APRIL 2014 BAD FAITH CASES: AFTER FINDING INSURER IMPROPERLY DENIED COVERAGE, COURT FOUND SUMMARY JUDGMENT MOTION ON BAD FAITH CLAIM PREMATURE, AS THE RECORD WAS INSUFFICIENT TO DETERMINE IF THE INSURER ACTED WITH KNOWLEDGE OR RECKLESS DISREGARD OF THE LACK OF A REASONABLE BASIS FOR DENYING THE INSUREDS’ CLAIM (New Jersey Federal)

In Tripoldi v. Universal North American Ins. Co., the insureds had attempted to construct a water proofing system in their basement, the results of which ultimately damaged the structure of a basement wall in their home to the degree that it became uninhabitable. They made a claim and the insurer denied covered. The insured brought a breach of contract and bad faith suit.

As to the latter, they asserted that there was no debatable reason why the loss should not have been covered under the policy, and that the denial was arbitrary, capricious, and in direct contravention of the insurer’s own engineering report, and the stated cause of loss in that report.

The insureds also alleged that the carrier’s conduct was outrageous, and violated several provisions of the New Jersey Unfair Claims Settlement Practice Act and its accompanying regulations.

The coverage issue involved whether the structural damage to a wall that led to the home’s condemnation constituted a “collapse”. In the absence of any policy definition, under New Jersey law, the term collapse did not require an actual fall, but “any serious impairment of structural integrity that connotes imminent collapse threatening the preservation of the building as a structure or the health and safety of occupants and passers-by.”

However, the policy at issue did define “collapse”, and the issue was whether the damage sustained to the basement wall constituted an abrupt falling down or caving in of any part of a building, which would not require the falling down of the entire building. All parties further had the understanding that the basement wall at issue never collapsed completely in.

After a lengthy analysis, the court found that the circumstances met the policy definition of collapse, and summary judgment was granted to the insured on coverage.

Moving to the bad faith claim, the court stated that in the context of first-party insurance claims, the Supreme Court of New Jersey has held that “[t]o show a claim for bad faith, a plaintiff must show [1] the absence of a reasonable basis for denying benefits of the policy and [2] the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.”

Establishing a bad faith claim requires that a “plaintiff must show two elements: (1) the insurer lacked a ‘fairly debatable’ reason for its failure to pay a claim, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”

In addition, a “plaintiff may also demonstrate an insurer’s bad faith when the insurer unreasonably delays the processing of a valid claim, and the insurer knows or recklessly disregards the fact that the delay is unreasonable. However, neither negligence nor mistake may constitute bad faith on behalf of an insurer. “Rather, it must be demonstrated that the insurer’s conduct is unreasonable and the insurer knows that the conduct is unreasonable, or that it recklessly disregards the fact that the conduct is unreasonable.”

In other words, to show that an insurer has acted in bad faith, a plaintiff must demonstrate that no fairly debatable reason exists for denying or delaying the processing of a claim. “Under the ‘fairly debatable’ standard, a claimant must establish a right to summary judgment on the substantive claim in order to be entitled to assert a claim against the insurer for bad faith refusal to pay [or delay in processing].”

Both parties moved for summary judgment on the bad faith issue. The insureds asserted that the insurer conducted a grossly inadequate investigation into their loss, affirmatively misrepresented the findings of an expert report in its letter to the insureds denying coverage, added conditions to coverage that were not otherwise required under the policy, and affirmatively misrepresented that engineers were present at the site inspection.

However, the court found that the insureds failed to provide the Court with sufficient evidence that the insurer acted with reckless indifference to the proofs the insureds had submitted.

Still, the court did not rule for the insurer. It found that the record and the documents submitted in support of both parties’ motions did not present sufficient evidence for the Court to make a determination on whether the insurer acted with knowledge or reckless disregard of the lack of a reasonable basis for denying the insureds’ claim.

Procedurally, at that point in time, the insureds had not conducted any depositions of any of the insurer’s employees or any of the individuals involved in the investigation and evaluation of their claim. Thus, the summary judgment motion was premature.

Date of Decision: December 31, 2013

Tripoldi v. Universal North America Ins. Co ., U. S. Dist. Court, District of New Jersey, Civ. No. 12-1828 (D.N.J. Dec. 31, 2013) (Hillman, J.)