Foran Glennon Palandech Ponzi & Rudloff
New Jersey Supreme Court refuses to lower the standard for bad faith
Joseph Tiger and Charles Rocco
In Badiali v. New Jersey Manufacturerâ€™s Group, the insured and two pro-policyholder organizations asked the New Jersey Supreme Court to lower New Jerseyâ€™s standard for bad faith.Â Instead, the Court upheld the existing Pickett standard.Â Pickett requires an insured to show that the existence of coverage is not â€śfairly debatableâ€ť in order to prevail in a bad faith action. Â Pickett v. Lloydâ€™s, 131 N.J. 457, 473 (1993).Â The existence of coverage is â€śfairly debatableâ€ť unless the insured can establish a right to summary judgment on the substantive claim.Â Id.Â With the Courtâ€™s decision in Badiali, insurers facing bad faith actions in New Jersey will continue to benefit from the strong protection afforded by Pickett.
Factual Background.Â The bad faith action arose out from the New Jersey Manufacturerâ€™s Insurance Group (â€śNJMâ€ť)â€™s decision to dispute an arbitration award in favor of its insured, August Badiali.Â Badiali v. N.J. Mfrs. Ins. Grp., 107 A.3d 1281, 1284 (2015).Â NJM relied on a policy provision that allowed either party to dispute an arbitration award over $15,000.Â Id.Â Although the total award exceeded $15,000, NJMâ€™s individual share did not.Â Id.Â The trial court ruled that NJMâ€™s individual share was relevant, not the size of the total award. It therefore rejected NJMâ€™s decision to dispute the award.Â The appellate court affirmed.Â Id.Â After NJM paid its share of the award, Badiali filed suit against NJM, alleging that NJM acted in bad faith by disputing the award when its individual share was less than $15,000.Â Id. at 1284-5.
Prior to the close of discovery, NJM moved for summary judgment dismissing the bad faith action.Â Badiali, 107 A.3d at 1285.Â It cited an unpublished New Jersey decision in which an insurer was permitted to dispute an arbitration award based on the total amount of the award rather than the insurerâ€™s individual share.Â Id. (referencing Geiger v. N.J. Mfrs. Ins. Co., No. Aâ€“5135â€“02 (App. Div. Mar. 22, 2004)).Â NJM argued that Geigerâ€™s existence demonstrated that the decision to dispute the award was â€śfairly debatable.â€ťÂ Id. at 1285. Â Badiali argued that he was entitled to discovery to learn NJMâ€™s true basis for disputing the award.Â The trial court granted NJMâ€™s motion and the Appellate Division affirmed, stating that â€śitâ€¦ does not matter that [Badiali] was deprived of the opportunity to explore the formulation of NJM’s strategy in the prior suit in pretrial discovery in this suit.â€ťÂ Badiali v. New Jersey Mfrs. Ins. Grp., 57 A.3d 37, 40 (App. Div. 2012).Â Thus, NJMâ€™s actual basis for having disputed the award was irrelevant under Pickett.Â Badiali appealed to the New Jersey Supreme Court.
Discussion.Â Badiali argued that the Court should modify Pickett to consider the individual investigation performed by the insurer.Â Badiali Petition for Cert., pp. 15-16.Â Badiali further argued that Pickett afforded insureds essentially no protection. Â Badiali Petition at pp. 15-16.Â Two pro-policyholder organizations filed amicus briefs, likewise asking the Court to modify or overturn Pickett. Â Badiali, 107 A.3d at 1286-7.Â They argued that in practice, Pickett precluded insureds from conducting discovery in bad faith actions. Â Br. in Sup. of U. Policyholdersâ€™ Motion to Appear as Amicus Curiae and on the Merits, p. 5.Â Moreover, they claimed that courts consistently dismissed bad faith actions even when an insurer had conducted only a cursory investigation.Â Id. at pp. 6-12.Â It was suggested that insurers were relying on information obtained during litigation to justify denials that were based on only a perfunctory investigation.Â Id. at p. 16, FN3.
The New Jersey Supreme Court rejected these requests to modify Pickett.Â The Court considered the argument that the individual investigation and valuation should be considered in bad faith cases, but â€śexpress[ed] reservation about the potential discovery complications associated with such an approach…â€ťÂ Badiali, 107 A.3d at 1291.Â As such, the Court declined to modify the Pickett standard.Â Id.Â The Court then considered the facts of the case, held NJMâ€™s decision to dispute the award to be â€śfairly debatable,â€ť and affirmed the decision dismissing the bad faith action.Â Id. at 1293.
Conclusion.Â Pickett has been the law of the land in New Jersey for more than 20 years.Â The Pickett standard sets a high bar for bad faith actions against insurers.Â To prevail in a bad faith action, an insured must show that that the existence of coverage is not â€śfairly debatable.â€ťÂ With the New Jersey Supreme Courtâ€™s decision in Badiali, insurers facing bad faith actions in New Jersey will continue to benefit from the strong protection afforded by Pickett.