COURT DISTINGUISHES BAD FAITH CLAIM FROM BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING, AND REFUSES TO SEVER AND STAY THE LATTER CLAIM (New Jersey Federal)
The insurer brought a declaratory judgment action seeking a finding of no coverage and to void the policy. The insured counterclaimed for declaratory judgment, breach of contract, and breach of the covenant of good faith and fair dealing. The insurer labeled this final count a bad faith claim, and argued such claims are routinely severed and stay. The insured argued this was not a bad faith claim, and that proving the covenant of good faith and fair dealing breach overlapped with proving the other two counts.
The court denied the motion to sever and stay the good faith and fair dealing count.
First, the court accepted that if the insured stated its claim was not a bad faith claim, then it was not a bad faith claim. It then went on to analyze the carrier’s argument that bad faith and the breach of the covenant of good faith and fair dealing were functionally equivalent, and should be treated in the same manner; again arguing bad faith claims are routinely severed and stay.
The court steadfastly disagreed for the following reasons:
(1) The insurer offered no argument opposing the insured’s position that there were no significant differences in the proofs for the “breach of fiduciary duty” claim and the other counterclaims.
(2) Because the implied covenant of good faith and fair dealing is inherent in every contract, it is intertwined with the contact claim, and these claims are not significantly different.
(3) Severing the claims might limit the insured’s ability to take discovery on the meaning of a particular phrase in the policy, and the insurer’s intent as to the meaning of that phrase. This would prejudice the insured, and could create procedural issues for the court if the insured opposed summary judgment on the ground that facts were unavailable per Rule 56(d). The court found no real prejudice to the insurer.
Lastly, if the case did go to trial, the court observed the insurer “can seek severance or bifurcation of some part of the case, although it is difficult to imagine the basis. However, at this stage, there is absolutely no basis for severance or stay, which would be unfair and grossly inefficient.”
