Bad Faith

Ever since the Supreme Court's landmark decision in Pickett v. Lloyd's, 131 N.J. 457 (1993), the courts of this state have applied the "debatably valid" standard under both first-party and third-party claims.

Bad Faith On First Party Claims

A “first-party” claim against an insurance company is a suit by an insured against his insurance company because of its failure to settle his claim. Pickett v. Lloyd's (A Syndicate of Underwriting Members), 131 N.J. 457 (1993). The Court in Pickett has stated:

We are satisfied that there is a sufficient basis in law to find that an insurance company owes a duty of good faith to its insured in processing a first-party claim. We begin by noting that every contract imposes on each party the duty of good faith and fair dealing in its performance and its enforcement. In New Jersey, we have stated that obligation to be an implied term of every contract. Id.

The Court went on to state that an insurance company may be liable to a policyholder for bad faith in the context of paying first-party 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. See, Pickett, supra. Stated another way, the cause of action for the bad faith refusal to pay first party benefits requires the plaintiff to 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 reasonable basis for denying the claim. See also, Miglicio v. HCM Claim Mgmn’t Corp., 288 N.J. Super. 331, 341-42 (Law Div. 1995). A finding of bad faith against an insurer in denying an insurance claim cannot be established through simple negligence. Moreover, mere failure to settle a debatable claim does not constitute bad faith. Badiali v. New Jersey Mfrs. Ins. Group, 220 N.J. 544 (2015).

Bad Faith On Third Party Claims

A 'third-party" claim is a suit based on the insurer's failure to settle a third party tort claim for a reasonable sum. In Pickett, the Supreme Court held that a bad faith suit for an insurer's failure to pay aclaim will be recognized "when the failure to pay...results from a denial or a withholding of benefits for reasons that are not even debatably valid" and "the economic losses sustained...are clearly within the contemplation of the insurance company." Pickett, 131 N.J. at 461. Just as with first-party benefits, bad faith in the third-party context requires a showing of more than mere negligence.

The Duty To Defend

If you have been sued and your insurance carrier has denied you a defense and indemnification under your liability policy, yoo too may have a case of bad faith against the carrier.

An insurer's duty to defend an insured against a lawsuit is well defined in Lumbermen's Mutual Casualty Co. v. United Services Automobile Ass'n, 218 N.J. Super. 492, 497 (App.Div.1987), as follows:

The duty to defend is determined by comparing the allegations of the Complaint with the coverage provisions of the policy: the duty exists only if the complaint states a theory of recovery for which coverage is provided by the policy; there is no duty as to counts not covered. Hartford Acc. & Indemnity. Co. v. Aetna Life & Cas. Ins. Co., 98 N.J. 18, 21-23 (1984); Burd v. Sussex Mutual Insurance Co., 56 N.J. 383, 388-389 (1970). The duty to defend is measured without regard to the ultimate merits of the cause of action: if the complaint alleges facts which, if proved, would constitute a covered risk, the insurer must defend even though if its insured wins at trial, the insurer will have no duty to pay. Hence, it is said that the duty to defend is independent of or broader than the duty to pay. Danek v. Hommer, 28 N.J. Super. 68, 79 (App.Div.1953), aff'd o.b. 15 N.J. 573 (1954).

As a general proposition, a liability insurer has a contractual obligation to provide a sufficient defense against all actions covered by the insurance policy. Hartford, supra, 98 N.J. at 22. Its duty to defend is broader than its duty to indemnify. Rosario, et al. v. Haywood, et al., 351 N.J. Super. 521, 524 (2002). The duty to defend is triggered by a complaint alleging a covered claim. Voorhees v. Preferred Mutual Insurance Company, 128 N.J. 165, 173 (1992). "[T]he complaint should be laid alongside the policy and a determination made as to whether, if the allegations are sustained, the insurer will be required to pay the resulting judgment, and in reaching a conclusion, doubts should be resolved in favor of the insured." Danek v. Hommer, 28 N.J. Super. 68, 77, (App. Div. 1953), aff'd, 15 N.J. 573, 105 A.2d 677 (1954). "It is the nature of the claim for damages . . . [that] triggers the obligation to defend." L.C.S., Inc. v. Lexington Insurance Co., 371 N.J. Super. 482, 490, (App. Div. 2004).

Neither the duty to defend nor the duty to indemnify "exists except with respect to occurrences for which the policy provides coverage." Hartford, supra, 98 N.J. at 22. It is the "obligation to indemnify, either actual or potential, which invokes the duty to defend." Hartford Insurance Group v. Marson Construction Corp., 186 N.J. Super. 253, 260, (App. Div. 1982).

However, "the duty to defend is not necessarily limited to what is set forth in the complaint." Jolley v. Marquess, 393 N.J. Super. 255, 271, (App. Div. 2007). "[F]acts indicating potential coverage that arise during the resolution of the underlying dispute . . . may trigger the duty to defend." SL Industries, Inc. v. American Motorists Insurance Company, 128 N.J. 188, 198 (1992) The SL Court reasoned, "To allow the insurance company 'to construct a formal fortress of the . . . pleadings and to retreat behind its walls, thereby successfully ignoring true but unpled facts within its knowledge that require it, under the insurance policy, to conduct the putative insured's defense,' would not be fair." Id. This is so because "'an insurer's duty is measured by the facts.'" Ibid. (quoting J.A. Appleman, 7C Insurance Law and Practice § 4683, at 56 (Berdal ed. 1979)).

Generally, the insured has the burden "to bring the claim within the basic terms of the policy." Reliance Ins. Co. v. Armstrong World Indus., Inc., 292 N.J. Super. 365, 377 (App.Div.1996) (citing Diamond Shamrock Chems. Co. v. Aetna Cas. & Sur. Co., 258 N.J. Super. 167, 216 (App.Div.1992). Where the language of a policy supports two reasonable meanings, one favorable to the insurer and one favorable to the insured, the interpretation supporting coverage will be applied. Simonetti v. Selective Ins. Co., 372 N.J. Super. 421, 428-29 (App.Div.2004); Ellmex Constr. Co. v. Republic Ins. Co., 202 N.J. Super. 195, 204 (App.Div.1985); Corcoran v. Hartford Fire Ins. Co., 132 N.J. Super. 234, 243 (App.Div.1975). However, the court will not strain the construe the policy so that it affords coverage where it ordinarily would not. Id. Rather, should the terms of a policy be unambiguous they will be given their plain meaning. Ibid.