(Article from Insurance Law Alert, February 2015)
For more information, please visit the Insurance Law Alert Resource Center.
The New Jersey Supreme Court reiterated that a “fairly debatable” standard should be applied to insurer bad faith claims and held that an insurer did not act in bad faith by rejecting an arbitration award because it had “fairly debatable” reasons to do so.
Badiali v. New Jersey Manuf. Ins. Grp., 2015 WL 668206 (N.J. Feb. 18, 2015).
The coverage dispute arose out of a motor vehicle accident. An insured driver (“plaintiff”) filed an uninsured motorist claim, which proceeded to arbitration that resulted in an award in plaintiff’s favor. Plaintiff’s insurer, New Jersey Manufacturers Insurance Group (“NJM”), rejected the award and refused to pay. Plaintiff brought suit and a trial court confirmed the award and found NJM liable. In a subsequent action, plaintiff alleged that NJM acted in bad faith. Thereafter, the court awarded summary judgment in NJM’s favor, holding that NJM’s rejection of the arbitration award was based on “fairly debatable” reasons and therefore not in bad faith. The New Jersey Appellate Division and New Jersey Supreme Court affirmed.
The New Jersey Supreme Court held that the bona fides of NJM’s rejection of the arbitration award was “fairly debatable” in light of policy language and a prior unpublished Appellate Division opinion in a case to which NJM was a party. Addressing a matter of first impression, the court explained that although unpublished decisions have no legal precedential value, an unpublished decision may form a sufficient basis for avoiding a finding of bad faith, particularly where, as here, the insurer was involved in the other litigation and thus had reason to believe that “it was making a legitimate legal and business decision.” The unpublished decision aside, the court held that policy language established a “fairly debatable” basis for rejecting the award. NJM’s policy provided that either party may demand a trial if an arbitration award exceeds $15,000. Here, although NJM’s share of the arbitration award was less than that amount, the total award was approximately $29,000. The court therefore concluded that NJM’s refusal to accept the arbitration award, based on its total value rather than NJM’s proportionate share, was not unreasonable. (However, the court ruled that going forward, any policy references to $15,000 as the basis for rejecting an arbitration award should be interpreted to refer to the amount that the insurance company is required to pay, not to the total amount of the award).
Badiali reinforces that under New Jersey law, first-party bad faith requires a showing that “no debatable reasons existed for denial of the benefits.” The court expressly declined to adopt an approach that considers the investigation and valuation performed by the assigned claims handler in denying coverage, expressing reservations “about the potential discovery complications associated with such an approach.”