New Jersey Hot Potato: Insurer Who Merely Serviced Policy Can Be Liable for Bad Faith

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NEW JERSEY, Oct. 20 – A U.S. District Judge in New Jersey has ruled that an insurer who does not issue, but merely services, a policy of insurance, may be held liable for bad faith conduct.

In Fischer v. National Surety Corp., Civ. No. 16-8220 (KM), 2017 U.S. Dist. LEXIS 174267 (D.N.J. Oct. 20, 2017) (McNulty, J.), the insured plaintiffs had a home insurance policy “issued by Fireman’s Fund, underwritten by National Surety, and serviced by ACE American.” The insureds  complained that after promptly reporting a claim they were subject to nearly two years of dealings with various insurance company representatives, but did not receive full payment for the original loss.

After filing suit against the insurers, ACE filed a motion to dismiss bad faith and breach of contract claims, pointing out that National Surety was the insurer, and it was not, and therefore it could have not bad faith exposure to a non-insured.

U.S. District Judge Kevin McNulty denied the motion to dismiss, observing that at this state of the proceedings the precise servicing arrangements between the defendants was unclear.  Judge McNulty also dismissed ACE’s argument that without an insuring agreement, there could be no bad faith claim as s matter of law.

Citing the leading bad faith case of Pickett v. Lloyds. The court ruled:

Pickett itself … seems to contemplate a bad faith cause of action against a party other than the primary insurance company. Indeed, it reasoned that because an agent owes a duty to the insured, the insurer must ‘owe[] an equal duty ..[a]gents of an insurance company are obligated to exercise good faith and reasonable skill in advising insureds…“[e]ven if the [insureds] fail to establish the existence of a contract with ACE American, their bad faith cause of action may still be viable.”

Fischer v. National Surety Corp., Civ. No. 16-8220 (KM), 2017 U.S. Dist. LEXIS 174267 (D.N.J. Oct. 20, 2017) (McNulty, J.)

Editor’s Note:  As insuring agreements, and servicing arrangements get more complex, new theories of non-contractual bad faith liability on the part of insurers and claims entities are likely to arise, and be based on the tort concept of the responsibility to act reasonably when a duty toward an insured  is undertaken.

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New Jersey: Bad Faith Claims Must Contain Factual Support For Insurer’s Reckless Disregard

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NEW JERSEY, April 3 – A New Jersey Federal Court has dismissed a bad faith claim filed by homeowners seeking coverage for property damage sustained  in a fire loss on January 12, 2016.   In Williams v. State Farm, U.S. District Judge Joseph H. Rodriquez found that the homeowners’ bad faith  allegations fell short of the factual support required under the Federal Rules of Civil Procedure.   The allegations were based around State Farm’s failure to pay the claim, but added little factual detail.

In granting State Farm’s motioin to dismiss, Judge Rodriguez wrote:

 

“While the lack of a reasonable basis may be inferred and imputed to an insurance company, there must be allegations of reckless indifference to facts or to proofs submitted by the insured… (quotations and citations omitted).  Plaintiffs reference a ‘reckless disregard for the rights of the Plaintiffs’ but do so in conclusory fashion, thereby leaving the Court to infer reckless indifference from the fact that Defendant denied coverage; however, the Court declines to make such an inference. Plaintiffs do not  provide sufficient factual allegations to suggest an absence of a reasonable basis on the part of Defendant for denying coverage. The mere allegation that Defendant’s denial of coverage inferentially establishes bad faith relies on the very speculation forbidden by Twombly and Iqbal. Accordingly, the Court dismisses Plaintiffs’ claim for bad faith without prejudice.

Having determined that Plaintiffs’ claim for breach of the duty of good faith and fair dealing is insufficiently pled and therefore is dismissed, the Court need not address whether Plaintiffs are entitled to punitive damages under that claim.”

Williams v. State Farm Fire & Cas. Ins. Co., No. 16-9028, 2017 U.S. Dist. LEXIS 50261 (D.N.J. Apr. 3, 2017) (Rodriguez, J.)

Summary Judgment For Insurer In Mold Coverage Dispute

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CAMDEN, July  15 — A New Jersey federal judge ruled an insurer’s handling  of claims for water and mold damages were neither breach of contract nor bad faith.  The Court further ruled that the insurer paid the full amount of the mold remediation sublimit under the policy.

Warren and Maryann Andrews sued Merchants Mutual Insurance Co. in the U.S. District Court for the District of New Jersey after a dispute arose under the Andrews’ homeowners’ policy with Merchants.  The insureds discovered several water leaks after a rainstorm, and filed a claim for coverage with Merchants.

The Andrewses sought coverage from Merchants Mutual for the damages. Merchants made partial payment for some of the damages, including a $10,000.00 payment to satisfy the policy’s mold remediation sublimit.

The Andrewses were unsatisfied with the payment, and alleged breach of contract and bad faith against Merchants in the New Jersey federal action.  In the case,  Merchants moved for summary judgment.

U.S. District Judge Joseph H. Rodriguez granted the motion, determining that Merchants Mutual fully  paid the mold remediation sublimit, and otherwise fully performed its obligations under the homeowners policy.  Rodriguez also found no evidence in the record of claims delay on the part of merchants, which led to the dismissal of both the breach of contract and bad faith claims.

Warren and Maryann Andrews v. Merchants Mutual Insurance Co., No. 14-5147, D. N.J.; 2016 U.S. Dist. LEXIS 89997

NJ: National Union Avoids Claim Due To Late Notice; Need Not Show Prejudice

NEW JERSEY,  Feb. 11 – The New Jersey Supreme Court has ruled that National Union Fire Ins. Co. of Pittsburgh need not demonstrate prejudice  to avoid liability to provide defense and indemnity to an insured who reported the underlying claim six months late,  in violation of the policy’s notice requirements.  In Templo Fuente De Vida Corp. v. National Union Fire Ins. Co. of Pittsburgh, the Court ruled that the insurer did not have to defend or indemnify its insured, First Independent Financial Group, in a lender liability suit brought by putative borrowers.

The policy provided that First Independent provide notice of any claim made against it  during the policy period, or within 30 days following the end of the policy period, provided the notice was no later than 30 days following the insured’s initial notice of the claim.    First Independent did not report the claim at issue  until six months after it was sued, had hired its own counsel, and answered the complaint.  National Union denied coverage  on grounds of late notice, and First Independent settled the underlying claims in part, assigning to the plaintiffs its coverage claims against National Union.

The assignee plaintiffs filed a declaratory judgment action, and National Union was granted summary judgment based on the late notice defense.  An intermediate appeals court affirmed the ruling in favor of National Union.

In affirming the ruling in favor of National Union, the Court undertook an analysis of the differences between claims made policies and occurrence policies, and wrote:

Claims made policies commonly require that the claim be made and reported within the policy period, thereby providing a fixed date after which the insurance company will not be subject to liability under the policy. … Claims made policies also tend to have an additional notice of claim provision phrased in terms of the insured notifying the insurer of a claim or potential claim promptly or the like[.] 13 Couch on Insurance 3d 186:13 (2009).

The prompt notice requirement and the requirement that the claim be made within the policy period in claims made policies maximiz[e] the insurer s opportunity to investigate, set reserves, and control or participate in negotiations with the third party asserting the claim against the insured and mark the point at which liability for the claim passes to an ensuing policy,

The Court also held that in the claims made context, prejudice was not an element of establishing the late notice defense:

[W]hen First Independent began defending against plaintiffs claims without first notifying National Union, an action explicitly barred by the terms of the policy, it violated a condition precedent of timely notice to National Union, and thus breached the policy’s express condition of notice of a claim in order for coverage to attach. We decline plaintiffs invitation to read the insurance policy at issue as a contract of adhesion, or engage in a strained construction to support the imposition of liability or write a better policy for the insured than the one purchased…

 Accordingly, we hold that First Independent s failure to comply with the notice provisions of the bargained for Directors and Officers policy constituted a breach of the policy, and National Union may decline coverage without demonstrating appreciable prejudice. We recognize that a different conclusion may have been reached in other jurisdictions, but our jurisprudence has never afforded a sophisticated insured the right to deviate from the clear terms of a claims made policy.

The Court unanimously upheld judgment as a matter of law in favor of National Union.

Templo Fuente De Vida Corp. v. National Union Fire Ins. Co. of Pgh., (N.J. 2016)

Success Not Element of Insurance Fraud in New Jersey

New Jersey, January 20.  The New Jersey Supreme Court has unanimously  ruled that the state insurance fraud statue does not require the perpetrator to be successful in  the effort to sustain a conviction.   In State v. Goodwin, A-20 September Term 2014, 07352 (pdf copy attached below), Justice Albin wrote for a 6-0 majority that the making of a statement of a material fact  to an insurer “that has the capacity to influence a decision-maker in determining whether to cover a claim” was sufficient proof to sustain a conviction under N.J.S.A. 2C:21-4.6(a).

Justice Albin wrote:

If the falsehood is discovered during an investigation but before payment of the claim, a defendant is not relieved of criminal responsibility.  Here, defendant falsely reported that his girlfriend’s vehicle was stolen.  It was for the jury to determine whether the series of false statements about the theft generated by the defendant had the capacity to influence the insurance carrier in deciding whether to reimburse for the damage caused by the arson.

Goodwin, at pp. 2-3.    The Supreme Court reversed a N.J. Superior Court ruling which overturned the conviction on grounds that the jury instructions permitted conviction without showing harm or prejudice to the insurer, Progressive.

Justice Albin found that the State’s argument that “material fact” required an element of actual prejudice to it was far too strict an interpretation of the statute.  He referred to prior state and federal criminal statutes on perjury and false statement to rule that actual harm has never been a prerequisite to a conviction for crimes of falsehood.

Finally, the Court ruled that the Model Jury Charge on insurance fraud accurately set forth the standard for conviction and that the jury was free to conclude that Goodwin’s knowingly false statements affected Progressive’s analysis of whether to pay the claim.

State v. Goodwin, N.J. Supreme Court, 2016

 

Federal Magistrate Judge Sanctions Insurer for Delayed Production of Draft Coverage Letter; Rules In-House Counsel E-mails Not Privileged

US D. New Jersey, Dec. 30, 2015 – U.S. Magistrate Judge Ann Marie Donio has granted in part and denied in part Plaintiff’s motion for sanctions against Bankers Standard Insurance Company in a bad faith and breach of contract case under a  homeowners’ insurance policy arising out of damage from Superstorm Sandy.   In Zawadsky v. Bankers Standard Insurance (link to full opinion below), the Court made several pronouncements which should be of concern to insurers, and their in house legal departments.

Draft Partial Coverage Letter: Admission of Coverage?

Although Bankers Standard issued a denial letter regarding the insured’s homeowners claim,  there was evidence that a junior adjuster had previously drafted a coverage letter extending partial coverage for the loss.  Judge Donio ruled that the intentional delay in turning the draft letter over was sanctionable under F.R.C.P. 37:

Most importantly, the Draft Partial Coverage Letter — despite Defendant’s assertion to the contrary — is an admission by one claims adjuster that there is coverage under the Policy. The fact that a more senior adjuster trumped that position and directed a flat denial of coverage be issued does not erase this conclusion. Additionally, the concealment of that conclusion — that admission — bespeaks of purposeful conduct that may, after the depositions are conducted, warrant additional sanctions. As noted by Plaintiffs, if it were not for the inadvertent production by Defendant on February 2, 2015 of the unredacted email, Plaintiffs would still not have the Draft Partial Coverage Letter.

(emphasis added).  The Court found the conduct of Bankers Standard Insurance sanctionable in this regard.

Emails Involving In House Counsel:  Lawyers or Claims Investigators?

Judge Donio ruled that Bankers Standard failed to adequately demonstrate that email strings involving in house legal department lawyers sufficiently came under protection for attorney client privilege.  She wrote:

…the timing of these communications supports Plaintiffs’ argument that Defendant’s in-house counsel was part of the investigation of Plaintiffs’ claim and not providing legal advice. The burden is on Defendant to appropriately support its application of the privilege at the time of the motion. Defendant has left it up to the Court to decipher these emails and determine whether in-house counsel is providing legal advice or acting as part of the claims investigation. Defendant has failed to demonstrate that the documents are protected by the attorney-client privilege.

As a result, the Court also ordered production of unredacted emails including communication with in house counsel.

Severity of the Sanction

Rather than granting the sanction requested by the Plaintiff — striking all of the insurer’s substantive defenses and moving directly to a damages trial — Judge Donio issued the lesser sanction of orders compelling production of the documents under dispute, and allowing the Plaintiff to re-open discovery on the issue of the draft partial coverage letter

Takeaways:

  • Bankers Standard was clearly concerned about the presence of a draft partial coverage letter in the same claims file in which a later full denial of coverage letter existed.   They elected to attempt to shield the letter from discovery.  Another option which may have proved the better route would have been to simply disclose the letter as part of the story of the on-going thought process of the claim, which later gave way to a reasonable conclusion, after consultation with senior claims staff and counsel, that there was ultimately no coverage for the loss.   Insurers are not prohibited from a change of mind on a coverage position if the claims investigation supports it.

 

  • This case is a signal example of why the  line of demarcation between claims staff and in-house legal counsel should never be blurred.  Here, Bankers Standard’s  failure to sufficiently articulate to the Court why the in house legal staff performed legal work, rather than claims investigation, sounded the death knell for attorney client privilege in the case.

 

  • The chances of Inadvertent production of privileged material can be reduced by the cross-checking of the production by a second or third pair of eyes in counsel’s office, and can be guarded against by inadvertent disclosure and claw-back discovery agreements, entered into at the outset of the case, along with such things as confidentiality agreements, and consent agreements to protective orders.

Zawadsky v. Bankers Standard Ins. Co., (D. N.J. 2015)

NJ Gov. Signs Fraudulent COI Bill

New Jersey Governor Chris Christie has signed legislation which makes it expressly illegal to request the issuance of certificates of insurance which contain false or misleading information. Click on link below for full text of bill.

New Jersey Bill S-3270