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A Viable Bad Faith Argument Comes To NJ
Law360, New York (August 07, 2012, 1:45 PM ET) -- This author has recently described two major
decisions in which the court held that a property insurer acted in bad faith. See Insurance Law 360, May
21, 2012, and July 16, 2012.
Bello v. Merrimack Mutual Fire Ins. Co., No. A-4750-10T4 (N.J.App. Div. July 12, 2012) is the third leg of
this trilogy. This decision is important in and of itself. Moreover, New Jersey has been one of the most
difficult states for a policyholder to convince a court that the insurer had acted in bad faith, with only a
single reported decision. Pickett v. Lloyds, 131 N.J. 457 (1993).
In Bello, the insurer argued that it had a reasonable defense to coverage, and that it reversed its denial
and admitted coverage during the administrative review process. Neither the jury, the trial judge nor the
New Jersey Superior Court Appellate Division found these arguments convincing.
Bello, the insured, asserted that both his roof and a retaining wall on his property had suffered damage
because of a violent windstorm on March 8, 2008. The homeowner's insurance policy limited coverage
for the retaining wall to $100,750.
Merrimack sent an adjuster, Thomas Cusack, to review the claim. Cusack allowed the roof claim, and
sent an engineering firm to assess the retainer wall. That firm sent Daniel Seeley, who was not an
engineer. His report basically found that years of neglect had "inherently weakened the wall, and that
[t]he stone masonry wall would not have fallen if the overall integrity was not compromised prior to any
high wind condition[s]."
On May 15, 2008, Cusack denied coverage for Bello’s claim with respect to the wall. Bello challenged the
denial, and spoke to David Wilson, a claims examiner at Merrimack’s parent company. By letter dated
June 12, 2008, Wilson reiterated Cusack’s initial denial.
However, Wilson had reviewed the claim in a May 20 memo. In the memo, he acknowledged that Seeley
was not an engineer, and that the engineering firm’s report identified wind as a factor in the loss. He
conceded that there was a covered loss because of the wind damage. He later testified that he planned
to have an engineer re-inspect the damage.
However, his admission of a covered loss in May 20 did not prevent him from denying the claim on June
12. This was the basis for the bad faith found by the jury and affirmed by the Appellate Division. The fact
that Merrimack did reverse its decision and accept coverage did not cure the prior bad faith.
The Appellate Division, relying on Pickett, reiterated that every contract carried with it a covenant of
good faith and fair dealing. An insurance company violated that covenant when it had no valid reason to
delay processing a claim and knew or "recklessly disregarded that it had no reasonable basis for denying
the claim." The Appellate Division found no reversible error in the jury’s finding of bad faith.
Bad faith is expensive for insurers. When Merrimack admitted coverage, it tendered a check for
$100,750, the policy limit. The jury awarded $624,023.20, with no setoff for Merrimack’s prior payment.
The court then awarded attorneys’ fees of $195,583.34, and costs of $31,346.41.
The fee award must be considered as consequential damages arising from bad faith, since New Jersey
normally only awards attorney’s fees to a successful claimant on a liability policy, and not a property
policy.
What are the take-aways from these three bad faith decisions?
First and most basic, insurance companies do commit bad faith, and policyholders must be sensitive to
this issue.
Second, if the policyholder believes that she has a valid claim, she should not accept "claim denied" as a
final answer.
Third, take discovery from the insurer, and contest insurers’ claims of privilege. Insurance companies
normally deny discovery of internal claims-handling documents. For the policyholder, those documents
are gold. Without the Wilson memo, Bello could not have demonstrated bad faith.
Finally, these three cases demonstrate that bad faith is now a viable argument. In most cases, insurance
companies do not commit bad faith and legitimately pay claims. However, if your claim is the one
incorrectly denied, you must consider bad faith as a possible claim.
--By Robert D. Chesler and Michael D. Lichtenstein, Lowenstein Sandler PC
Bob Chesler and Michael Lichtenstein are members of the firm in Lowenstein's Roseland, N.J., office.
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.
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