NO COVERAGE DUE FOR COVID-19 LOSSES IN LIGHT OF VIRUS EXCLUSIONS, AND THUS NO BAD FAITH POSSIBLE (New Jersey Federal – two cases)
Today’s post addresses two recent cases where New Jersey federal judges held Covid-19 business loss claims barred by insurance policy virus exclusions.
Case 1 (Judge Hillman)
In this Covid-19 business closure case, the insured claimed coverage was due for business interruption, and under the policy’s civil authority coverage provision. The carrier denied coverage based upon a virus exclusion. The insured brought breach of contract and bad faith claims, which the insurer successfully moved to dismiss.
First, after an extensive analysis and review of developing case law, the court found the Covid-19 business loss barred by the policy’s virus exclusion.
As to bad faith, the court observed that under New Jersey law, causes of action for bad faith can include a denial of insurance coverage, or conduct that goes beyond coverage denial. In coverage denial cases, the insured has to prove the lack of a reasonable basis to deny benefits, and a knowing or reckless disregard of the unreasonableness of the carrier’s denial.
Such claims cannot survive if they are fairly debatable; nor can there be a cognizable “bad faith claim for denial of coverage if the insurer was correct as a matter of law in denying coverage.” [Interestingly here, the court cites Third Circuit case law supporting this principle where the courts were addressing Pennsylvania’s bad faith statute, and not New Jersey’s common law insurance bad faith law. The court also cited this “Pennsylvania” case law on bad faith reaching beyond coverage denial claims.]
New Jersey Federal Judge Hillman dismissed the bad faith claim with prejudice, stating
In the context of a claim for coverage based solely on the Closure Orders where there are no claims that the insured property or nearby property has been physically damaged and access to Plaintiff’s property has not been entirely prohibited, there is nothing to investigate: coverage does not exist on the face of that claim. Therefore, Plaintiff has not shown bad faith in Defendant’s lack of investigation or by denying Plaintiff’s claim. Discovery on this issue would not change that conclusion. As detailed above, the Court has already concluded Defendant was correct as a matter of law in denying Plaintiff coverage. Accordingly, the Court will dismiss with prejudice Plaintiff’s bad faith claim. …. “Because the Court has found that [the insurer] was not obligated to provide coverage under the terms of the Policy, the bad faith claim similarly fails.”
Judge Hillman looked to Judge Kugler’s 2020 Shore Options opinion, summarized here, to support this conclusion.
After a lengthy analysis, Chief Judge Wolfson ruled that New Jersey’s principles governing insurance policy interpretation required application of a virus exclusion to bar coverage for a group of restauranteurs asserting Covid-19 business loss claims. She then entered a judgment on the pleadings for the insurer on plaintiffs’ bad faith claim.
We quote the Chief Judge’s bad faith reasoning in full:
In Pickett v. Lloyd’s, 131 N.J. 457, 481 (1993), the New Jersey Supreme Court enumerated two situations under which an insurance company can be held to have acted in bad faith in the context of a first party claim: (1) “denial of benefits” and (2) “processing delay.” The Court reasoned that, like all contracts, an insurance contract contained a covenant of good faith and fair dealing in its performance and enforcement. …
Thus, the Court concluded that the insured should have a remedy when the insurer breaches its fiduciary duty to its insured by acting in bad faith. Id. To prove bad faith, “a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard or the lack of a reasonable basis for denying the claim.” … “While the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is reckless indifference to facts or to proofs submitted by the insured, neither negligence nor mistake is sufficient to show bad faith.” …. Rather, it must be demonstrated that the insurer’s conduct is unreasonable and the insurer knows that the conduct is unreasonable, or that it recklessly disregards the fact that the conduct is unreasonable. ….
In the present matter, Plaintiffs assert a claim that Defendant acted with bad faith when it denied benefits set forth in Plaintiffs’ contract with Defendant. … However, as previously discussed, Plaintiffs’ losses are barred by the Virus Exclusion. Consequently, because no coverage exists for Plaintiffs’ claims, the bad faith claim fails.
[Yesterday’s post summarized a separate August 9, 2021 New Jersey Federal Court opinion, addressing the same bad faith coverage issues, though outside the Covid-19 context, likewise concluding that if no coverage is due, bad faith is not possible.]