Archive for the 'NJ - Coverage Issues' Category

The insureds purchased a homeowners policy that provided up to $10,000 in coverage for mold-related damage. The policy did not cover water damage. The insureds’ roof was damaged, causing a leak in the master bedroom. The insurer paid this claim. Shortly thereafter, Hurricane Sandy made landfall, and the insured testified the house was damaged from subsurface water “[coming] up” from the crawl space beneath the house.

Just before Hurricane Sandy hit, the insureds noticed mold damage in the master bathroom and closet. The insureds engaged air quality specialists to test the rest of the home, who found mold in the crawl space beneath the house. On medical and engineering advice, the insureds demolished and rebuilt the home. They submitted a $282,000 claim for renovations. The insurer paid $12,158 for the roof repairs and various other items listed in the engineering report, and the $10,000 policy limit for mold.

The insured sued for breach of contract and breach of the duty of good faith and fair dealing. The trial court granted summary judgment to the insurer, finding the insurer fully performed under the policy, and insufficient evidence to support a claim of bad faith.

The Third Circuit likewise ruled for the insurer. The insurer paid the policy limit for mold damage, and the insureds’ own experts reported the other damages resulted from the water in the crawl space, and water damage was excluded under the policy.

As to the bad faith claim, the Third Circuit stated, “‘[a]n insurance company owes a duty of good faith to its insured in processing a first-party claim,’ but no liability arises if a decision concerning a claim is ‘fairly debatable.’” Because the insureds were unable to prevail on the breach of contract claim, they could not prevail on a bad faith claim for refusal to pay benefits owed under the policy. As such, the Third Circuit affirmed the District Court.

Date of Decision: January 10, 2018

Andrews v. Merchants Mutual Insurance Co., No. 17-1413, 2018 U.S. App. LEXIS 637 (3d Cir. Jan. 10, 2018) (Fuentes, Shwartz, Vanaskie, JJ.)

The insured’s property included a bulk liquid storage facility, and operated a propane gas distribution center containing six large liquid propane storage tanks. The policy included a variety of standard exclusions. Five months after the policy issued, the insured noticed sinkholes at the base of its propane tanks. The insured filed a property loss notice with the insurer, and retained an engineering firm to conduct a site inspection.

The engineering firm concluded that the sinkhole opened up after a period of excessive rainfall. The insurer began investigating the claim under a full reservation of its rights. It ultimately denied coverage pursuant to the policy’s “Cost of Excavation,” “Land and Water,” and “Earth Movement Exclusions”. However, the insurer invited the insured to submit further documentation that could alter its denial of coverage. After some back-and-forth, the insured ultimately brought suit for breach of contract and bad faith. The insurer moved for summary judgment on both claims.

The Court granted the insurer’s motion to dismiss the breach of contract claim for two reasons. First, the insured failed to meet its burden of establishing that the actual property covered under the policy was damaged. Second, the Court ruled that the policy’s flood exclusion precluded coverage. The flood exclusion excluded coverage for damaged caused by “surface water,” and the insured’s own engineering firm confirmed that rainfall/surface water contributed to the opening of the sinkholes.

As to the bad faith claim, the Court observed the heightened evidentiary standard “to provide evidence so clear, direct, weighty and convincing as to enable a clear conviction, without hesitation, about whether or not the [insurer] acted in bad faith.” The Court ruled that the undisputed facts showed that the insurer had a reasonable basis for its coverage denial, and that the insured failed to produce evidence that a reasonable jury could use to find bad faith by a clear and convincing standard.

The Court granted the insurer’s motion for summary judgment in its entirety.

Date of Decision: September 18, 2017

Heller’s Gas, Inc. v. International Insurance Co. of Hannover Ltd., No. 4:15-CV-01350, 2017 U.S. Dist. LEXIS 151072 (M.D. Pa. Sept. 18, 2017) (Brann, J.)

On May 25, 2017, the New Jersey Supreme Court issued its opinion in Oxford Realty Group Cedar v. Travelers Excess & Surplus Lines Co., setting out a number of principles on interpreting commercial insurance policies, application of the reasonable expectations doctrine and the doctrine of contra proferentem, and the nature of surplus lines insurance. A list of these principles, as quoted from the majority Opinion, is set out below.

1. Surplus lines insurance and party sophistication.

“Surplus lines insurance policies, governed by N.J.S.A. 17:22-6.40 to -6.84, offer coverage in specialized situations. Surplus lines policies insure ‘risks which insurance companies authorized or admitted to do business in [New Jersey] have refused to cover by reason of the nature of the risk.’ …. These policies are unique in that the insured parties ‘engage[] in high risk enterprises for which insurance could only be obtained from a surplus lines carrier’ through a broker.’ …. Insureds procure surplus lines policies covering commercial risk through insurance brokers, thus involving parties on both sides of the bargaining table who are sophisticated regarding matters of insurance.”

2. The role of the Property Coverage Form in shaping policy interpretation.

“The Property Coverage Form constitutes the insuring agreement and proceeds to delineate the boundaries of coverage under the Policy. It thus establishes the structure for analyzing how the Policy’s parts work together.”

3. The first step in determining the meaning of policy language and plain language.

“In assessing the meaning of provisions in an insurance contract, courts first look to the plain meaning of the language at issue. …. ‘If the language is clear, that is the end of the inquiry.’”

4. How to look at “ambiguity”.

(a) “[I]n the absence of an ambiguity, a court should not ‘engage in a strained construction to support the imposition of liability’ or write a better policy for the insured than the one purchased.”

(b) “The presence of an ambiguity is key because ‘if an ambiguity exists, the court will resort to tools and rules of construction beyond the corners of the policy.’”

(c) “But our courts will not manufacture an ambiguity where none exists.”

(d) “An ‘insurance policy is not ambiguous merely because two conflicting interpretations of it are suggested by the litigants.’”

(e) “Nor does the separate presentation of an insurance policy’s declarations sheet, definition section, and exclusion section necessarily give rise to an ambiguity.”

5. Ambiguity and the doctrine of contra proferentem; sophisticated and unsophisticated insureds.

(a) “Ordinarily, our courts construe insurance contract ambiguities in favor of the insured via the doctrine of contra proferentem. …. In applying contra proferentem, courts‘adopt the meaning that is most favorable to the non-drafting party.’”

(b) Sophisticated commercial insureds, however, do not receive the benefit of having contractual ambiguities construed against the insurer. …. Contra proferentem is a consumer-protective doctrine ‘only available in situations where the parties have unequal bargaining power. If both parties are equally ‘worldly-wise’ and sophisticated, contra proferentem is inappropriate.’”

6. Ambiguity and the doctrine of reasonable expectations.

(a) “The doctrine of reasonable expectations is a related doctrine [to contra proferetem] commonly applied in cases where an ambiguity is alleged. …. Under that doctrine, “the insured’s ‘reasonable expectations’ are brought to bear on misleading terms and conditions of insurance contracts and genuine ambiguities are resolved against the insurer.’”

(b) “Similar to the doctrine of contra proferentem, the doctrine of reasonable expectations is less applicable to commercial contracts.”

7. The litigants cannot themselves create ambiguity in language.

In rejecting an argument raised by the insured on the existence of ambiguity, the Court stated that the insured’s “alternative reading presents a conflicting interpretation suggested by litigants rather than a genuine ambiguity.”

Oxford Realty Group Cedar v. Travelers Excess & Surplus Lines Company, No. A-85 September Term 2015, 077617 (New Jersey Supreme Court May 25, 2017) (Opinion by Justice Fernandez-Vina, joined by Chief Justice Rabner, and Justices LaVecchia, Patterson, and Solomon)

Fineman, Krekstein & Harris, P.C.’s coverage group is headed by Hema P. Mehta, Esquire.

The appellate court addressed bad faith in this environmental contamination coverage case. The panel reiterated the law that “an insurance company may be liable to a policyholder for bad faith in the context of paying benefits under a policy. The scope of that duty is not to be equated with simple negligence. In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits. In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.”

The court then restated the “fairly debatable” standard, which mandates that an insured bad faith plaintiff must be able to establish “as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.” The court affirmed that the trial court’s summary judgment dismissing the bad faith claim was proper. Although the appellate court affirmed a finding that coverage was due, the insurer had a reasonable basis to deny the claim, “particularly considering that the governing law was not as developed at that time as it is now.”

Date of Decision: April 21, 2017

Mid-Monmouth Realty Assocs. v. Metallurgical Indus., DOCKET NO. A-0237-14T2, 2017 N.J. Super. Unpub. LEXIS 993 (App.Div. Apr. 21, 2017) (Brown, Fuentes, Simonelli, JJ.)

Photo by M. M. Ginsberg

This case involved a denial of coverage on the basis that the insured failed to get his car physically inspected after purchase. The court affirmed a grant of summary judgment on the coverage claim, and on the bad faith claim.

As to the bad faith claim, an “insured who alleges bad faith by the insurer must establish the merits of his or her claim for benefits. If there is a valid question of coverage, i.e., the claim is ‘fairly debatable,’ the insurer bears no liability for bad faith.” The court found the claim at issue was “fairly debatable”. The insurer was entitled to deny the claim outright. It had “complied with all notice and suspension procedures provided in the regulations. It did not have discretion to provide coverage when plaintiff did not comply and have the vehicle inspected.”

Date of Decision: March 14, 2017

Gibbins v. Gov’t Emples. Ins. Co. Geico, DOCKET NO. A-1035-15T3, 2017 N.J. Super. Unpub. LEXIS 632 (App. Div. Feb. 28, 2017) (Fasciale and Gilson, JJ.)