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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.)