Archive for the 'NJ – Litigation Conduct' Category

BAD FAITH CLAIM FOR INSURER’S BRINGING RESCISSION SUIT ALLOWED TO PROCEED; LITIGATION PRIVILEGE NOT APPLICABLE (New Jersey Federal)

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Plaintiff was a life insurer and defendant trust owned life insurance policies issued by the insurer. The insurer brought suit seeking rescission based on putative fraudulent representations, which the trust denied. The trust asserted a breach of the duty of good faith and fair dealing counterclaim, among other things. The carrier moved to dismiss the counterclaims.

We only address the motion to dismiss the good faith and fair dealing counterclaim, a claim founded on the insurer’s bringing the rescission suit in bad faith.

The trust pleaded the carrier “breached the duty of good faith and fair dealing by commencing the instant action ‘based on interpretations of the Policies that it knew were clearly contradicted by the medical waiver it had granted, and by the information contained in its underwriting file … relating to [illness at issue].’”  The insurer also allegedly acted in bad faith by “conjuring” up pretend disputes against the trust for the purpose of bringing suit to intimidate the trust into dropping its insurance claims, and “unfairly attempt[ing] to manipulate the sworn testimony of third-party witnesses with the intent to mislead the Court and the parties to this litigation.’”

The insurer argued these claims were “barred by the litigation privilege, which ‘grants absolute privilege and immunity to statements or communications made by attorneys, parties, and their representatives in the course of judicial and quasi-judicial proceedings[.]’” The court rejected this argument.

The court found the carrier “fail[ed] to provide any legal authority demonstrating that (1) the filing of a complaint and commencement of an action constitutes a ‘communication’ protected by the litigation privilege, or (2) the litigation privilege applies to claims alleging breach of the duty of good faith and fair dealing.”

The court relied on precedent holding “that a cause of action for breach of the implied covenant of good faith and fair dealing can be maintained under New Jersey law based on allegations that a party has assert[ed] an interpretation [of the contract] contrary to [its] own understanding of the express terms of that contract.” Moreover, that that earlier case held that the “issue of lack of good faith … cannot be resolved on a motion to dismiss for failure to state a claim.”

Thus, Judge Shipp held the litigation privilege did not apply.  Moreover, the court found the plaintiff could “allege a breach of the duty of good faith and fair dealing related to [the] commencement of the instant action and that, at this stage of the litigation, dismissal of such a claim is inappropriate.”

Date of Decision: February 28, 2021

Symetra Life Insurance Company v. JJK 2016 Insurance Trust, U.S. District Court District of New Jersey No. 18 CV 12350 MASZNQ, 2021 WL 795267 (D.N.J. Feb. 28, 2021) (Shipp, J.)

OCTOBER 2015 BAD FAITH CASES: INSURER DID NOT ACT IN BAD FAITH BY EXHAUSTING POLICY LIMITS IN SETTLING SOME, BUT NOT ALL CLAIMS, WHERE SETTLEMENT AVOIDED MILLIONS OF DOLLARS IN EXPOSURE TO INSURED, AND INSURED WAS FULLY APPRISED THAT REMAINING CLAIM WOULD NOT BE COVERED (New Jersey Appellate Division)

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In Doitch v. Khatri, a third-party action for insurance coverage, the insureds filed a breach of contract and fiduciary duty complaint against an insurer refusing to settle a claim on behalf of the insureds. Summary judgment was granted to the insurer, and the insureds appealed.

The underlying claims arose from a fire damaging the insured’s home, a multi-family dwelling, as well as surrounding properties.  There were also serious bodily injuries to an upstairs tenant and a firefighter responding to the fire. The insured had a homeowners’ policy with the insurer with a $300,000 coverage limit per incident.

Multiple claims and lawsuits were filed against the insureds after the fire. The insurer ended up paying one claim in full as part of an arbitrated property damage decision. Three other claims, which exceeded $7.5 million, were consolidated and scheduled to proceed to trial. Meanwhile, a tenant of the insureds notified the insurer through a letter from her attorney that, “we are in the process of conducting an investigation to obtain the cause and origin of the fire.”

The letter requested, “photos of the area where the fire began,” but made no mention of a claim for damages. The tenant’s insurer asserted a property damage subrogation on behalf of the tenant, alleging that many of her belongings were destroyed by the fire. The homeowner’s insurer denied the claim, and stated that after an investigation, the insured was not legally responsible for the tenant’s damages.

One month before the three other claims were set for trial, the insurer notified the insured that the three other claimants were willing to settle their claims “for the amount of money remaining available under [the insured’s] $300,000.00 liability policy.” The insurer advised that it would be best to settle the three claims currently in suit, as the insurer believed there were valid defenses to all the claims, but that a possible recovery would likely exceed the amount of money available under the policy.

The insurer acknowledged that the remaining claim would not be resolved by this settlement. The insureds agreed to settle the three claims in suit at that time, exhausting the remainder of the policy.

Nearly three months later, the insureds received notice of a complaint filed by the remaining claimant. In response, the insured filed a third-party complaint against the insurer demanding that the insurer indemnify and defend against the claim, and argued that the insurer’s failure to do so was a breach of contract and fiduciary duty.

The Law Division granted the insurer summary judgment on the bad faith claim.  Further, the court found that the insurer had no duty to initiate and engage in settlement negotiations with the remaining claimant.  Rather, the insurer “negotiated and obtained very favorable settlements… in the face of claims seeking in excess of $7.5 million.” Moreover, the settlements were executed with the insured’s consent “and only after explan[ing to the insured that] the settlement would not resolve the ongoing property damage claim.”

On appeal, the Appellate Division observed that “absent bad faith, an insurer may settle with one or more claimants, notwithstanding that the settlements may exhaust the policy limits.” There was no evidence that the insurer acted in bad faith or breached its fiduciary duty, and the appellate court agreed with the reasoning of the Law Division.

Date of Decision: September 3, 2015

Doitch v. Khatri, Docket No. A-3513-13T1, 2015 N.J. Super. Unpub. LEXIS 2134 (App. Div. September 3, 2015) (Kennedy, J. and Hoffman, J.)