Foran Glennon Palandech Ponzi & Rudloff

April 2015

New Jersey Supreme Court refuses to lower the standard for bad faith

Joseph Tiger and Charles Rocco

In Badiali v. New Jersey Manufacturer’s Group, the insured and two pro-policyholder organizations asked the New Jersey Supreme Court to lower New Jersey’s standard for bad faith.  Instead, the Court upheld the existing Pickett standard.  Pickett requires an insured to show that the existence of coverage is not “fairly debatable” in order to prevail in a bad faith action.  Pickett v. Lloyd’s, 131 N.J. 457, 473 (1993).  The existence of coverage is “fairly debatable” unless the insured can establish a right to summary judgment on the substantive claim.  Id.  With the Court’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.  The bad faith action arose out from the New Jersey Manufacturer’s Insurance Group (“NJM”)’s decision to dispute an arbitration award in favor of its insured, August Badiali.  Badiali v. N.J. Mfrs. Ins. Grp., 107 A.3d 1281, 1284 (2015).  NJM relied on a policy provision that allowed either party to dispute an arbitration award over $15,000.  Id.  Although the total award exceeded $15,000, NJM’s individual share did not.  Id.  The trial court ruled that NJM’s individual share was relevant, not the size of the total award. It therefore rejected NJM’s decision to dispute the award.  The appellate court affirmed.  Id.  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.  Id. at 1284-5.

Prior to the close of discovery, NJM moved for summary judgment dismissing the bad faith action.  Badiali, 107 A.3d at 1285.  It cited an unpublished New Jersey decision in which an insurer was permitted to dispute an arbitration award based on the total amount of the award rather than the insurer’s individual share.  Id. (referencing Geiger v. N.J. Mfrs. Ins. Co., No. A–5135–02 (App. Div. Mar. 22, 2004)).  NJM argued that Geiger’s existence demonstrated that the decision to dispute the award was “fairly debatable.”  Id. at 1285.  Badiali argued that he was entitled to discovery to learn NJM’s true basis for disputing the award.  The trial court granted NJM’s motion and the Appellate Division affirmed, stating that “it… 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.”  Badiali v. New Jersey Mfrs. Ins. Grp., 57 A.3d 37, 40 (App. Div. 2012).  Thus, NJM’s actual basis for having disputed the award was irrelevant under Pickett.  Badiali appealed to the New Jersey Supreme Court.

Discussion.  Badiali argued that the Court should modify Pickett to consider the individual investigation performed by the insurer.  Badiali Petition for Cert., pp. 15-16.  Badiali further argued that Pickett afforded insureds essentially no protection.  Badiali Petition at pp. 15-16.  Two pro-policyholder organizations filed amicus briefs, likewise asking the Court to modify or overturn Pickett.  Badiali, 107 A.3d at 1286-7.  They argued that in practice, Pickett precluded insureds from conducting discovery in bad faith actions.  Br. in Sup. of U. Policyholders’ Motion to Appear as Amicus Curiae and on the Merits, p. 5.  Moreover, they claimed that courts consistently dismissed bad faith actions even when an insurer had conducted only a cursory investigation.  Id. at pp. 6-12.  It was suggested that insurers were relying on information obtained during litigation to justify denials that were based on only a perfunctory investigation.  Id. at p. 16, FN3.

The New Jersey Supreme Court rejected these requests to modify Pickett.  The Court considered the argument that the individual investigation and valuation should be considered in bad faith cases, but “express[ed] reservation about the potential discovery complications associated with such an approach…”  Badiali, 107 A.3d at 1291.  As such, the Court declined to modify the Pickett standard.  Id.  The Court then considered the facts of the case, held NJM’s decision to dispute the award to be “fairly debatable,” and affirmed the decision dismissing the bad faith action.  Id. at 1293.

Conclusion.  Pickett has been the law of the land in New Jersey for more than 20 years.  The Pickett standard sets a high bar for bad faith actions against insurers.  To prevail in a bad faith action, an insured must show that that the existence of coverage is not “fairly debatable.”  With the New Jersey Supreme Court’s decision in Badiali, insurers facing bad faith actions in New Jersey will continue to benefit from the strong protection afforded by Pickett.