MARCH 2014 BAD FAITH CASES: COURT DISMISSES BAD FAITH COUNTERCLAIM TO INSURER’S INJUNCTIVE ACTION FOR RESCISSION, WHICH WAS DEFENDING INSURED UNDER A RESERVATION OF RIGHTS, AS LOSS OF A DEFENSE AS A RESULT OF THE RESCISSION ACTION IS NOT BAD FAITH (New Jersey Federal)

In Nova Casualty Co. v. Col-Mor Apartments, Inc., the insured was sued on the basis that it was providing drinking water contaminated with radioactive materials. The insurer defended under a reservation of rights, and also brought an action seeking the equitable remedy of rescission, alleging that the insured knew about the contamination prior to the policy being issued, and failed to reveal it.

The insured asserted a bad faith counterclaim arguing that the timing of the rescission action after providing for part of Defendant’s defense in nearly two years of state court litigation, amounted to bad faith, and that rescission of the policies would “unreasonably interfere” with its ability to litigate the state court action and “prejudice” it by “depriving it of its ability to direct its defense in the underlying [state court] litigation . . . .”

The Court dismissed the counterclaim stating: “It is readily apparent that Defendant’s true complaint is not with any bad faith motive actuating Plaintiff’s suit, but with the prospect of having its defense funds for the state court action dry up. Of course, if Plaintiff’s allegations are true, and Defendant lied to Plaintiff in order to obtain liability coverage that it was otherwise not going to receive, Defendant was never entitled to those funds in the first place. Defendant’s argument — that Plaintiff violated its rights by suing it for injunctive relief— is a position unmoored from both New Jersey law and common sense.

Under Defendant’s theory anytime an insurer, after providing a defense to an insured pursuant to an explicit reservation of rights, then seeks relief from an allegedly void insurance contract, the insurer’s conduct would be actionable. This Court is confident that that New Jersey Supreme Court would not countenance such a cause of action, which would effectively deny an insurance company its due process rights to sue for a declaration rescinding an insurance agreement.”

Date of Decision: January 9, 2014

NOVA CASUALTY COMPANY, v. COL-MOR APARTMENTS, INC., Civil Action No. 13-04496, UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY, 2014 U.S. Dist. LEXIS 2522 (D.N.J. Jan. 9, 2014)(Chesler, J.)