NOVEMBER 2012 BAD FAITH CASES: COURT DISMISSES INSURED’S BAD FAITH CLAIM BECAUSE UNDERLYING ALLEGATION ABOUT CARRIER’S IMPROPER UNILATERAL RECISSION OF POLICY WAS DENIED (New Jersey Federal)
In JPMorgan Chase Bank, N.A. v. Republic Mortg. Ins. Co., the court heard a carrier’s motion to dismiss its insured’s amended complaint and cross-motion for summary judgment. The dispute arose from a mortgage insurance policy that the insured purchased to cover defaults on residential loans issued by the insured. The policy contained a unilateral cancellation provision, which permitted the carrier to rescind coverage at its option if any of the insured’s statements on documents submitted for coverage were materially false or misleading.
First, the court addressed the insured’s declaratory judgment count, which sought a ruling that the carrier may not unilaterally cancel its policy without judicial opinion or an arbitration award. The court disagreed, reasoning that the insured failed to allege that it did not make any material misrepresentations in its applications, which would render the carrier’s rescission fraudulent.
Instead, the insured sought an advisory opinion that, if and when the carrier rescinds coverage when an insured hasn’t made a false or misleading statement, the carrier’s unilateral rescission will be unlawful. The court ruled that such an advisory opinion would be constitutionally impermissible and granted the carrier’s motion.
As to the insured’s breach of contract count, the court granted the carrier’s motion. The court reasoned that a carrier may rescind coverage under an insurance policy by virtue of “the terms of the contract, the mutual consent of the parties though an extraneous agreement, or a reserved power in the contract like that of unilateral cancellation.” As such, the carrier would be permitted to rescind coverage without a judicial opinion or arbitral award.
As to the insured’s bad faith claim, the court granted the carrier’s motion. The insured argued that the carrier acted in bad faith by interfering with the insured’s reasonable expectations of coverage. However, the bad faith allegations were predicated on the carrier’s unilateral rescission practice, which the court did not find unlawful. The court then granted the insured leave to amend its complaint, to the extent that its bad faith claim is based upon other grounds.