The New Jersey Supreme Court has released two significant insurance bad faith opinions, both in the context of uninsured motorist claims. In Badiali v. New Jersey Manufacturers Ins. Co., the Court acknowledged that an insurer’s reliance upon unpublished appellate decisions does not constitute bad faith. In Wadeer v. New Jersey Manufacturers Ins. Co., the Court recognized that res judicata precludes a claimant from pursuing a bad faith action when the insurer’s alleged bad faith was at issue in a prior coverage action. In both decisions, the Court upheld the well-established “fairly debatable” standard for determining whether an insurer’s claims handling conduct was in bad faith, rejecting arguments filed in amicus briefs that the Court should adopt broader standards of bad faith more favorable to policyholders. However, the Court directed a rules committee to consider several aspects of the New Jersey Civil Rules relevant to insurance bad faith claims. In particular, the Court suggested that the entire controversy doctrine should not preclude claimants from pursuing bad faith claims following the resolution of coverage actions.
Badiali concerns an accident in which the plaintiff was rear-ended by an uninsured motorist. The plaintiff had uninsured motorist coverage through his personal insurer and his employer’s insurer. The plaintiff brought an uninsured motorist claim that proceeded to arbitration, resulting in an award of $29,148.31, divided equally between the plaintiff’s insurer and his employer’s insurer. While the employer’s insurer paid its half of the award, the plaintiff’s insurer rejected the arbitration award and demanded a trial de novo, based upon policy language authorizing it to reject arbitration awards that in total exceed $15,000.00, the statutory minimum limit for uninsured motorist coverage in New Jersey.
The award was affirmed at trial and upheld on appeal, based upon the determination that the insurer was not entitled to a trial de novo unless its share of the arbitration award exceeded its coverage limits. The plaintiff subsequently brought a bad faith action against the insurer, which resulted in summary judgment in the defendant’s favor.
The New Jersey Supreme Court began its analysis by noting that simple negligence in denying an insurance claim is not in bad faith. Furthermore, an insurer does not act in bad faith by failing to settle a debatable claim. Rather, pursuant to Pickett v. Lloyd’s, a bad faith claim requires a showing that no debatable reasons existed for the denial of a claim.
The defendant insurer contended that its rejection of the arbitration award was in reliance upon an unreported decision of the New Jersey Superior Court, Appellate Division, in which the Court held that under the same policy language at issue here, the insurer was permitted to seek a trial de novo in a case that (as in the present case) concerned an uninsured motorist arbitration award that exceeded $15,000.00, although the insurer’s share was less than $15,000.00.
While noting that unpublished New Jersey appellate opinions are not citable authority, the Court determined that “it was illogical to suggest that [the defendant], or any corporation, cannot rely upon previous unpublished opinions—especially those in which they were specifically involved—in forming their business decisions.” The Court therefore held that the existence of the unpublished opinion demonstrated that the defendant insurer “had, at the very least, fair reason to believe that it was making a legitimate legal and business decision by rejecting the arbitration award” and demanding trial.
The Court further held that the insurer’s rejection of the arbitration award was not in bad faith even in the absence of the unpublished decision, as it was based upon a “reasonable and principled reading of the applicable policy language.” The Court also rejected the plaintiff’s argument that the insurer’s demand for a trial de novo was contrary to D’Antonio v. State Farm Mut. Auto. Ins. Co., in which the Appellate Division held that under similar policy language, an insurer’s ability to reject an underinsured motorist arbitration award is based upon the amount of the UIM carrier’s liability as determined by the arbitrators, and does not include amounts paid by the tortfeasor’s insurer. As an uninsured motorist claim, by definition, is a claim in which the tortfeasor has no insurance, the Court found that it was “not unreasonable” for the defendant insurer to conclude that D’Antonio did not apply to uninsured motorist claims.
The Court therefore affirmed the trial court’s determination that the defendant insurer did not engage in bad faith. However, the Court cautioned that going forward, policy language authorizing an insurer to reject arbitration awards in excess of $15,000.00 would only be enforceable if the insurer’s share of the award exceeded $15,000.00.
In the second case, Wadeer v. New Jersey Manufacturers Ins. Co., the defendant insurer declined a demand to settle an uninsured motorist claim for its policy limits, and subsequently rejected two arbitration awards. The uninsured motorist claim proceeded to trial, resulting in a jury verdict in excess of the UM policy limits. Determining that the insurer had not acted in bad faith, the trial court molded the verdict to the policy limits. However, pursuant to the New Jersey Rules of Civil Procedure’s Offer of Judgment rule, the trial court added attorney’s fees, costs, and interest to the award, as a consequence of the insurer’s rejection of an offer of judgment that was less than 120% of the total award. The Appellate Division affirmed the trial court’s determination that the insurer did not act in bad faith, but overturned the award of fees, costs, and interest, holding that the offer of judgment rule did not apply because the offer of judgment was not less than 120% of the awarded compensatory damages.
The policyholder then brought a bad faith action against the insurer concerning its handling of the uninsured motorist claim. The trial court granted summary judgment in the insurer’s favor, holding that the bad faith claim should have been brought in the initial action, and was therefore barred under res judicata and the entire controversy doctrine. The trial court’s decision was affirmed by the Appellate Division.
The Supreme Court determined that as the issue of bad faith was raised and fully litigated in the initial action, the second bad faith action was barred under res judicata. However, the Court declined to hold that the second bad faith action was barred under the entire controversy doctrine. Noting that acts of bad faith in the handling of uninsured motorist claims may continue throughout the course of the litigation, the Court opined that “viewing bad faith claims as separate and distinct actions promotes judicial efficiency and economy.” The Court referred New Jersey’s rule regarding the entire controversy doctrine (R. 4:30A) to its Civil Practice Committee for review.
The Court also observed that as currently written, the Offer of Judgment rule provides little incentive for UM/UIM insurers to settle, given the fact that UM/UIM verdicts are ordinarily molded to the defendant insurer’s policy limits. The Court therefore also referred the Offer of Judgment rule (R. 4:58-2) to its Civil Practice Committee for consideration of an amendment addressing this issue. Finally, the Court referred the New Jersey civil rule providing for an award of attorney’s fees in favor of successful third-party insurance claimants (R. 4:42-9(a)(6)) to the Civil Practice Committee for consideration of whether the rule should be amended to allow a fee award for first-party claimants.
In holding that reliance upon an unpublished appellate court decision is not bad faith and confirming that claimants whose bad faith claims fail in an initial litigation are not entitled to a second bite at the apple, Badiali and Wadeer are positive developments for New Jersey insurers. However, Wadeer raises the prospect of several amendments to the New Jersey Civil Rules that may expose insurers to additional extra-contractual liability for insurance claims handling.