DECEMBER 2014 BAD FAITH CASES: WHERE INSURER DENIES CLAIM, AND INSURED SETTLES WITH TORTFEASOR, COURT OBSERVES THAT IF INSURER’S DENIAL IS IN BAD FAITH THERE IS AN EQUITABLE WAIVER OF ITS SUBROGATION CLAIM (New Jersey Appellate Division)

In Nucci v. American Insurance Company, New Jersey’s Appellate Division addressed an insurer’s subrogation rights where it had originally denied coverage, was subject to suit for non-payment, and the insured partially settled the matter with another co-defendant whom had caused the damage for which the insured sought coverage.  The insurer argued that the insured’s claims had to be dismissed against it because the insured breached its contract by waiving the insurer’s subrogation rights through the settlement with the third party tortfeasor.  In the context of its opinion, the Appellate Division stated: “Plaintiff’s complaint did not expressly assert that [the insurer] acted in bad faith, in which case equity would preclude subrogation. Moreover, the trial court has not yet decided whether [the insurer] denied the claim ‘erroneously or wrongfully,’ and thus in ‘breach of contract.’ …. [The insurer] denied the claim after two inspections of the insured’s property. The trial court may find that the denial was in ‘good faith.’”

In addressing the merits, the Appellate Division rejected the basic premise that the insured would automatically waive the insurer’s potential subrogation rights simply by settling with the tortfeasor.  Rather, one issue involved whether the settling co-defendant was aware of the insurer’s subrogation rights, along with the novel issue of whether the third party could still be liable under a subrogation theory when it settled before the insurer had actually made any payment to the insured.

The appellate court remanded, stating: “Accordingly, we … remand this matter to the trial court for the limited purpose of affording the settling co-defendants the opportunity to brief whether their potential subrogation liability continues because they settled with notice of [the insurer’s] cross-claim [for subrogation]. We believe it is also appropriate to give the settling co-defendants the opportunity on remand to brief whether [the insurer] waived its potential subrogation rights by denying plaintiff’s claim, or by failing to pay that claim before the settling co-defendants settled with plaintiff.”

Date of Decision:  December 11, 2014

Nucci v. Am. Ins. Co., DOCKET NO. A-0147-13T1 , SUPERIOR COURT OF NEW JERSEY, 2014 N.J. Super. Unpub. LEXIS 2859 (App. Div.  December 11, 2014) (Simonelli, Guadagno, Leone, JJ.)