This Philadelphia Federal Court decision addressed breach of contract and bad faith claims under New Jersey law. The parties had agreed that this property damage coverage case was governed by New Jersey law because the property was located in New Jersey.
The insured sought coverage for Covid-19 business losses. The carrier voluntarily made some limited payments, subject to a reservation of rights, but ultimate denied coverage. The court found that under the plain language of a Communicable Disease and Water-Borne Pathogen Business Income and Extra Expense Coverage endorsement, no coverage was due. Thus, the breach of contract and declaratory judgment claims were dismissed.
The court also dismissed the bad faith claim under New Jersey law.
Under New Jersey law (other than in UM/UIM cases, see this post), a bad faith “plaintiff must show the lack of a reasonable basis for denying the claim or unreasonably delaying its processing, and the insurer’s knowledge or reckless disregard that it was acting unreasonably.” The New Jersey bad faith plaintiff must establish and “demonstrate that coverage was so clear that it was not ‘fairly debatable.’” Most importantly, “a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad faith refusal to pay the claim.” As the court found no coverage due, the insured could not meet this necessary predicate to make out a bad faith claim under New Jersey law.
The insured attempted to avoid the consequences of there being no coverage obligation by arguing that the carrier had initially offered to pay for decontamination costs, while simultaneously refusing to pay for business income and other expenses. The insurer, however, had issued a reservation of rights letter, “detailing why it was denying [the insured’s] claim, [while clarifying] that it ‘did agree to reimburse you for your reasonable costs for cleaning … subject to a full reservation of rights.’” Thus, the insurers voluntary limited payments did not constitute “evidence that its subsequent denial of [the] full claim was done in bad faith.”
Date of Decision: January 14, 2022
BSD-360, LLC d/b/a The Goddard School v. Philadelphia Indemnity Insurance Company, U.S. District Court Eastern District of Pennsylvania No. CV 20-4719, 2022 WL 138075 (E.D. Pa. Jan. 14, 2022) (Pratter, J.)