OCTOBER 2017 BAD FAITH CASES: SEVERANCE AND STAY OF BAD FAITH CLAIM GRANTED ON ALL FOUR CRITERIA; RESOLUTION OF BREACH OF CONTRACT CLAIM DETERMINITIVE OF BAD FAITH CLAIM (New Jersey Federal)
The insureds owned commercial property damaged due to storm-related incidents. They retained an outside adjusting firm. After the adjusting firm first notified the insurer of the claims, the insurer sent its own adjusters to investigate the property claims and to make a coverage decision. Upon investigation, the insurer concluded the commercial property had not been open to the public for three years, and that the insureds had apparently demolished whole portions of the building. The insurer retained legal counsel to analyze the coverage issues. It ultimately denied coverage.
The insured sued for breach of contract and bad faith. The insurer moved to sever and stay the bad faith claim. The Court stated that the practice of severing the claims “is appropriate where the claims . . . are ‘discrete and separate’ in that one claim is ‘capable of resolution despite the outcome of the other claim.” In making its determination, the Court considers four factors: “(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.”
First, the Court found that the breach of contract claim concerns coverage under the policy, and that the bad faith claim deals with the insurer’s “general claims handling procedures, its claims conduct in this case, and its knowledge and state of mind about the grounds for denial of coverage.” As such, the Court held that this factor weighs in favor of bifurcation.
Next, the Court ruled “the contract and bad faith claims require the testimony of different witnesses and different documentary proof.” Thus, it held that this factor also weighs in favor of bifurcation.
The Court then found the insured would not suffer prejudice if the two claims are severed, reasoning that “relatively little discovery has been exchanged and it is therefore uncertain whether the initial coverage claim will be denied. If so, the bad faith claims would similarly fail.” The Court also stated that should the insureds prevail on the breach of contract claim, they could then pursue their bad faith claim.
Lastly, the Court held that the insurer would be prejudiced if it were forced to litigate the bad faith claim coextensively, because permitting discovery on the bad faith claim, prior to the resolution of the breach of contract claim would be premature.
In conclusion, all four factors weighed in favor of bifurcation and the Court granted the insurer’s motion to sever and stay the bad faith claim.