In addressing the common practice of severance and stay in New Jersey federal insurance cases involving breach of contract and breach of the implied covenant of good faith and faith dealing (and in this case breach of fiduciary duty as well), the court stated:
This Court has the discretionary authority to sever and stay claims, for purposes of pretrial proceedings, see Fed. R. Civ. P. 26(d)(2), or for trial, see Fed. R. Civ. P. 42(b), in the interests of justice and efficiency. I find that a severance and stay of Counts 2 [breach of the implied covenant of good faith and fair dealing] and 3 [breach of fiduciary duty] makes sense, both as logic and as case management.
If, for example, there is no coverage, then denial of a claim cannot have been in bad faith, so discovery and litigation on the bad faith issue will have been wasted. Only if coverage is found need a court explore complicated issues of the insurer’s motives and the level of certainty it was required to have before denying a claim. In short, “[p]roof an insured is entitled to coverage as a matter of law is a necessary pre-requisite to pursuing discovery regarding a bad faith claim.” ….
No surprise, then, that severance and stay of bad faith claims has been called the “prevailing practice” in both the state and federal courts of New Jersey. …. The same principle applies as to fiduciary breach claims.
Nothing about the claims here suggests that a finding of bad faith or a fiduciary breach is so likely that the Court should collapse the sequence of issues and depart from the usual, sensible practice of severance.
Date of Decision: April 25, 2017
Port Liberte Homeowners Association, Inc. v. Lexington Ins. Co., No. 16-7934, 2017 U.S. Dist. LEXIS 63394 (D.N.J. Apr. 25, 2017) (McNulty, J.)