Archive for the 'NJ - Bifurcate/Sever & Stays' Category
Plaintiff was the beneficiary of a $1 Million life insurance policy. The carrier declined to pay benefits, and she brought 3 claims: (1) a declaration that the policy was valid and she was entitled to the proceeds; (2) breach of contract for damages resulting from delay in payment; and (3) bad faith. The carrier sought to sever the last two claims, and stay discovery, characterizing them both as bad faith claims.
The court found the delay in payment claim simply to be a contract claim for consequential damages, not bad faith in claims handling, and denied the motion on that count. The court also did not expect damage discovery to be extensive or complicated, and there would be no material benefit, or prejudice avoided, by severance and stay.
On the bad faith claim, the court recognized that stay and severance were common in bad faith cases; however, there was no automatic rule to that effect. Rather, each case is determined on its own merits. It cited to the Beachfront case for this proposition, though a stay was granted in that case due to prejudice in allowing the discovery to proceed. Similarly, in this case, plaintiff’s bad faith discovery requests were irrelevant to the underlying claims, and disproportional to those declaratory relief and contract claims.
Further, the focus of the underlying claims was whether the insured made misrepresentations when applying for insurance, whereas the focus of the bad faith case is claims handling and processes. Thus, the two types of claims and are best treated as distinct. Moreover, proof would involve different witnesses and documents. Further, there is also no prejudicial delay, as the bad faith claim could proceed promptly if plaintiff prevails on her contract claims.
Finally, the insurer would be prejudice by continuing with the bad faith discovery. It would have to undergo significant expenditure of time and money, which would be needless if it prevailed on the underlying claims.
Thus, the court severed and stayed the bad faith claim until resolution of those underlying claims.
Date of Decision: October 31, 2018
Ames v. USAA Life Ins. Co., U. S. District Court for the District of New Jersey Civil No. 18-9865 (RMB/JS), 2018 U.S. Dist. LEXIS 186315 (D.N.J. Oct. 31, 2018) (Schneider, M. J.)
In this complex federal case, the carrier sought to bifurcate trial and discovery on coverage and bad faith, asking the court to hold discovery in abeyance pending the coverage determination. The court declined.
“In determining whether bifurcation under Rule 42(b) is proper, ‘courts should consider whether bifurcation will avoid prejudice, conserve judicial resources, and enhance juror comprehension of the issues presented in the case.’” Applying this standard, the court found that “such considerations are not advanced by bifurcation, as this case: (1) was filed over two-and-a-half years ago; (2) will not be disposed of on the pleadings…; and (3) requires additional discovery to move on to the next stage of the litigation.”
The court found it exceedingly clear that this procedurally and substantively complex case was not going to be simplified or expedited “by holding bad faith discovery in abeyance pending a determination of coverage….” The court relied upon Magistrate Judge Clark’s opinion in National Union Fire Ins. Co. v. Becton, observing, “bifurcation of coverage and bad faith claims was not appropriate where case was pending for over three years, the case would not be disposed of on the pleadings, and discovery remained.”
Date of Decision: October 2, 2018
Ventrice v. Lexington Insurance Co., U.S. District Court District of New Jersey Civil Action No.: 2:16-cv-00660, 2018 U.S. Dist. LEXIS 169789 (D.N.J. Oct. 2, 2018) (Cecchi, J.)
This case addresses a wide array of New Jersey bad faith issues. The underlying facts involve disputed coverage and defense obligations in a suit against the insured based on the Telephone Consumer Protection Act (TCPA).
The insurer withdrew its defense based on trial court finding no coverage, which was later reversed on appeal
The insurer had been defending under a reservation of rights, but withdrew the defense when the trial court ruled no coverage was due. The underlying case proceeded. A $19 million judgment was entered on an unopposed summary judgment motion against the insured.
Subsequently, the appellate division reversed the trial court’s coverage ruling, and remanded to explore further factual issues before determining the coverage question.
The insured assigned it claims to the underlying plaintiffs, who counterclaimed for bad faith and failure to settle within policy limits, and who also intervened in the coverage dispute again alleging bad faith. Before reaching a jury in the declaratory judgment action, the court dismissed the bad faith claims “except for the count in its counterclaim that alleged [the insurer] acted in bad faith by failing to settle the underlying action at a time when it controlled that litigation and could have settled the claim within … policy limits.”
The jury found for the insured on coverage, and the court further awarded attorney’s fees under R. 4:42-9(a)(6). The total award exceeded $5 million.
On appeal, the court went through the relevant policy language and exclusions in great detail. Among other issues addressed, it found the verdict should have been reversed on the issue of what constituted “property damage,” with a single exception, that was also the sole actionable occurrence. Thus, the judgment was significantly undermined on appeal.
Bad faith issues
The court then addressed a variety of bad faith issues. This was triggered by the insurer’s late effort on the eve of trial to renew an attempt to dismiss the bad faith failure to settle claims for failure to bring forth expert testimony to support the failure to settle claim.
The insured “objected to the untimeliness of the motion and requested an adjournment if the court was inclined to dismiss for lack of an expert.” The judge found that there was no actionable bad faith claim under the “fairly debatable standard”, and that the insured had failed to negotiate a reasonable settlement once the defense was withdrawn.
“Alternatively, the judge found that any assessment of [the insurer’s] conduct in this complex case was beyond the ken of the average juror and dismissed the bad faith failure to settle claim because [the insured] had no expert. Noting the case management order required [the insured] to furnish an expert report nearly one year earlier, she denied any adjournment and dismissed the bad faith failure to settle counterclaim.”
The Appellate Division agreed an expert was necessary, but reversed the trial court’s ruling. It found that the motion in limine was functionally a summary judgment motion that was untimely and prejudicial.
The Court then addressed the nature of New Jersey bad faith claims, and the standards applicable in first and third party contexts.
Standards for failure to settle within policy limits
The failure to settle a third party claim within policy limits is governed by the New Jersey Supreme Court’s Rova Farms decision. Because the insurer controls the settlement, it has a fiduciary obligation to exercise good faith in considering settlement. The decision not to settle within policy limits “must be a thoroughly honest, intelligent and objective” decision.
“It must be a realistic one when tested by the necessarily assumed expertise of the company. This expertise must be applied, in a given case, to a consideration of all the factors bearing upon the advisability of a settlement for the protection of the insured. While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.”
Expert needed on bad faith claim to assist jury
Rejecting a settlement by itself does not constitute bad faith. There must be “an assessment of the reasonableness of an insurer’s settlement negotiations in the underlying action” and this assessment “will likely hinge upon the credibility of fact witnesses, as well as expert testimony as to what went wrong on the settlement front and why.”
In this case, the factors were varied and complicated, and expert testimony was necessary to assist the jury in making a bad faith decision under Rova Farms and its progeny. Thus, the trial court was right on the issue that an expert was needed.
Some advice of how to handle late raised issues that will be allowed to go to trial, and the ability to sever bad faith claims
In reversing the dismissal, the appellate judges gave some practical advice to trial courts under these circumstances. Either the trial court have been adjourned to allow time to obtain the expert testimony and response, or the bad faith claim could have been severed and tried after the coverage case. The case was remanded for the trial judge to address the bad faith claim.
Some advice of using “fairly debatable” standard (Pickett) in failure to settle cases (Rova Farms)
The appellate judges then stated they would not address the issue of whether the trial judge’s fairly debatable ruling as a basis for dismissal was proper. The court then went on to discuss the interplay of Rova Farms and the Pickett fairly debatable standard at some length. It observed that the fairly debatable standard arose in the first party context, and that Rova Farms addressed failure to settle third party claims.
The Appellate Division had previously ruled that the fiduciary duty implicated in the third party failure to settle context does not exist in the first party context. However, another Appellate Division panel had ruled that the fairly debatable standard did apply in third party coverage cases (as differentiated from failure to settle cases). Thus, “[n]o reported New Jersey decision has addressed whether Pickett‘s ‘reasonably debatable’ standard applies to an insured’s bad faith refusal to settle claim.”
The Third Circuit has addressed the issue, and found that the Rova Farms’ standards, rather than the Pickett fairly debatable standards should control third party failure to settle claims.
“Whether [the insured] would be held liable for [the third-party’s] injuries was “fairly debatable,” but in the context of a third-party claim with a possibility of an excess verdict, Pickett supplies only part of the equation. The “fairly debatable” standard is analogous to the probability liability will attach in a third-party claim, but it does not consider the likelihood of an excess verdict.
A third-party claim that may exceed the policy limit creates a conflict of interest in that the limit can embolden the insurer to contest liability while the insured is indifferent to any settlement within the limit. This conflict is not implicated when the insured is a first-party beneficiary, where the claimant and the insurer are in an adversarial posture and the possibility of an excess verdict is absent.
Rova Farms, not Pickett, protects insureds who are relegated to the sidelines in third-party litigation from the danger that insurers will not internalize the full expected value of a claim due to a policy cap.”
The present panel chose to decide the issue, though (no pun intended), it acknowledged “the appeal of the Third Circuit’s rationale. An insurer who, while exclusively controlling the litigation, acts in bad faith and refuses to settle a third-party claim within its insured’s policy limits exposes the insured to personal liability. The situation therefore presents different concerns from those posed by a suit where the insurer acts in bad faith and wrongfully denies contractual benefits to the insured under its policy of insurance.”
Failure to negotiate a settlement after coverage denial may not preclude a later bad faith claim
Finally, the panel rejected the trial court’s finding that the insured’s failure to negotiate a settlement once coverage was denied precluded the possibility of a later bad faith claim.
The court looked generally to case law concerning insured’s conduct in settling, or not settling, cases where the insurer has declined involvement on the basis it does not believe coverage is due. Insured are not required as a matter of law to settle at their own expense. Rather, “under certain circumstances, insureds could do so without violating policy terms where there has been a breach by the insurer.”
In sum, the panel reversed the bad faith claim dismissal and remanded the matter to proceed on the bad faith claim.
Date of Decision: July 31, 2018
Penn National Insurance Co. v. Group C Communications, Inc., New Jersey Superior Court Appellate Division, DOCKET NOS. A-0754-15T1 A-0808-15T1, 2018 N.J. Super. Unpub. LEXIS 1833 (N.J. App. Div. July 31, 2018) (O’Connor, Messano and Vernoia, JJ.)
In this Hurricane Sandy related litigation, the insured brought claims for breach of contract and bad faith after the insurer denied coverage under a homeowner’s insurance policy pursuant to a surface water exclusion. The trial court severed and stayed the bad faith claim, and both parties moved for summary judgment on the breach of contract claim. The judge presiding over the motion proceeding granted summary judgment in favor of insurer, and denied the insured’s cross-motion for summary judgment “for the reasons set forth in [insurer’s] motion papers.” The motion judge “failed to make any findings of facts or reach any conclusions of law, as mandated by [New Jersey Rule of Court] 1:7-4(a).” The Appellate Division reversed and remanded, reasoning that “[a] trial judge is obliged to set forth factual findings and correlate them to legal conclusions[]” in accordance with the New Jersey Rules of Court.
Date of Decision: May 1, 2018
Estate of Doerfler v. Federal Insurance Co., Superior Court of New Jersey, Appellate Division, Docket No. A-3353-15T2, 2018 N.J. Super. LEXIS 69 (N.J. App. Div. May 1, 2018) (Fuentes, Manahan, and Suter, JJ.)
In this complex coverage dispute, the insurer appealed two magistrate judge’s decisions to the district judge: (1) a 2017 opinion and order denying insurer’s motion to compel the insured’s production of privileged documents concerning the underlying lawsuits and settlements; and (2) a 2018 opinion and order denying the insurer’s motion to bifurcate and stay discovery regarding the insured’s bad faith counterclaim. The underlying litigation concerned occurrence-based policies that provided coverage for over two decades, and whether insurer has a duty of coverage regarding several class-actions and anti-trust actions brought against the insured after the policy period.
In affirming the magistrate’s 2017 order, the court held that the insurer failed to show how the privileged information was both relevant and material, and failed to show how it could not obtain this information through less intrusive means.
Regarding the 2018 bifurcation order, the insurer argued that “under New Jersey law ‘a policyholder should not be permitted to engage in discovery related to a bad faith claim until such time as it has established as a matter of law that it was entitled to coverage.’” The court rejected this argument, under Federal Rule 42 which governed in this federal action. The district judge held that the insurer failed to meet its burden of showing that bifurcating the bad faith claim would serve judicial economy and not prejudice the parties.
Date of Decision: April 12, 2018
Travelers Casualty & Surery Co. v. Becton Dickinson & Co., United States District Court, District of New Jersey, Civil Action No. 14-4410 (JMV), 2018 U.S. Dist. LEXIS 61853 (D.N.J. Apr. 12, 2018) (Vazquez, J.)
This case involves a discovery dispute regarding coverage litigation between the parties, and the court’s reversing its decision to bifurcate bad faith discovery.
The insurer was seeking a declaration there was no obligation to defend or indemnify in connection with two antitrust lawsuits the insured settled for $100,000,000. The insured brought claims for bad faith, alleging the insurer failed to conduct a reasonable investigation of the underlying actions and the claim for coverage. The insurer argued the insured breached various policy conditions, specifically when it failed to notify the insurer of the underlying action until ten years after the settlement, with the insured arguing no appreciable prejudice from the late notice.
The Court previously bifurcated the bad faith discovery in the interests of judicial economy.
The insurer sought a protective order prohibiting the insured from inquiring into certain topics related to the bad faith claim during a Rule 30(b)(6) deposition of the insurer’s corporate representative. On the other hand, the insured moved to quash the insurer’s subpoena upon its attorney in the underlying action.
First, the Court vacated its earlier order bifurcating the bad faith discovery, reasoning that years later discovery does not appear to be nearing the finish line. The Court explained that further bifurcation would just lead to two protracted discovery battles. As such, the Court denied the insurer’s motion for a protective order.
Regarding the insured’s motion to quash, the Court found that the insurer “failed to establish that [the insured] placed . . . privileged information sought at issue in this matter or that such information is material to the issues before th[e] Court . . . .” and consequently granted the insured’s motion to quash the subpoena.
Date of Decision: January 30, 2018
The insureds owned commercial property damaged due to storm-related incidents. They retained an outside adjusting firm. After the adjusting firm first notified the insurer of the claims, the insurer sent its own adjusters to investigate the property claims and to make a coverage decision. Upon investigation, the insurer concluded the commercial property had not been open to the public for three years, and that the insureds had apparently demolished whole portions of the building. The insurer retained legal counsel to analyze the coverage issues. It ultimately denied coverage.
The insured sued for breach of contract and bad faith. The insurer moved to sever and stay the bad faith claim. The Court stated that the practice of severing the claims “is appropriate where the claims . . . are ‘discrete and separate’ in that one claim is ‘capable of resolution despite the outcome of the other claim.” In making its determination, the Court considers four factors: “(1) whether the issues sought to be tried separately are significantly different from one another; (2) whether the separable issues require the testimony of different witnesses and different documentary proof; (3) whether the party opposing the severance will be prejudiced if it is granted; and (4) whether the party requesting severance will be prejudiced if it is not granted.”
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First, the Court found that the breach of contract claim concerns coverage under the policy, and that the bad faith claim deals with the insurer’s “general claims handling procedures, its claims conduct in this case, and its knowledge and state of mind about the grounds for denial of coverage.” As such, the Court held that this factor weighs in favor of bifurcation.
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Next, the Court ruled “the contract and bad faith claims require the testimony of different witnesses and different documentary proof.” Thus, it held that this factor also weighs in favor of bifurcation.
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The Court then found the insured would not suffer prejudice if the two claims are severed, reasoning that “relatively little discovery has been exchanged and it is therefore uncertain whether the initial coverage claim will be denied. If so, the bad faith claims would similarly fail.” The Court also stated that should the insureds prevail on the breach of contract claim, they could then pursue their bad faith claim.
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Lastly, the Court held that the insurer would be prejudiced if it were forced to litigate the bad faith claim coextensively, because permitting discovery on the bad faith claim, prior to the resolution of the breach of contract claim would be premature.
In conclusion, all four factors weighed in favor of bifurcation and the Court granted the insurer’s motion to sever and stay the bad faith claim.
Date of Decision: September 26, 2017
Legends Mgmt. Co. v. Affiliated FM Ins., No. 16-CV-1608, 2017 U.S. Dist. LEXIS 158898 (D.N.J. Sept. 26, 2017) (Mannion, J.)
The insured alleged that she suffered serious bodily injuries after a rear-end collision. The vehicle at fault only had $25,000 in available coverage, and the insured’s UIM policy contained limits of $100,000 per person and $300,000 per accident. Alleging injuries amounting to $75,000 in value, the insured filed a UIM claim with the insurer. The insured allegedly forwarded all documentation supporting her injuries to the insurer’s claims adjuster, but the insurer ignored her documentation or acted with reckless indifference to the documentation provided. She filed a claim against the insurer for breach of the implied duty of good faith and fair dealing.
The insured moved to dismiss this claim, arguing that (1) the Court lacked federal subject matter jurisdiction because the insured’s claim does not exceed $75,000; and (2) that the insured failed to state a claim upon which relief can be granted. The insured also moved to sever and stay the insured’s bad faith claim, pending the disposition of the insured’s claim for breach of contract.
(1) The Court denied insurer’s motion to remand, reasoning that “[the insured’s] bad faith claim, if successful, includes the potential for an award of consequential damages and punitive damages . . .” that would exceed the jurisdictional threshold of $75,000.
(2) The Court denied the insured’s motion to dismiss, reasoning that the complaint “sets forth numerous examples of bad faith conduct that sufficiently allege[s] a ‘reckless disregard’ for [the insured’s] rights.” These allegations included delay tactics, conducting an improper investigation, and failing to evaluate medical records in a reasonable manner.
(3) Finally, the Court granted the insurer’s motion to sever and stay the bad faith claim from the insured’s breach of contract claim, citing judicial economy and avoiding prejudice to the insurer.
Date of Decision: September 12, 2017
In addressing the common practice of severance and stay in New Jersey federal insurance cases involving breach of contract and breach of the implied covenant of good faith and faith dealing (and in this case breach of fiduciary duty as well), the court stated:
This Court has the discretionary authority to sever and stay claims, for purposes of pretrial proceedings, see Fed. R. Civ. P. 26(d)(2), or for trial, see Fed. R. Civ. P. 42(b), in the interests of justice and efficiency. I find that a severance and stay of Counts 2 [breach of the implied covenant of good faith and fair dealing] and 3 [breach of fiduciary duty] makes sense, both as logic and as case management.
If, for example, there is no coverage, then denial of a claim cannot have been in bad faith, so discovery and litigation on the bad faith issue will have been wasted. Only if coverage is found need a court explore complicated issues of the insurer’s motives and the level of certainty it was required to have before denying a claim. In short, “[p]roof an insured is entitled to coverage as a matter of law is a necessary pre-requisite to pursuing discovery regarding a bad faith claim.” ….
No surprise, then, that severance and stay of bad faith claims has been called the “prevailing practice” in both the state and federal courts of New Jersey. …. The same principle applies as to fiduciary breach claims.
Nothing about the claims here suggests that a finding of bad faith or a fiduciary breach is so likely that the Court should collapse the sequence of issues and depart from the usual, sensible practice of severance.
Date of Decision: April 25, 2017
In Abiona v. Geico Indemnity Company, the insurer sought to dismiss the underinsured motorist bad faith claim, and if not dismissed, then to sever and stay the bad faith claims. The claim was not dismissed, but the court did agree to sever and stay the bad faith claim.
The insured alleged that the insurer completely denied UIM benefits, declined to participate in non-mandatory find arbitration, and failed to present any good faith settlement offer, despite the insured’s submitting extensive medical records to support the claim of severe and permanent injury. This documentation allegedly included the insurer’s own IME report, which opined that “the insured is a surgical candidate from the injuries sustained by this accident if the epidural injection therapy does not resolve the significant pain from the herniated lumbar disc caused by this accident.”
In refusing to dismiss the bad faith claim, the court found that the insurer’s medical opinion that surgery could be required “nudges” the allegation of reckless disregard of the lack of a reasonable basis to deny the claim “across the line from conceivable to plausible.”
Next the court found it had jurisdiction to hear the case, when looking at the contract damages, and potential consequential and punitive damages permitted under New Jersey’s bad faith law.
On the issue of severance and stay, the court observed: “The prevailing practice in both state and federal court is to sever breach of insurance contract claims from bad faith claims, and to proceed with the contract claim before turning to the bad faith claim (if still necessary after adjudicating the contract claim).” The court added that: “Severance of a bad faith claim will often be desirable because, as courts have recognized, there is real potential for prejudice to the insurer should it ‘be required to produce its claim file prematurely.’”
The court accepted the insurer’s assertion that it would suffer prejudice without severance, and described the insured as “merely” arguing that judicial economy weighs against severance – a position contrary to the above-stated principles and numerous cases following those principles. It quoted from an earlier state court decision: “The toll on judicial economy by allowing full-disclosure up front . . . is obvious. Requiring simultaneous discovery on both claims will result in a significant expenditure of time and money, generally rendered needless if the insurer prevails on plaintiff’s UM or UIM claim.” Thus, it granted the motion to stay and sever in the interests of judicial economy and to avoid prejudice to the insurer.
Date of Decision: March 16, 2016
Abiona v. Geico Indem. Co., 2016 U.S. Dist. LEXIS 34179 (D.N.J. Mar. 16, 2016) (Hillman, J.)
