IF COVERAGE IS NOT DUE, BAD FAITH CLAIM FAILS (New Jersey Federal)
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.”
