NOVEMBER 2012 BAD FAITH CASES: COURT REFUSES MOTION TO AMEND ON BAD FAITH COUNT WHERE ALLEGED FRAUD WENT TO PROCUREMENT OF POLICY AND NOT DENIAL OF CLAIM, AND THERE WAS DISPUTE OF MATERIAL FACT ON COVERAGE (New Jersey Federal)

In American General Life Ins. Co. v. Ellman Savings Irrevocable Trust, the insured was seeking leave to amend its counterclaim to allege additional facts concerning its fraud and insurance bad faith claims. While the court found the amendments as to fraud were permitted since amendment would not be futile, it reached the opposite result on the bad faith claims.
The case involved a flexible premium adjustable life policy, and the insured wanted to add numerous claims of fact concerning the insurer’s intent not to honor the policy before and at the time it was entered. The court observed that most of these alleged misdeeds occurred prior to any investigation of the insurance claim at issue, relating mostly to procurement of the policy; and that there was a fairly debatable basis to contest the claim.
The court applied New Jersey law, which requires that a party seeking to establish a bad faith claim show first, that the insurer lacked a fairly debatable reason for its failure to pay a claim, and second that the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim. In practical terms, establishing a bad faith claim requires that a plaintiff must be able to establish, as a matter of law, a right to summary judgment on the substantive claim. If the plaintiff cannot establish a right to summary judgment, the bad faith claim must fail. Thus, if there are material issues of disputed fact which would preclude summary judgment as a matter of law, an insured cannot maintain a cause of action for bad faith.
The court also observed that a bad faith claim can be premised on the insurer’s failure to investigate an insured’s claim for benefits, and that it is appropriate to determine whether the claim was properly investigated and whether the results of the investigation were subjected to reasonable evaluation and review. However, this cause of action is not appropriately based on an insurer’s failure to investigate an application.
Applying the law to the fact, the court found that the insured’s bad faith claim was futile and rejected the motion to amend.
Date of Decision: Dec. 17, 2010
American General Life Ins. Co. v. Ellman Savings Irrevocable Trust, No. 8-5364, 2010 U.S. Dist. LEXIS 133713 (D.N.J. Dec. 17, 2010) (Bongiovanni, M.J.)