Fallas v. Favero, United States Court of Appeal for the Third Circuit, No. 17-3837 (3d Cir. Nov. 15, 2018) (Jordan, Rendell, Vanaskie, JJ.)

OCTOBER 2018 BAD FAITH CASES: INSURED CAN NEITHER PURSUE (1) PRIVATE CLAIMS UNDER UNFAIR CLAIMS SETTLEMENT PRACTICES ACT, NOR (2) UNDER PROPOSED INSURANCE FAIR CONDUCT ACT SINCE IT HAS NOT BECOME LAW (New Jersey Federal)

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The insured attempted to bring a claim under Senate Bill 2144, the proposed Insurance Fair Conduct Act. However, this bill has never become law, and the court would not permit the insured to pursue such a claim. Nor could the insured pursue a claim under New Jersey’s Unfair Claims Settlement Practices Act since this did not provide a private right of action.

Date of Decision: October 23, 2018

Bell v. Crown Life Ins. Co., United States District Court District of New Jersey Civil Action No. 3:16-cv-08006 BRM-DEA, 2018 U.S. Dist. LEXIS 181562 (D.N.J. Oct. 23, 2018) (Arpert, J.)

NEW JERSEY SENATE PASSES STATUTORY BAD FAITH BILL -- OR WILL SOME SAY IT IS AN INSURER NEGLIGENCE BILL?

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On June 7, 2018, New Jersey’s Senate passed New Jersey Senate Bill 2144, the New Jersey Insurance Fair Conduct Act (IFCA). In its current form, the proposed law creates an insurance bad faith statute that would provide remedies for “an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy,” and/or for violations N.J. Statute 17:29B-4. Among other provisions, subsection 9 of 17:29B-4 includes New Jersey’s Unfair Claims Settlement Practices Act (UCSPA), which lists 14 different forms of insurer misconduct.

COULD THE PROPOSED LAW ONLY REQUIRE PROOF OF NEGLIGENCE FOR DELAY OR DENIAL OF A BENEFIT?

By contrast with current common law bad faith, the IFCA does not clearly state any additional requirement that an unreasonable delay or denial be accompanied by some form of bad faith, intentional conduct or reckless indifference, or whether the word “unreasonable” itself means more than negligence. Defining common law bad faith, New Jersey’s Supreme Court stated in the Badiali case that: “A finding of bad faith against an insurer in denying an insurance claim cannot be established through simple negligence. … Moreover, mere failure to settle a debatable claim does not constitute bad faith. … Rather, to 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.” New Jersey’s federal courts have frequently interpreted the fairly debatable bad faith standard as requiring proof the insurer knew its conduct was unreasonable or recklessly disregarded that fact. This includes both pre and post Badiali cases, including recent decisions.

Thus, without further explanation, it is not wholly clear whether the IFCA is subject to a negligence standard, or if IFCA unreasonableness is meant to include the additional common law elements that go beyond mere negligence. If the standard is negligence, then it would be a misnomer to call this a bad faith statute at all.

The statute proposes including treble damages and attorneys’ fees, and legal costs within its remedies, which some may argue are atypical punishments for merely negligent conduct. By comparison, however, the Consumer Fraud Act (CFA) provides for treble damages and attorney’s fees to address a wide range of conduct and mental states. Thus, the CFA punishes affirmative statements that constitute misrepresentations, irrespective of an intent to mislead; knowing material omissions, which do require proof of intent; or strict liability for regulatory violations.

WHAT STANDARDS APPLY TO UCSPA VIOLATIONS?

On this last point, the proposed IFCA encompasses the UCSPA, among other portions of section 17:29B-4. Within the UCSPA’s 14 subsections, reasonableness is often the express standard, however, some subsections simply describe the conduct constituting whether an insurer has acted improperly, or, in some instances it describes conduct beyond mere negligence. The UCSPA’s language includes, e.g.: “misrepresenting pertinent facts”, “failing to acknowledge and act reasonably promptly”, “failing to adopt and implement reasonable standards”, “refusing to pay claims without conducting a reasonable investigation based upon all available information”, “failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed”, “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear”, “making claims payments to insureds or beneficiaries not accompanied by a statement setting forth the coverage under which the payments are being made”, “compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds”.

Despite using reasonableness standards in many instances, the UCSPA is underpinned by the notion that the misconduct is frequent enough to indicate a general business practice. This frequency requirement would seem to indicate that an element of intentionality or purposefulness is the fundamental reason that it is necessary to address the misconduct listed in all 14 subparts. In eliminating the frequency requirement, is the IFCA overlooking the idea that the UCSPA was designed to punish ongoing and continuous bad behavior because of its purposeful, intentional or reckless repetition, and not merely individual instances of negligent or unintentional behavior?

It is also interesting to compare subsection 17:29B-4(9)(f) and the new delay or denial IFCA cause of action. Under UCSPA subsection (9)(f): “Committing or performing with such frequency as to indicate a general business practice any of the following: … (f) ‘Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear….” This statutory language includes two concepts to make out misconduct: (1) a lack of good faith effort to settle when (2) it is unreasonable not to make a fair settlement. Under the proposed new law, the failure to pay a benefit due is actionable if it unreasonable, with no mention of any failure to act in good faith as an additional element.

THERE IS NO STATEMENT ON THE STANDARD OF PROOF

In addition, there is no explanation of what burden of proof applies, i.e., preponderance of the evidence or clear and convincing evidence. It should be noted that the preponderance of evidence standard applies to the Consumer Fraud Act and Insurance Fraud Prevention Act. Moreover, while statutory UCSPA violations require that the acts at issue be committed or performed “with such frequency as to indicate a general business practice,” that is not the proposed standard under the new law. Neither unreasonable delay or denial claims, nor actions for UCSPA violations, require “the claimant … to prove that the insurer’s actions were of such a frequency as to indicate a general business practice.”

IS THE PROPOSED LAW ONLY APPLICABLE TO FIRST PARTY BENEFIT PAYMENTS?

The “Statement” accompanying the bill begins: “This bill, the ‘New Jersey Insurance Fair Conduct Act,’ establishes a private cause of action for first-party claimants regarding certain unfair or unreasonable practices by their insurer.”

The bill defines: “’First-party claimant’” or ‘claimant’ means an individual, corporation, association, partnership or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy.” Under this definition, it certainly appears that a claimant must be an insured who has been denied an entitlement to a benefit. In unreasonable delay or denial cases, there must be a delay or denial “for payment of benefits under an insurance policy….” Thus, if no monetary benefit is due, the statute should not apply.

As to UCSPA cases, claims may be asserted “for any violation of the provisions of” the UCSPA’s sections. Based on the definition of claimant, one would assume that there must be some actual denial of a monetary benefit due to the insured for a claimant to raise a UCSPA based IFCA action. Regulatory oversight should apply where no benefit is denied, but the UCSPA has been violated. The statute could be clearer on this point.

In practice, first party claims are often contrasted with third party claims to mean that first party claims are direct claims by an insured to a carrier to indemnify losses suffered by the insured. Third party claims involve instances where an insured is subject to another’s claim for loss caused by the insured, or where the insured has been sued and is seeking a defense and indemnification for losses suffered by others attributable to the insured. Following these uses, and looking solely to the bill’s text, it is not perfectly clear whether the proposed new law covers third party claims, though it would seem not to cover such claims.

The definition of claimant includes “asserting an entitlement to benefits owed [1] directly to or [2] on behalf of an insured under an insurance policy.” A benefit “owned directly to” an insured clearly addresses first party claims. Some may try to argue that the phrasing, a benefit owed “on behalf of an insured,” could be interpreted to mean owed on behalf of an insured to those making claims against the insured. Moreover, is the duty to pay for the insured’s defense in a third party action a benefit owned directly to the insured?

This language could use some clarification in the statute’s text itself in the first instance if it is to become law, rather than going through years or decades of case law to answer these questions in the courts, as issues of statutory interpretation. One only need look at the effusion of statutory bad faith case law in neighboring Pennsylvania over the last 29 years to see the benefits of writing a clear statute in the first instance. If, as seemingly set forth in the “Statement,” the new law is only to cover traditional first party claims, then make that clear in the text. If it is to cover something more, then make that clear.

REMEDIES AND NEED FOR FURTHER CLARIFICATION

The proposed law provides that “upon establishing that a violation of the provisions of this act has occurred,” plaintiffs “shall be entitled to: (1) actual damages caused by the violation of this act; (2) prejudgment interest, reasonable attorney’s fees, and all reasonable litigation expenses; and (3) treble damages.”

The new law uses the phrase “upon establishing”, which again points out (1) the absence of what the burden of proof is to establish a cause of action under this statute; (2) whether the statute requires negligence, some form, intent, recklessness or bad faith; (3) whether the unreasonableness must be subjective or objective; and/or (4) whether there could be instances of strict liability.

Moreover, these remedies are mandatory and not discretionary because plaintiffs “shall be entitled” to the listed relief. Again, it arguably would be out of the ordinary to award mandatory treble damages and attorney’s fees upon proof of negligence only.

As to the meaning of “actual damages”, this relief would appear to be redundant with an ordinary breach of contract claim if limited to benefits due and not paid under the policy. However, the meaning of the term is not defined in the proposed new law. Does the term “actual damages” also encompass consequential damages? Does it encompass emotional distress damages? Again, the lack of definition opens the door to years of litigation over such issues.

Some other loose ends: Looking at issues arising in other state’s interpreting bad faith statutes, it may be useful to include an express statute of limitations and what portions of the statute go to the jury or not.

We will be following the legislative process and reporting on the proposed IFCA as it develops.

DECEMBER 2016 BAD FAITH CASES: NO BAD FAITH WHERE EVIDENCE FAILED TO SHOW LACK OF REASONABLE EVALUATION OR INVESTIGATION; NO PRIVATE ACTION UNDER UNFAIR CLAIMS SETTLEMENT PRACTICES ACT (New Jersey Federal)

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In this Superstorm Sandy property damage case, the insured alleged bad faith, among other claims. The court found the insured could not overcome the “fairly debatable” standard, and make a case for an unreasonable denial that was reckless or intentional in nature.

The insured only provided invoices, an itemized bill for the repair work performed, and corresponding proofs of payment in support of its claim; but none of those documents provided evidence that the property damage at issue occurred as a result of water backup and sump overflow as opposed to flooding. Nor did these documents do anything to contradict the results of the insurer’s investigation and inspection to determine the cause of the reported damages. There was “nothing evidential to suggest that Defendant lacked a reasonable basis for denying Plaintiff’s claim or that Defendant had knowledge of or showed a reckless disregard of the lack of a reasonable basis for denying the claim.” Summary judgment was entered for the insurer.

In addition, the insured had alleged a violation of the Unfair Claims Settlement Practices Act, apparently claiming bad faith; however, there is no private cause of action under that statute. Thus, summary judgment was granted on that issue as well.

Date of Decision: November 15, 2016

Carevel, LLC v. Aspen Am. Ins. Co., No. 13-7581, 2016 U.S. Dist. LEXIS 157919 (D.N.J. Nov. 15, 2016) (Walls, J.)

MAY 2016 BAD FAITH CASES: NO PRIVATE RIGHT OF ACTION UNDER NEW JERSEY’S INSURANCE TRADE PRACTICES ACT OR UNFAIR CLAIMS SETTLEMENT PRACTICE ACT (New Jersey Federal)

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In GEICO v. Korn, the court addressed what it called a muddled claim that appeared to be for bad faith.  The claim referenced both New Jersey’s Insurance Trade Practices Act and Unfair Claims Settlement Practices Act, neither of which allow for a private cause of action. The insured also pleaded that the insured had “failed to act in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become perfectly clear.” The court dismissed the insureds’ claim without prejudice, and with leave to amend.

Date of Decision:  April 21, 2016

GEICO v. Korn, 2016 U.S. Dist. LEXIS 53210 (D.N.J. Apr. 21, 2016) (Bumb, J.)

APRIL 2016 BAD FAITH CASES: (1) NO CONSUMER FRAUD ACT CLAIM FOR DENIAL OF BENEFITS; (2) NEGLIGENCE CLAIM UNDER UNFAIR CLAIMS SETTLEMENT PRACTICES ACT NOT ASSIGNABLE OR ACTIONABLE; AND (3) NO BAD FAITH CLAIM WHERE QUESTION WHETHER PROPERTY DAMAGE FELL WITHIN POLICY PERIOD WAS FAIRLY DEBATABLE (New Jersey Federal)

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In Nationwide Mutual Insurance Company v. Caris, the underlying facts involved the alleged fraudulent sale of a property with contamination.  The insureds entered a consent judgment and assigned their rights against the carrier to the buyers.  The buyers then brought various claims against the insurer, including bad faith claims.

The court dismissed a New Jersey Consumer Fraud Act claim because the allegation was that the insurer failed to provide benefits, not that it procured the insurance policy through fraud.

The assignees also had raised a negligence per se claim for improper claims handling and failure to give timely notice that no coverage would be provided.  The court found that the assignees had no standing to bring a claim based upon negligence, as such a claim could not be assigned to them prior to judgment being entered.

Moreover, to the extent this was pleaded as an alternative to asserting a bad faith claim, no such cause of action exists under New Jersey law: “[A]n insurance company may be liable to a policyholder for bad faith in the context of paying benefits under a policy. The scope of that duty is not to be equated with simple negligence.”

Finally, “there is no private right of action for policyholders against their insurers based on UCSPA violations or negligence.”

Turning to the bad faith claim: the insured “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.”  New Jersey courts apply the “fairly debatable” standard, meaning  “if there are material issues of disputed fact which would preclude summary judgment as a matter of law, an insured cannot maintain a cause of action for bad faith.”

“In the case of processing delay, bad faith is established by showing 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.” This is essentially the same as the fairly debatable standard, and the “mere failure to settle a debatable claim does not constitute bad faith.”

Despite a litany of bad faith allegations, the assignees could not establish the insurer lacked a reasonable basis to deny coverage, or that its coverage position – that there was no property damage caused by an occurrence during the policy period – was unreasonable.

Thus, “[w]hen a carrier proffers ‘plausible reasons for the denial of coverage’ and ‘demonstrates that there is, at the very least, genuine questions regarding whether [an insured’s] claims fall within the coverage provided,’ dismissal of a related bad faith claim is proper, even on a motion to dismiss.”

The burden in this case was on the insureds to prove the property damage occurred during the policy period, and the court found that issue was fairly debatable.  Thus, it granted the motion to dismiss the bad faith claim.

Date of Decision: March 14, 2016

Nationwide Mut. Ins. Co. v. Caris, No. 14-5330, 2016 U.S. Dist. LEXIS 33407 (D.N.J. Mar. 14, 2016) (Rodriguez, J.)