In LM Ins. Corp v. All-Ply Roofing Co. the insured alleged, among other things, that the insurer audited its premiums, and reclassified its employees, as revenge for underreporting income, and that this stated a bad faith claim. The insurer argued there are no recognizable bad faith claims in New Jersey for audit or premium disputes, but rather bad faith claims against insurers in New Jersey are limited to claims handling issues.
The court found for the insured, and held that the insured stated a claim for breach of implied covenant of good faith and fair dealing against Plaintiff based on the insurer’s auditor re-classifying all of insured’s employees as roofers in retaliation for the insured under-reporting its payroll. The insurer had offered no binding authority that New Jersey law limits “bad faith” claims against insurers to claims handling, without affording a viable bad faith action with respect to premium disputes.
Specifically, New Jersey courts imply a duty of good faith and fair dealing in all contracts. “[W]hen a breach of the duty of good faith and fair dealing can be shown, liability may be had in tort as well as in contract under New Jersey common law. An insurer’s obligation to exercise good faith “depend[s] upon the circumstances of the particular case.” “The boundaries of ‘good faith’ will become compressed in favor of the insured depending on those circumstances” presented. “[I]n New Jersey the covenant of good faith and fair dealing is contained in all contracts and mandates that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.'”
The insured’s Counterclaim states that the insurer’s policy contracts imply that it would deal fairly with the insured and perform its obligation under the contract in good faith. It also alleged that the auditor elected to maliciously disregard the insured’s course of business and performance while exhibiting egregious and outrageous misconduct when the insured attempted to have the classification revised, by claiming every employee of the insured was classified as a “roofer.” In essence, the insured’s counterclaim stated sufficient facts to claim the insurer consciously manipulated the insured’s premium obligations so as to punish the insured for what the insurer deemed “under-reporting” of its payroll, while maximizing the insurer’s profit at the insured’s expense. This in effect injured the right of insured to receive the “fruits” of the contract, and the insureds were held to have stated a claim for breach of the implied covenant of good faith and fair dealing.
The court did dismiss the claim for statutory attorney’s fees, as inapplicable in first party cases, but did permit the punitive damages claim to go forward, as the counterclaim clearly alleged malice on the part of the insured’s auditor when he willfully, without cause and in retaliation, reclassified the insured’s employees to the highest classification.
Date of Decision: January 23, 2015
LM Ins. Corp v. All-Ply Roofing Co., Civil Action No. 14-cv-04723, 2015 U.S. Dist. LEXIS 7621 (D.N.J. January 23, 2015) (Linares, J.)