New Jersey Supreme Court Issues Two Insurance Bad Faith Decisions

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  In deciding to reject the arbitration award, NJM relied on an unpublished decision by the Appellate Division, Geiger v. N.J. Mfrs.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  Pursuant to Rule 1:36-3 of the New Jersey Rules of Court, however, “[n]o unpublished opinion shall constitute precedent or be binding upon any court.”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by res judicata, collateral estoppel, the single controversy doctrine or any other similar principle of law, no unpublished opinion shall be cited by any court.”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, 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 with appropriate and specific direction to the original content.


By William D Wilson

I am a partner in Mound, Cotton, Wollan & Greengrass, which is headquartered in New York City. I am in charge of running the firm's New Jersey office, which is in Florham Park. I have been practicing law for approximately 23 years and focus primarily on insurance related matters