May 2017 Bad Faith Cases: Fineman, Krekstein & Harris Obtains Dismissal Of Bad Faith Claim Where Compliant Fails To Allege Actionable Claim Of Improper Investigation (New Jersey Federal)

Fineman, Krekstein & Harris obtained dismissal of a bad faith claim against the insurer where the insured’s complaint did not set out sufficient facts to make a plausible claim for an inadequate investigation.

The court observed that under the federal rules, courts carry out a three-tiered test to determine if a complaint can survive a motion to dismiss: (1) the court “must take note of the elements the plaintiff must plead to state a claim.”; (2) “the court ‘should identify allegations that, because they are no more than conclusions, are not entitled to the assumption of truth.”; and (3) “when there are well-pleaded factual allegations, the court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.”

In applying this process, the court observed that under New Jersey law, a bad faith plaintiff must show both “the absence of a reasonable basis for denying the claim for coverage; and … that the insurer knew or recklessly disregarded its absence of a reasonable basis.” Further, “if an insurance company’s reasons for denying coverage are ‘fairly debatable,’ then the insurance company cannot be liable for bad faith.”

In this case, the issue was whether the insured’s property loss was the result of vandalism or theft. The insurer’s investigator concluded, after providing the details for his reasoning, that the loss was due to uncovered theft. The insurer denied coverage on that basis. The insured alleged coverage was denied in bad faith on the alleged basis that the insurer did not “undertake an independent investigation into the cause of the alleged loss.”

The court rejected this argument. It found that the insured “failed to allege facts demonstrating that [the insurer] lacked a reasonable basis for denying the claim for coverage, or that it knew or recklessly disregarded its absence of a reasonable basis.” There was no dispute that an investigation was conducted and the investigator concluded the loss was due to theft, not vandalism. There were no allegations of fact to support a claim that the investigation was conducted in bad faith. Rather, the pleadings merely showed that the insured disagreed with how the insurer conducted its investigation. Even if this alleged negligence, “allegations of simple negligence or mistake cannot support a claim for bad faith.”

The court stated: “Indeed, there are no factual allegations indicating that [the insurer] conducted a sham investigation in order to wrongfully deny [the] claim, or that [the] investigation was so woefully deficient that it should have known it lacked a reasonable basis to deny coverage.”

Thus, the motion to dismiss was granted, the court adding that the insured “may move to amend its counterclaim should discovery later reveal bad faith conduct….”

Date of Decision: April 25, 2017

American Southern Home Insurance Company v. Unity Bank, No. 16-3406, 2017 U.S. Dist. LEXIS 62381 (D.N.J. Apr. 25, 2017) (Wolfson, J.)

Hema Mehta of Fineman, Krekstein & Harris was defense counsel.