JULY 2014 BAD FAITH CASES: INSURER’S MOTION TO DISMISS HOSPITAL’S BAD FAITH BREACH OF CONTRACT CLAIM DENIED (New Jersey Federal Court)
The plaintiff/counterclaim-defendant insurer brought claims against defendant/counterclaim-plaintiff hospital for failure to require patients to pay certain out-of-pocket expenses. The insurer originally brought a claim alleging that the hospital had violated ERISA by refusing to charge the expenses to patients. The hospital counterclaimed, alleging the insurer failed to reimburse the hospital for care given to its insureds.
In its counterclaim, the hospital alleges that, through an agent, the insurer entered into an oral agreement with the hospital in which the insurer waives its right to audit the hospital in exchange for a substantially discounted rate. The insurer alleges that it later discovered that the hospital was not charging patients co-insurance in accordance with a cost-sharing plan between them. After the hospital declined to charge these costs to patients, the insurer stopped paying for patient care.
The hospital, however, contends that it was never required to initiate a cost-sharing plan, but did so under pressure from the insurer. Further, the hospital states that the insurer withheld coverage pending an audit which was allowed by the hospital in contravention to its prior discount agreement. The insurer brought suit against the hospital, alleging fraud, unjust enrichment, and ERISA violations. The hospital countersued, claiming breach of contract, breach of the implied covenant of good faith and fair dealing, and common law fraud.
In considering the insurer’s motion to dismiss the hospital’s claim of breach of the implied covenant of good faith and fair dealing, Judge Martini found that the hospital’s complaint satisfies the pleading standards set forth in F.R.C.P. 8(a).
The court stated that, in New Jersey, “the implied covenant of good faith and fair dealing is inherent in every contract, and requires that neither party shall do anything which would have the effect of destroying or injuring the right of the other party to receive the full fruits of the contract . . . “
Further, a plaintiff must allege bad faith in order to prevail on a claim for breach of the covenant.
The court found that the hospital’s allegations regarding the oral agreement with the insurer’s agent, although unlikely, did state a valid claim for breach of the implied covenant if viewed in the light most favorable to the hospital. The court rejected the insurer’s arguments that the alleged oral agreement was a “re-pricing agreement” instead of a contract, and that the alleged contract was between the hospital and the agent, not the insurer.
The insurer also alleged that the hospital had failed to plead bad faith; however, the Court found that allegation that the insurer agreed to pay the claims after finishing the audit but failed to do so was a sufficient to survive a motion to dismiss.
The Court denied the insurer’s motion to dismiss the breach of contract and breach of the implied covenant. The Court did grant the motion with regard to the fraud claim, but gave the hospital leave to amend.