MARCH 2015 BAD FAITH CASES: NEW JERSEY SUPREME COURT FINDS NO BAD FAITH WHERE INSURER RELIED UPON UNPUBLISHED APPELLATE DIVISION OPINION IN TAKING ACTION, AND WHERE POLICY LANGUAGE MADE INSURER’S POSITION FAIRLY DEBATABLE; COURT RESTATES NEW JERSEY LAW ON FIRST PARTY BAD FAITH CLAIMS (New Jersey Supreme Court)

In Badiali v. New Jersey Manufacturers Insurance Group, the New Jersey Supreme Court issued its second opinion in a single day involving first party insurance bad faith claims.  The insured was injured by an uninsured motorist.  The insured had two insurers.  The matter went to arbitration on the uninsured motorist claim, and the insured was awarded $29,148.62.  One of the insurers paid its half of the award, $14,574.31, but the other insurer appealed.  The policy provided that awards under $15,000 were binding, but awards over $15,000 could be appealed.  The insured brought a bad faith claim, on the basis that the award was less than $15,000 and was binding.

Based upon an unpublished Appellate Division opinion, the appealing insurer took the position that the number used to determine the appeal was the total award, i.e., $29,148.62, not the amount actually due from the particular insurer.  The court found that this made the insurer’s position fairly debatable, and there was no bad faith.  The issue was not whether the Appellate Division’s decision was legally correct, but whether the insurer could reasonably rely upon that decision in taking the appeal. Alternatively, the Court held that the insurer’s reading of the policy language was reasonable, and thus its position was fairly debatable for this reason as well.

That being said, the Court then went on to clarify the law for future cases. It held that “any reference in a policy of insurance to the statutory $15,000 policy limit as the basis for rejecting an arbitration award applies only to the amount that the insurance company is required to pay, not to the total amount of the award.”

Finally, we will quote the Court’s summary of the law on the duty of good faith and fair dealing, including statutory references, for the value of having the Supreme Court’s recent restatement of that law.

“All contracts impose an implied obligation of good faith and fair dealing in their performance and enforcement. …. The New Jersey Legislature has attempted to codify these principles, particularly in the insurance industry, by defining what is considered to be unfair or deceptive business practices in the area of insurance claims settlement. See N.J.S.A. 17:29B-4(9). Such practices include: ‘[r]efusing to pay claims without conducting a reasonable investigation based upon all available information[,]’ N.J.S.A. 17:29B-4(9)(d); ‘[f]ailing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed[,]’ N.J.S.A. 17:29B-4(9)(e); ‘[c]ompelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds[,]’ N.J.S.A. 17:29B-4(9)(g); and, finally, ‘[n]ot attempting to negotiate in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear[,]’ N.J.S.A. 17:29B-4(9)(f) (emphasis added).”

“Good faith is generally defined as ‘honesty in fact in the conduct or transaction concerned.’ N.J.S.A. 12A:1-201(19). The good faith obligations of an insurer to its insured run deeper than those in a typical commercial contract. Unlike with a typical commercial contract, in which ‘[p]roof of bad motive or intention” is vital to an action for breach of good faith, … an insurer’s breach of good faith may be found upon a showing that it has breached its fiduciary obligations, regardless of any malice or will….’”

“One inherent fiduciary obligation of every insurer is the duty to settle claims. …. Whether an insurer has acted in bad faith and thereby breached its fiduciary obligation in connection with the settlement of claims ‘must depend upon the circumstances of the particular case.’” “A finding of bad faith against an insurer in denying an insurance claim cannot be established through simple negligence. …. Moreover, mere failure to settle a debatable claim does not constitute bad faith. …. Rather, to establish a first-party bad faith claim for denial of benefits in New Jersey, a plaintiff must show “that no debatable reasons existed for denial of the benefits.”’”

“Under the salutary ‘fairly debatable’ standard enunciated in Pickett, ‘a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad faith refusal to pay the claim.’”

Date of Decision:  February 18, 2015

Badiali v. New Jersey Mfrs. Ins. Group, A-48 September Term 2012, 071931, 2015 N.J. LEXIS 133 (N.J. February 18, 2015) (Fernadez-Vina)