April 2014 Bad Faith Cases: No Bad Faith In Claims Processing Where No Coverage Due And Coverage Was Disputed, And Where Facts Did Not Demonstrate The Kind Of Knowledge Or Reckless Disregard To Establish Bad Faith (New Jersey Appellate Division)

In Johnson v. Plasser American Corporation, an excess carrier paid in its $4,000,000 policy limits to settle a severe personal injury case involving the insured’s employee.  There were issues concerning exclusions and whether the duty to defend was ever invoked based on exhaustion of the underlying policy’s limits.  There was some alleged delay in response by the excess carrier to demands by the insured’s counsel.  The actual issues before the court involved whether the carrier had to reimburse attorney’s fees under Rule 4:42-9(a)(6), and whether there was bad faith in claims handling.

The court found that the duty to defend was never invoked, and that coverage was excluded.  Thus, no attorney’s fees were due as the insured did not prevail on the indemnity claim.  As to the bad faith claim, the Appellate Division upheld the trial court’s dismissal of the insured’s bad faith and breach of the covenant of good faith and fair dealing claims.

The insured did not assert bad faith in settlement. The carrier contributed $4 million — its umbrella policy limit — toward settlement of the underlying action, thus (1) shielding the insured from a potential judgment exceeding its coverage; and (2) shielding itself from a possible Rova Farms bad faith claim that it exercised bad faith in refusing to settle.

Rather, the insured focused on the carrier’s delay in providing its position regarding the insured’s request for a defense and indemnification under the umbrella policy. “In short, it alleges bad faith processing of its claim.” The insured also alleged the delay forced it to retain coverage counsel to ascertain its rights to coverage, which the carrier opposed, resulting in putative damages consisting of the insured’s legal fees.

The court found explanations for the delay in the record, though it did not condone a failure to respond; but ultimately it was clear to the insured that the insurer contested coverage.

The Court observed that: “An insurer owes a duty of good faith in processing an insured’s claim. … However, the standard applies to inattention to an uncontested claim.” The Court refused to follow the minority of jurisdictions  supporting a cause of action for harm to the insured by the handling of an uncovered claim, but rather approved the majority view that “a covered claim is a sine qua non to maintaining a claim-handling claim”.  In this case, the coverage claim was contested, and contested successfully; thus, the insured’s coverage claim had no merit.

Further, the mere failure to issue a timely response to defense counsel’s letter is insufficient to establish bad faith, as simple negligence is not enough. Rather, “[w]hen a case involves a processing delay: [B]ad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay. In either case (denial or delay), liability may be imposed for consequential economic losses that are fairly within the contemplation of the insurance company.”
Date of Decision: February 26, 2014
Johnson v. Plasser Am. Corp., DOCKET NO. A-2116-12T1,  2014 N.J. Super. Unpub. LEXIS 372 (N.J. Super. App. Div. February 26, 2014) (Reisner and Ostrer, JJ.)