NOVEMBER 2016 BAD FAITH CASES: COURT FINDS THAT (1) LOSSES QUALIFIED AS ACCIDENTAL OCCURRENCES AND WERE SUBJECT TO COVERAGE; AND (2) INSURED DID NOT ACT IN BAD FAITH IN SETTLING CLAIMS WITH CUSTOMERS WITHOUT INSURER’S CONSENT (New Jersey Superior Court Appellate Division)
The insured made animal health products, and filed a complaint seeking a declaratory judgment that its insurer was required to provide coverage for economic losses suffered by three of the insured’s customers. The customers raised chickens for human consumption, and alleged that the growth of the chickens were stunted due to the chickens ingesting a drug made by the insured intended to control a common intestinal disease. The insured also alleged that the insurer had breached the implied covenant of good faith and fair dealing. Both parties moved for summary judgment.
In granting summary judgment in favor of the insurer, the trial court found that there was no coverage and that the insured waived its right to indemnification by settling customer claims without the insurer’s consent. The insured appealed.
On appeal, the Appellate Division reversed, and concluded that the losses associated with the growth-stunting effects of the insured’s product did constitute “occurrences” and “property damage” within the meaning of the provisions in the policy providing coverage. The Court reasoned that the pivotal question under the insuring clauses was whether the stunted growth of the chickens allegedly caused by the insured’s product was an “accident”, and therefore an “occurrence”. The Court found that the stunted growth was a covered occurrence, because it was not foreseeable that the additive consumed by the chickens would lead to harmful side effects.
The Appellate Division rejected the insurer’s contention that any coverage it may owe to the insured for the payments to the three customers was nullified because the insured settled with the customers without the insurer’s consent. The insurer argued that the insured did not act in good faith when it settled with one of its customers because “it did so before either the amount of damages or its liability to [the customer], if any, was even remotely clear.”
However, the Court found that the insured did not act in bad faith when it settled with its customer, as two and a half months had passed after the insured submitted the claim to the insurer and had yet to receive a response. The Court reasoned that in this situation, the insured “made a reasonable business decision to settle, to ensure continued relations with an important customer and to avoid the risks and costs of litigation.”
