Some courts’ treatment of these claims demonstrates that insurers are best positioned to avoid common law bad faith claims by ensuring a timely and thorough investigation and documentation of claims. (Photo: Bigstock)We previously reported on a developing trend in Connecticut of underinsured/uninsured motorist (UIM/UM) coverage complaints, including claims for breach of the covenant of good faith and fair dealing (common law bad faith).
In this supplement, we discuss similar trends in New York and New Jersey. A significantly higher volume of bad faith claims exist in New Jersey UIM/UM coverage cases than in New York. This may be attributable to the general percentage of uninsured motorists in each state.
As in Connecticut, New York and New Jersey courts’ treatment of these claims demonstrates that carriers are best positioned to avoid facing common law bad faith claims in the UIM/UM context by employing procedures that ensure a timely and thorough investigation and documentation of claims and timely, clear and direct communication with claimants regarding the bases for the insurer’s coverage position. New Jersey’s “fairly debatable” standard, discussed below, is especially forgiving but not a water-tight defense to bad faith claims in the UIM/UM context.
New York claims
In New York, bad faith requires a “gross disregard” of the insured’s interests and a deliberate or reckless failure to “place on equal footing the interests of its insured with its own interests when considering a settlement offer.” Bad faith cannot stand as a distinct tort cause of action. However, bad faith allegations may form the basis for a claim for consequential damages beyond the limits of the policy.
At the pleading stage, New York courts hesitate to dismiss claims for bad faith in UIM/UM cases where a complaint contains sufficient factual allegations and supports enough reasonable inferences to sustain a claim for consequential damages. Discovery may be required prior to dismissing a bad faith claim in the UIM/UM context. Importantly, however, New York courts have dismissed bad faith claims in UIM/UM coverage cases where insurers thoroughly investigated the claims prior to denying coverage.
New Jersey claims
In contrast, New Jersey courts apply a less stringent standard than New York for pleading bad faith. An insured must plead, and ultimately prove, an absence of a reasonable basis for denying policy benefits and the insurer’s knowledge or reckless disregard of the lack of a reasonable basis for denying coverage. Bad faith also can be shown by pleading and proving that the insurer breached its fiduciary obligations, regardless of any malice or ill will.
Beyond the pleading stage, when determining whether a bad faith claim is viable, New Jersey follows a “fairly debatable” standard, which requires an insured to establish its right to summary judgment on its bad faith claim. In Pickett v. Lloyd’s, the New Jersey Supreme Court held that the insured carries the burden of establishing bad faith by showing that no debatable reasons exist for the denial of coverage. The Court ultimately affirmed the lower court’s judgment against the insurer after a jury trial, which found that the insurer’s failure to handle a claim for four months after an accident demonstrated bad faith.
In contrast, New Jersey courts have held that there is no bad faith where an insurer’s interpretation of a policy is fairly debatable. Under that standard, courts have dismissed bad faith claims raised with UIM/UM coverage claims where the insurer was deemed to have had a valid reason to deny benefits or delay processing the claim. Notably, there are limited examples of New Jersey courts ruling favorably for insureds on bad faith claims in UIM/UM coverage cases, perhaps evidencing that despite the relaxed pleading standard for such claims under New Jersey law, New Jersey courts generally are not receptive to such claims in that context.
Given this case law, carriers are more likely to avoid bad faith claims in New York and New Jersey by ensuring that their investigations into UIM/UM coverage claims are completed promptly and are well-documented, including consideration of all information presented. Further, thorough, well-documented coverage analyses outlining the bases for the carrier’s coverage position (including the recitation of the facts on which the insurer relied and the policy language bases for any denial of coverage), as well as timely and detailed communication to the claimant regarding the carrier’s position, is critical.
Melicent Thompson (pictured left) is a partner with the law firm of Gfeller Laurie, LLP. She has been practicing law for close to 25 years and has developed broad litigation experience in state and federal courts. Her insurance coverage law practice encompasses all areas of coverage advice in both the first- and third- party contexts and related litigation services, including declaratory judgment actions, defense of bad faith claims and reinsurance matters. She is an actively practicing member of the Connecticut and Georgia legal bars and may be reached at [email protected].
Attorneys Stacey Samuel (center) and Elizabeth O. Hoff (pictured right) represent insurers in coverage counseling matters in both the first- and third-party contexts as well as in all aspects of associated coverage litigation, including bad faith claims. They may be reached at [email protected] and [email protected], respectively.
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N.Y. and N.J. seeing rising bad faith claims in UIM/UM cases - PropertyCasualty360
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