Starr Gern Law Firm Obtains Key Decision Regarding Insured's Rights When a Claim is Denied or Payment is Delayed By an Insurer in Bad Faith.

September 2008

In Taddei v. State Farm Insurance Company, A-2806-06T, the Appellate Division held that the Rova Farms model for dealing with bad faith does not apply in first-party contexts. The Appellate Division remarked that there were public policy reasons on both sides of the argument about whether Rova Farms should be applied to first-party bad faith cases, but considered itself bound by New Jersey Supreme Court precedents to deny such a cause of action.

The Appellate Division rejected State Farm's argument that the offer of judgment rule provides the sole remedy available to a UM or UIM claimant who believes his or her carrier acted in bad faith in handling the claim, holding:

We can conceive of no reason to limit a UM claimant's remedy if he or she believes the insurer has acted in bad faith, to the offer of judgment rule. The existence of the rule should not bar an aggrieved insured from pursuing a meritorious claim against the insurer for breach of the covenant of good faith and fair dealing, and the ability to recover all consequential damages, and, in an exceptional and particularly egregious case, even be permitted to pursue punitive damages.

Significantly, the Appellate Division questioned whether the fairly debatable standard should apply when evaluating whether a carrier exercised good faith in handling an unliquidated bodily injury claim, quoting Skaling v. Aetna Ins. Co., 799 A. 2d. 997, 1011 (R.I. 2002) for the proposition that the fairly debatable standard may not adequately address a carrier's obligation to act reasonably in the handling of its insured's claim. Specifically, the Appellate Division in Taddei quoted the Rhode Island Supreme Court's holding:

Although we decline to abandon the fairly debatable standard and recognize that an insured is entitled to debate a claim that is fairly debatable, we are not persuaded that an insurer is relieved of its obligations to deal with its insured consistent with its implied in law obligations of good faith and fair dealing simply because the claim is fairly debatable . . . . The insurer's failure to conduct an appropriate and timely investigation may subject the insurer to bad faith liability notwithstanding the merits of the claim. Although a fairly debatable claim is a necessary condition to avoid liability for bad faith, it is not always a sufficient condition. Rather, we are satisfied that the appropriate inquiry is whether there is sufficient evidence from which reasonable minds could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonable and either knew or was conscious of the fact that its conduct was unreasonable.

The Appellate Division declined to decide whether the plaintiff's pending Superior Court action against State Farm for violations of the New Jersey Consumer Fraud Act, common law fraud, negligent misrepresentation, breach of the duty of good faith and fair dealing, and violation of the New Jersey civil RICO statute is barred by the entire controversy doctrine, holding that this issue was for the trial judge to decide. On February 13, 2008, the Honorable Peter V. Ryan stayed that action pending the Appellate Division's decision. It is anticipated that Judge Ryan will now decide a motion to dismiss filed by State Farm in due course.

Globally, the decision was significant for two reasons. First, it confirmed that when a carrier fails to act in good faith in the handling of a UM/UIM claim, a plaintiff may have a cause of action for bad faith and can recover consequential losses and possibly punitive damages, as previously held by the Supreme Court of New Jersey in Pickett v. Lloyds, 131 N.J. 457 (1993). Second, the decision of the Appellate Division called into question the propriety of utilizing the fairly debatable standard for judging the conduct of a carrier in handling UM/UIM claim. If, as the Appellate Division observed, the fairly debatable standard is a necessary but not always sufficient condition to avoid liability for bad faith, then carriers may not escape liability by simply hypothesizing a reason after the fact to justify the decisions they made in their claims handling process. Rather, under these circumstances, a plaintiff bringing a first party bad faith claim will be permitted to evaluate what a carrier actually did when they investigated, evaluated and processed the claim.

Starr, Gern, Davison & Rubin, P.C.
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Roseland, NJ 07068-1640

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