New Jersey Insurance Blog

On February 18, 2015, the New Jersey Supreme Court issued two bad faith decisions, Badiali v. New Jersey Manufacturers Insurance Group, (A-48-12) (071931), and Wadeer v. New Jersey Manufacturers Insurance Company, (A-54) (072010).  The cases both involved uninsured motorists (“UM”) claims asserted against New Jersey Manufacturers Insurance Company (“NJM”).

UM coverage “insur[es] the policy holder, and others, against the possibility of injury or property damage caused by the negligent operation of a motor vehicle by an individual without liability insurance coverage.”  Badiali, at 22.  Despite the fact that a UM claim is asserted under an automobile liability policy, such claims are treated as first-party property insurance claims and not third-party liability claims.  The fact that UM coverage is treated as first-party insurance coverage can be significant because attorney’s fees are not recoverable in connection with a first-party insurance claim against an insurer.  They may be recoverable, however, in connection with a third-party liability claim against an insurer.  See N.J. Court Rule 4:42-9(a)(6).  In addition, the “fairly debatable” standard, which was first adopted in Pickett v. Lloyd’s, 131 N.J. 457 (1993), applies to the determination of whether an insurer acted in bad faith in connection with a first-party property claim.

In Badiali, the issue before the Court was whether NJM had a “fairly debatable” basis for rejecting an UM arbitration award, thereby precluding the assertion of a bad faith claim.  In deciding to reject the arbitration award, NJM relied on an unpublished decision by the Appellate Division, Geiger v. N.J. Mfrs. Ins. Co., No. A-5135-02 (App. Div. Mar. 22, 2004), which involved similar facts.  Pursuant to Rule 1:36-3 of the New Jersey Rules of Court, however, “[n]o unpublished opinion shall constitute precedent or be binding upon any court.”  In addition, “[e]xcept for appellate opinions not approved for publication that have been reported in an authorized administrative law reporter, and except to the extent required by res judicata, collateral estoppel, the single controversy doctrine or any other similar principle of law, no unpublished opinion shall be cited by any court.”

NJM argued that although the decision “lacked any precedential authority, . . . its mere existence provided that [its] conduct was reasonable, fair, and honest, and that it had ‘fairly debatable’ reasons to reject the arbitration award at issue and seek a trial de novo as a result.”  Decision at 5.  The trial court agreed with NJM, and granted summary judgment it its favor even though no discovery had been conducted.  The Appellate Division affirmed, concluding “that, as a matter of law, the mere existence of unpublished case law supporting NJM’s rejection of the arbitration award precluded a finding of bad faith against NJM, regardless of whether NJM relied on or was aware of that unpublished case.”  Id. at 6.

On further appeal, the New Jersey Supreme Court affirmed the decision by the Appellate Division.  The Court began its analysis by noting:

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 . . ., “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.”

Id. at 12 (citations omitted).  The court then rejected the insured’s argument that granting summary judgment was premature because discovery had not been completed.  Id. at 13. As noted by the Court, “[p]urely legal questions, such as the interpretation of insurance contracts, are questions of law particularly suited for summary judgment.”  Id.

With respect to the issue of whether the prior decision provided NJM with “fairly debatable”  reasons to reject the arbitration award, the Court reasoned:

[T]his Court has never considered whether the mere existence of an unpublished opinion will allow a party to avoid a finding of bad faith for actions taken in accordance with its holding.  In the context of the case before us, we find that it does; however we limit our holding to the in-house, business context present here.  In our view, it is illogical to suggest that NJM, or any corporation, cannot rely on previous unpublished opinions — especially those in which they were specifically involved — in forming their business decisions.  Having pursued a similar course of action in Geiger with the approval and endorsement of the Appellate Division, we find it was reasonable for NJM to maintain that same position, under nearly identical facts, in rejecting the arbitration award in the instant litigation.  To clarify, NJM had adequate reason to believe that its conduct was consistent with judicially accepted contract interpretation, corporate policies and practices.  Thus, we find the existence of the Geiger opinion establishes that NJM had, at the very least, fair reason to believe that it was making a legitimate legal and business decision by rejecting the arbitration award . . . and seeking trial.

Id. at 20.  The court then went on to “hold that the existence of the unpublished Geiger decision precludes a finding of bad faith against NJM.”  Id. at 21.  The court noted, however, that “[e]ven without reliance on Geiger, we find that NJM is able to show fairly debatable reasons based on . . . a reasonable interpretation of its policy language . . . .”  Id.

Finally, the Court stated:

In light of our disposition of the bad faith cause of action in this matter, we see no present need to address the entitlement of an insured to attorney’s fees in the uninsured/underinsured context. We further decline to address the issue of discovery, as we find such issue irrelevant to the instant case.

Id. at 25.

The primary issue before the Court in Wadeer, in contrast, was “whether a plaintiff’s claim alleging his insurer acted in bad faith by failing to settle his uninsured motorist (UM) claim is barred by the entire controversy doctrine or the doctrine of res judicata.”  Decision at 2.  After recovering a judgment against NJM, the insured commenced a second action asserting a bad faith claim against NJM.  The Court concluded that the claim was barred under the doctrine of res judicata because the insured raised the issue of a bad faith claim in the first action.

The Court also rejected the insured’s argument “that bad faith claims should not be subject to motion practice to decide the merits.”  Id. at 23.  The Court noted that “[a]ll cases regardless of type or complexity are amenable to motion practice to dismiss or for summary judgment if properly supported by the evidence and law.”  Id.

Finally, the Court referred to the Civil Practice Committee a number of issues, including whether Rule 4:42-9(a)(6) should be extended to authorize a fee award to an insured who brings direct suit against his insurer to enforce any direct coverage, including UM/UIM coverage.”  Decision at 5.

These two decisions are favorable for insurers because they establish that a bad faith claim may be dismissed on summary judgment, apparently even if no discovery has taken place.  They also reaffirm that the “reasonably debatable” standard applies to first-party bad faith claims.  In addition, Badiali supports the proposition that an insurer may rely on an unpublished decision in determining whether to pay a claim.  The number of published insurance decisions in New Jersey is limited.  In contrast, unpublished decisions are issued on a regular basis.  Although designated “unpublished,” such decisions often appear on Lexis and Westlaw, and frequently can be located by performing internet searches.  Thus, the Court arguably has greatly expanded the number of decisions an insurer may rely on in making a coverage determination.

Copies of the decisions are attached: A5412WadeervNJManufacturers A4812BadialivNJManufacturers

© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

The general statute of limitations for breach of contract actions in New Jersey is six years.  That statute generally applies to claims seeking recovery under an insurance policy.  Most first-party property insurance policies, however, contain an express contractual provision, known as a suit-limitation provision, that limits the time period within which an action seeking recovery under the policy may be commenced.  Most suit-limitation provisions provide that any action must be commenced within twelve months of the date of the loss, thereby shortening the statute of limitations that ordinarily would apply by five years.

Under New Jersey law, the running of a suit-limitation provision is tolled from the time the insured gives notice of a loss to its insurer until the claim is denied by the insurance company.  An issue that has arisen on a number of occasions has to do with what constitutes a denial, thereby starting the limitation period to run again.  Resolution of that issue is not as simple as it may seem.

The issue of what constitutes a denial sufficient to start the running of a suit-limitation provision recently was addressed by Judge Kugler of the United States District Court for the District of New Jersey in Inacio v. State Farm Fire and Casualty Company, Civil No. 14-4953 (RBK/AMD), 2015 WL 457049 (D.N.J. Feb. 3, 2015).  There, the insured, Richard Inacio (“Inacio”), sustained damage to his residence located in Monmouth Beach, New Jersey, as a result of Sandy.  He subsequently filed an insurance claim with his insurer, State Farm Fire and Casualty Company (“State Farm”), for wind and rain damage; he did not have flood coverage under his policy.

State Farm paid Inacio $901.29 for wind and rain damage.  In a December 7, 2012 letter, State Farm indicated that it determined that the remaining damage was caused by flood and, therefore, was not covered.  In that letter, State Farm further noted:

Suit Against Us. No action shall be brought unless there has been compliance with the policy provisions. The action must be started within one year after the date of loss or damage.

This Company does not intend by this letter to waive any policy defenses in addition to those stated above and reserves its right to assert such additional policy defenses at any time.

If you have any additional information regarding your claim which has not been previously considered or if you desire any additional explanation regarding this matter please contact me . . . .

(Id. at *1-2.)  While State Farm clearly indicated that an action would have to be commenced in accordance with the suit-limitation provision, it never stated that it was denying the claim.  In addition, it invited the insured to supply additional information if it “desire[d] any additional explanation regarding” the claim.

After receiving the letter, Inacio retained a public adjuster to assist him in dealing with State Farm.  The public adjuster inspected the premises and prepared a revised estimate of wind and rain damage, which was submitted to State Farm.  On July 29, 2013, State Farm conducted another inspection of the premises.  By letter dated August 18, 2013, State Farm sent Inacio a check in the amount of $15,005.37.  Inacio believed that the amount offered by State Farm was not sufficient to repair the premises and requested that State Farm submit the claim to appraisal in accordance with the terms of the insurance policy.  State Farm refused to submit the claim to appraisal and on June 13, 2014, Inacio sued State Farm in state court.  State Farm later removed the case to federal court.

State Farm subsequently filed a motion to dismiss the complaint on the basis that the action was not timely filed.  State Farm argued that its December 7, 2012 letter constituted a denial of the claim and, therefore, any action had to be commenced by December 7, 2013 at the latest.  Inacio, on the other hand, argued that:

because the December 7 letter (1) lacked any “denial language;” (2) requested additional information from the Plaintiff; and (3) failed to reference the prior covered damage and special circumstances, that the letter was ambiguous and not a clear and unequivocal denial of Plaintiff’s claim.

(Id. at *4.)

The court noted that the issue before it was “whether the December 7 letter was, on its face, an unambiguous formal denial so as to continue the running of the statute of limitations.”  (Id. at *4.)  The court concluded that it was not.  The court noted that claim “involve[d] ‘special circumstances,’ which suggest Defendant’s December 7 letter was an ambiguous denial at most.”  The “special circumstances” consisted of the fact that the December 7 letter referred only to possible flood damage, made no reference to the prior payment for wind and rain damage, and State Farm conducted a second inspection of the premises and paid an additional sum to the insured after it send out the December 7 letter.     In addition, the December 7 letter failed to contain “unequivocal ‘denial language’.”  (Id. at *6.)  The August 13 letter, in contrast, which accompanied the additional payment, made specific reference to “denial” of the claim.  The court summarized its reasoning as follows:

Based on the language in the December 7 letter referring only to flood damage, the lack of a clear denial, and an open-ended request for further information, the Court finds that the December 7 letter was not an unambiguous denial of Plaintiff’s insurance claim. Therefore, the Court cannot conclude that Plaintiff’s claims are clearly barred by the statute of limitations. Defendant’s Motion to Dismiss will be denied.

(Id. at *7.)

It should be noted that merely including an open-ended request for additional information, in and of itself, is not sufficient to make a denial ambiguous.  As noted by the court, other New Jersey “cases have held denial letters to be unambiguous even where a similar paragraph is included in the denial letter.”  (Id. at *6.)  There must be other “special circumstances” that, when viewed in total, make the denial ambiguous.

Thus, for purposes of enforcement of the suit-limitation provision, after receiving notice of a claim, and conducting an investigation, an insurer must issue a clear and unequivocal denial if it wants to re-start the running of the suit-limitation period.  By giving an insured an opportunity to supply additional information, continuing to adjust the loss, or by offering or making reference to alternative dispute resolution options, an insurer runs the risk that the suit-limitation period will not start to run again.

© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.