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This New Jersey federal case involved breach of contract and bad faith claims. The carrier successfully moved to sever and stay the bad faith claims.

General Bad Faith Principles

The court first stated general principles of New Jersey bad faith law.

  1. “A breach of the implied covenant of good faith and fair dealing, which is synonymous with a bad faith claim, focuses on the conduct of the insurer in its review and processing of a claim under an existing policy.”

  2. “It is a distinct cause of action from a policyholder’s breach of contract claim against an insurer.”

  3. “The breach of insurance contract claims concern policy coverage while bad faith claims concern the insurer’s general claims handling procedures, its claims conduct in the case at issue, and its knowledge and state of mind about the grounds for denial of coverage.”

  4. “Coverage is a necessary precondition to maintaining a bad faith claim predicated on a denial of benefits.”

  5. If the insured is unable to establish a right to the coverage claimed, the bad faith claim must be dismissed.”

  6. “Beyond the mere existence of coverage, ‘the plaintiff must show that no debatable reasons existed for denial of the benefits.’”

  7. “Under the ‘fairly debatable’ standard, ‘a claimant who [cannot] establish[] as a matter of law a right to summary judgment on the substantive claim [cannot] . . . assert a claim for an insurer’s bad faith refusal to pay the claim.’”

  8. “In other words, ‘a question of fact permits an insurer to ‘fairly debate’ an insured’s claim.’”

  9. “If factual issues exist as to the underlying claim (i.e., questions of fact as to whether plaintiff is entitled to insurance benefits—plaintiff’s first cause of action), the Court must dismiss plaintiff’s second cause of action—the ‘bad faith’ claim.”

  10. To ultimately prevail, the plaintiff must also establish ‘the defendant’s knowledge or reckless disregard of the lack of a reasonable basis in denying the claim.’”

  11. “Bad faith can take the form of more than just improper denial of benefits.”

  12. “In the case of processing delay, bad faith is established by showing that 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.”

  13. “Although the ‘fairly debatable’ and ‘unreasonable delay’ tests apply in different circumstances, the analysis under both formulations is essentially the same.”

General Principles Concerning Severing and Staying Claims

  1. “Severing claims under Rule 21 is appropriate where the claims to be severed are discrete and separate in that one claim is capable of resolution despite the outcome of the other claim.”

  2. “The effect of ordering severance is to separate the claims into ‘independent actions with separate judgments entered in each.’”

  3. “On the other hand, this Court can bifurcate claims for discovery and trial pursuant to Rule 42(b).”

  4. “Courts consider the same factors in deciding a motion to sever under Rule 21 as they do in resolving a motion to bifurcate under Rule 42(b).”

  5. “Courts consider the following prior to making this discretionary determination:

(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.”

Applying Law to the Facts in a Bad Faith Case

The court observed “that [because] the ‘fairly debatable’ standard necessitates a ruling on coverage prior to the adjudication of a bad faith claim, courts in this district have opined that it is ‘[n]o surprise, then, that severance and stay of bad faith claims has been called the ‘prevailing practice’ in both the state and federal courts of New Jersey.’” Anticipating the outcome here, the court added that “[i]t is common practice in both state and federal court to sever breach of insurance contract claims from bad faith claims . . . and . . . [to] proceed[] with the bad faith claims [only] if necessary following the adjudication of the contract claim.” (internal quotation marks omitted).

Specifically, in this case, the court found:

The bad faith claim was significantly different than the contract claim.

  1. The bad faith claim goes to the carrier’s state of mind.

  2. By contrast, the carrier’s “intent is wholly irrelevant to the otherwise straight-forward questions” concerning payments due from the carrier under the contract.

  3.  Bad faith discovery will distract from, and “undoubtedly delay, the resolution of the primary focus of the case, i.e., whether plaintiff’s . . . claim should be paid.”

  4. Here, the court first has to resolve coverage, and even if there is coverage, it “can only reach the bad faith claim if it finds that there are no factual issues pertaining to Plaintiffs’ entitlement to coverage ….”

Thus, “[d]iscovery on the bad faith claim should therefore wait until the question of coverage is resolved.”

The bad faith claim and contract claim involve different discovery.

  1. First, the court agreed with the majority of prior precedent that “bad faith claims regularly demand different witnesses and documentary proof from breach of contract claims.”

  2. For example, “’[d]iscovery relating to claims personnel, claims handling procedures and guidelines, and best practices is not directly relevant to the contract claims …, [e.g.,] ‘classic bad faith discovery such as information concerning defendant’s claims handling policies and procedures, and the experience and work evaluations of its claims personnel . . . is irrelevant to plaintiff’s . . . breach of contract claims’”

  3. In this case, the insureds wanted discovery of the insurer’s: entire underwriting file; claims manuals concerning the coverage subject at issue; information and documents regarding policy underwriting, drafting, selling, pricing, issuing, preparing, delivering or assembling the policy; and information and documents regarding the carrier’s decisionmaking in not making certain payments under the policy.

  4. The court found these “categories of documents … largely irrelevant to the breach of contract claims, which hinge on whether the parties abided by the terms of the Policy.”

There is no prejudice in granting a stay and severance.

  1. The prejudice issue is “ultimately one of judicial economy.”

  2. In this case, “the expedient resolution of the breach of contract claim best serves the interests of both parties as the expansive and contentious discovery necessitated by the bad faith claim may distract from the coverage questions at the foundation of this case.”

  3. Thus, the coverage claim should be the initial focus.

  4. Defendant would suffer significant expenditures of time and money, which could be rendered unnecessary if it prevails on coverage.

  5. Further, “[i]t promotes judicial economy and efficiency by holding in abeyance expensive, time-consuming, and potentially wasteful discovery on a bad faith claim that may be rendered moot….”

Date of Decision:  June 2, 2020

J. Fletcher Creamer & Son, Inc. v. Hiscox Insurance Co., U.S. District Court District of New Jersey Civil Action No. 19-21638 (ES) (MAH), 2020 U.S. Dist. LEXIS 96986 (D.N.J. June 2, 2020) (Hammer, J.)