JULY 2015 BAD FAITH CASES: COURT SEVERS AND STAYS FIRST PARTY BAD FAITH CLAIM (New Jersey Federal)

In Beachfront North Condominium Association v. Lexington Insurance Company, the New Jersey federal court granted the insurer’s motion to sever the breach of contract and bad faith actions, and to stay the bad faith claim.  The case involved a first party claim by a condominium association for Hurricane Sandy-related wind damage on its properties.

First, the court found the two claims were significantly different from each other, and that viewing them as separate “promotes judicial efficiency and economy.” Second, the two claims required the testimony of different witnesses and different documentary proof.  By way of example, the insured sought documents “concerning all of defendant’s employees, company guidelines, claims handling procedures, confidential employee salary information, and other subject areas not directly relevant to plaintiff’s first-party claim.” Such discovery “distracts from and will undoubtedly delay the resolution of the primary focus of the case, i.e., whether plaintiff’s first-party claim should be paid and if so the amount of the payment.”

Third, the insured would not be prejudiced by severing and staying the bad faith claim. The insured did “not know if upon the presentation of more evidence its coverage claim will still be denied, let alone whether [the insured] acted or will act in bad faith. As such, plaintiff’s bad faith claim could be premature.” Moreover, if the insured did win the contract claim, it could still pursue its bad faith claim, and the court expected the bad faith claim to be expeditiously resolved.

Fourth, the court found the insurer would be prejudiced under the circumstances at hand. The insured had propounded extensive written discovery on its bad faith claim, and the carrier would suffer a “significant expenditure of time and money, generally rendered needless if the insurer prevails.” Judicial economy and efficiency for all parties would be promoted by avoiding expensive and time-consuming discovery on plaintiff’s bad faith claim. The court also found that litigating the “bad faith claim, and the related discovery disputes arising therefrom, will significantly delay the final resolution of plaintiff’s breach of contract claim,” which should be the focus of the case.

Finally, the court noted that this was not a cookie cutter analysis to be applied in every case.  Rather, it made “clear that it is not ruling that in every case a plaintiff’s bad faith claim should be severed and stayed until its first-party claim is decided. Every case is different and must be decided on its own facts. Here, the balance of interests falls in [insurer’s] favor. In another case the balance could be different.”

Date of Decision: June 24, 2015

Beachfront North Condo. Ass’n v. Lexington Ins. Co., Civil No. 14-6706 (RBK/JS), 2015 U.S. Dist. LEXIS 84074 (D.N.J.  June 24, 2015) (Scheinder, U.S.M.J.)