November 2012 Bad Faith Cases: Failure to Bring Bad Faith Claim in UIM Proceeding Results in Bar Under Entire Controversey Doctrine (Third Circuit – NJ Law)

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In Reid v. Transportation Ins. Co., the Third Circuit affirmed a district court ruling granting summary judgment to the defendant (“the carrier”) in plaintiff’s action alleging bad faith based on the carrier’s failure to negotiate a settlement in an underlying underinsured motorist action.

On October 1, 1999, plaintiff was involved in a serious accident with an underinsured motorist (UIM) in the course of his employment. The carrier had issued an insurance policy to plaintiff’s employer containing “Business Auto” coverage for the period during which plaintiff was injured; that policy included $1M of underinsured motorist coverage. A dispute about subrogation rights ensued, and the parties engaged in seven years of litigation in the New Jersey courts regarding the carrier’s UIM liability. Plaintiff was ultimately successful in his action, and received a judgment in the amount of $1,036,650.56, including $186,650.56 in prejudgment interest.

Two years later, plaintiff brought suit against the carrier again, alleging bad faith failure to negotiate a settlement, bad faith denial of UIM benefits, and bad faith continuation of vexatious litigation. Specifically, plaintiff alleged the carrier acted in bad faith by (1) filing for a declaratory judgment to invoke the policy step-down clause, which would have lowered its coverage limit to $100,000; (2) appealing the denial of that judgment; (3) initially consenting to arbitration and then requesting a trial; (4) withdrawing that request and agreeing to reschedule arbitration; (5) filing a motion to vacate the order to arbitrate; (6) filing a motion for reconsideration of the Superior Court’s refusal to vacate the arbitration order; and (7) appealing the denial of the motion for reconsideration. In response, the carrier filed a motion for summary judgment, arguing the bad faith claim was res judicata under New Jersey’s Entire Controversy Doctrine. That motion was granted on November 3, 2011, and an appeal was timely filed.

New Jersey’s ECD “requires the assertion of all claims arising from a single controversy in a single action at the risk of being precluded from asserting them in the future.” Under the ECD, “a party cannot withhold part of a controversy for separate later litigation even when the withheld component is a separate and independently cognizable cause of action.” Plaintiff asserted (1) his claim did not accrue until the arbitration panel issued a binding award in his favor and that (2) by barring his claim, the District Court contradicted the fairness intended through the ECD.

Plaintiff’s first assertion, that he was unable to make a bad faith claim until the UIM arbitration panel found the carrier liable, was flawed. It is true that the success of a bad faith claim may depend on the success of the underlying litigation, but the simple assertion of a bad faith claim does not require such a finding. Furthermore, under the ECD, all claims arising out of the underlying controversy must be brought in the underlying litigation. Furthermore, throughout the course of the litigation, plaintiff raised two arguments indicating he was aware the carrier’s actions could have constituted bad faith. Specifically, plaintiff alleged the carrier’s failure to timely pay the UIM benefits constituted a willful breach of the insurance contract, as well as stating he was entitled to remedies for a failure to timely pay those benefits to which he was entitled.

Finally, New Jersey courts have held that where a bad faith claim is based on first-party UIM litigation and, “the insurer is in the litigation from the outset, any claims of bad faith can be asserted in the same litigation.” Based on these reasons, the Third Circuit held the District Court was correct to apply the ECD and bar plaintiff’s claim.

Secondly, plaintiff argues a New Jersey state court would decline to apply the ECD because doing so would be unfair and run counter to the doctrine’s purpose. The ECD has three purpose: “(1) complete and final disposition of cases through avoidance of piecemeal decisions; (2) fairness to parties to an action and to others with a material interest in it; and (3) efficiency and avoidance of waste and delay,” with fairness being the guiding principle. Courts attempt to balance whether the plaintiff has already had a “fair and reasonable opportunity to fully” litigate the claim in the original action against “fairness to the system of judicial administration.

Plaintiff clearly was aware the carrier’s actions may have constituted a bad faith claim based on the affirmative defenses he asserted. The court found because plaintiff should have known he had a potential bad faith claim against the carrier, he had a fair and reasonable opportunity to have fully litigated that claim in the original action. Furthermore, in the interest of judicial administration, it is more efficient to require plaintiffs to assert bad faith claims in the same lawsuit in which they seek first-party UIM benefits. For these reasons, the Third Circuit affirmed the order of the District Court.

Date of Decision: October 19, 2012

Reid v. Transportation Insurance Company, No. 11-4297, 2012 U.S. App. LEXIS 21876 (3d Cir. Oct. 19, 2012) (Fisher, J.)

At the trial level, the court observed that the crux of the insured’s claim was that the carrier engaged in bad faith litigation to postpone a finding of liability in the insured’s favor.

The carrier filed a motion for summary judgment, arguing that the insured’s bad faith claim should be denied as res judicata under New Jersey’s Entire Controversy Doctrine (“ECD”). The ECD provides that a litigant must raise all applicable claims during a single litigation. However, the insured did not bring the bad faith claim during the underlying coverage litigation. The insured argued that (1) its bad faith claim was not ripe during the underlying litigation; (2) it would be unfair to apply the ECD in this situation; and (3) that an application of the ECD would not satisfy the doctrine’s goals in this instance. Ultimately, the court disagreed with these contentions and found for the carrier, granting summary judgment and dismissing the insured’s bad faith claim as res judicata under the ECD.

Date of Decision: November 3, 2011

Reid v. CNA Ins. Co., No. 10-6246, 2011 U.S. Dist. LEXIS 127182, U.S. District Court for the District of New Jersey (D.N.J. Nov. 3, 2011) (Kugler, J.)