In Wadeer v. New Jersey Manufacturers Insurance Company, New Jersey’s Supreme Court took the opportunity to address potential changes in the Rules of Civil Procedure in the context of first party bad faith claims. In this uninsured motorist case, the plaintiff insured was injured by a driver who was never identified. The matter went to UM contractual arbitration, and the insurer appealed an award favorable to the insured.
The matter then went to arbitration in the Superior Court, and the insurer again appealed an unfavorable result, demanding a trial de novo. At trial, the insured obtained its largest award yet, from a jury, of over $200,000. The UM limit was $100,000 and the trial judge molded the award to $100,000, finding no bad faith under the “fairly debatable” standard. The insured had argued that the insurer’s bad faith should have permitted an award of the full $200,000.
The insured then filed a new, second, action in Superior Court, alleging breach of the duty of good faith and fair dealing. The insured asserted that the insurer acted in bad faith by failing to make a settlement offer and by failing to timely settle the claim. The insurer obtained summary judgment under the entire controversy doctrine and principles of res judicata. The Appellate Division affirmed the entire controversy doctrine ruling.
On appeal to the Supreme Court, the Court affirmed the res judicata ruling, but took steps toward clarifying the law on application of the entire controversy doctrine, the offer of judgment rule, and the rule governing awards of attorney’s to a successful first party claimant in a declaratory judgment action.
First, the court restated the law governing first party bad faith claims:
“[I]t is well-settled that, in New Jersey, ‘every insurance contract contains an implied covenant of good faith and fair dealing.'” …. As an extension, “an insurance company owes a duty of good faith to its insured in processing a first-party claim.” …. In order to make a showing of bad faith in a first-party claim based on a denial of benefits[fn2] “[a] plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one . . . implicit in that test is our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless . . . indifference to facts or to proofs submitted by the insured.”
[Fn2]. The test is “essentially the same” when showing bad faith based on “inattention to payment of a valid, uncontested claim.” …. ”
Under the ‘fairly debatable’ standard, 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.”
The court applied the doctrine of res judicata in ruling for the insurer. It found that the first action was substantially similar to the second action; and that the insured was seeking to re-litigate an issue that was before the trial court in the first action which had already been fully litigated and determined by that court. The second case sought damages for the insurer’s alleged bad faith in handling the UM claim, and it alleged the same wrongs and same legal theories, and included the same evidence and material facts, as in the first case.
However, the Court gave distinct treatment to the entire controversy doctrine (“ECD”) when applied to UM cases. Agreeing that the ECD was equitable in nature, “its application was unfair because [the insurer’s] bad faith, for the most part, came to light during the course of the underlying litigation surrounding plaintiff’s UM claim, …. [and that] barring such bad faith claims on the basis of the entire controversy doctrine is inappropriate in the UM context.” Thus, the Court stated “that the nature of first-party bad faith claims warrants exemption from a harsh application of this rigid doctrine.”
The Court reasoned: “Acts of first-party bad faith in the UM context can, and often will, continue throughout the course of the underlying legal proceedings; that is, an insurance carrier’s acts of bad faith may often not cease until a verdict is returned, and this is only after the plaintiff has been forced to fully litigate the matter through arbitration and trial. Rather than forcing a plaintiff to amend the initial complaint to add and reflect each incident of bad faith, we believe that viewing bad faith claims as separate and distinct actions promotes judicial efficiency and economy. We also note the difficulties that will be encountered in the discovery process by seeking information as to bad faith acts which may be prohibited in the UM cause of action.”
This did not end the discussion, because there remained questions of “whether fairness requires that our court rules be modified to permit an insured to bring a bad faith cause of action against an insurer after the underlying UM claim is resolved. In [the Court’s] view, the goals of the entire controversy doctrine are not served by mandating that the plaintiff simultaneously file a first-party bad faith claim with the underlying breach of contract/UM lawsuit. However, to foster debate about whether our courts should allow first-party bad faith claims to be asserted and decided after resolution of the underlying, interrelated UM action, we refer Rule 4:30A to our Civil Practice Committee for review.”
The Court’s directing Committee review for potential Rule revisions did not stop there, as it next addressed the Offer of Judgment Rule (R.4:58-2) and the Rule governing the award of attorneys’ fees (R.4:42-9(a)(6)) and whether that should apply in first party insurance cases.
As to the Offer of Judgment Rule, the current rule does not explicitly provide whether the jury’s verdict is the trigger for the sanctions and remedies available, or whether the molded judgment controls. The Court found generally that the molded verdict “is appropriate when done to conform with and reflect allocation of liability. However, in the UM/UIM context, where reduction is based not on a tortfeasor’s comparative negligence but instead on the policy limits of a given carrier,” the Court found there would be no incentive “for such carriers to settle … [because] carriers are prone to take their chances at trial where the offer of judgment is somewhat near their policy limits because they have relatively little to lose in doing so.” “Thus, the rule’s required reduction of a monetary jury award artificially to the policy limits renders moot any reasonable offer of settlement by the insured below the 120% threshold; unless an insured makes an offer of judgment that is unreasonably below its policy limits, it is unlikely that an insurance carrier will choose to settle the respective claim.” Therefore, the Court concluded that “the aims of Rule 4:58-2, ‘to encourage, promote and stimulate early out-of-court settlement,’ … are ill-achieved in the UM/UIM context under the rule’s current construction.” It then referred Rule 4:58-2 to the Civil Practice Committee “to consider and recommend an appropriate amendment addressing this infirmity.”
Finally, the Court addressed R.4:42-9(a)(6) which allows “for counsel fees to be awarded ‘in an action upon a liability or indemnity policy of insurance, in favor of a successful claimant.’” The Court observed that this Rule, as it now stands, does not apply to first part claims against insurers, where the insured brings a direct claim against the insurer. The Court likewise referred “this issue to the Civil Practice Committee for comments and recommendations addressing the issue.”
Date of Decision: February 18, 2015
Wadeer v. New Jersey Mfrs. Ins. Co., A-54 September Term 2012, 2015 N.J. LEXIS 132 (N.J. February 18, 2015) (Fernandez-Vina)