When "Fairly Debatable" Is Good Enough: New Jersey Supreme Court Affirms "Fairly Debatable" Standard for Insurance Bad Faith Claims

When "Fairly Debatable" Is Good Enough: New Jersey Supreme Court Affirms "Fairly Debatable" Standard for Insurance Bad Faith Claims


Two decisions from the New Jersey Supreme Court have affirmed that there can be no liability for bad faith in cases where an insurer’s actions in denying a claim are deemed "fairly debatable." While these decisions show a reluctance by one court to erode the level of conduct required to support a bad faith claim, policyholder attorneys continue to seek to reduce the standard by which bad faith claims are judged. Insurers must be vigilant in defending bad faith claims to make sure that the court applies the appropriate standard.

The two cases, Badiali v. N.J. Mfrs. Ins. Grp and Wadeer v. N.J. Mfrs. Ins. Co, illustrate how policyholders routinely try to pursue bad faith cases based on conduct that falls far short of the standard. While the rulings, issued on February 18, 2015, are a positive development for the insurance industry, the insurer in these cases had to persist through many levels of court challenges to maintain the standard.

In Badiali, the plaintiff, who had both personal coverage through New Jersey Manufacturers ("NJM") and an employer’s policy, filed a UM claim and obtained an arbitration award of $29,148.62. NJM and the employer’s insurer were statutorily obligated to split the award, so NJM owed $14,574.31. NJM disputed its share of the award based on language in its policy that permitted it to dispute an award in which the total amount exceeded $15,000, and demanded a trial de novo. The trial court determined that NJM was liable for $14,574.31, which decision was upheld on appeal. The plaintiff then brought a second claim against NJM for bad faith and consumer fraud. The trial court granted a motion for summary judgment on all counts in favor of NJM, even before discovery was completed, based on an unpublished decision (also involving NJM) from the Appellate Division that NJM acknowledged lacked precedential value but which it argued gave it a "fairly debatable" reason to reject the arbitration award. The Appellate Division affirmed the grant of summary judgment, and the Supreme Court granted plaintiff’s petition for certification.

The Supreme Court ruled that it was reasonable for NJM to rely on an Appellate Division opinion in which it was involved, even though that opinion did not have precedential authority. The Supreme Court further ruled that, even without the unpublished Appellate Division opinion, the language of the policy provided NJM with a rational reason to reject the arbitration award. With two "fairly debatable" reasons for its actions, the Supreme Court ruled that the granting of summary judgment in favor of NJM was appropriate. The Supreme Court also noted, however, that going forward any reference in an insurance policy to a financial threshold for rejecting an arbitration award would apply only to the amount that the insurance company is required to pay, not to the overall award. The Supreme Court articulated that part of its duty was to eliminate "fairly debatable" scenarios once they are identified.

In Wadeer, the plaintiff was injured in a motor vehicle accident after attempting to avoid an unidentified vehicle. Plaintiff filed a UM claim against NJM with whom he had a policy that included $100,000 in UM coverage. A private arbitrator determined that plaintiff was 30 percent liable for the accident and gave plaintiff a net award of $87,500. NJM rejected the award. A mandatory, non-binding arbitration determined that plaintiff was 50 percent liable and gave him a net award of $162,500, which NJM refused. Plaintiff made an offer of judgment of $95,000, which NJM refused. A jury determined that the phantom vehicle was 100 percent at fault and awarded plaintiff $222,175. Plaintiff sought to have the entire amount of the verdict imposed, notwithstanding the $100,000 policy limit. Plaintiff argued that the entire amount should be entered because NJM acted in bad faith, even though no bad faith claim had been formally filed. The trial judge ruled that NJM did not act in bad faith because it had "fairly debatable" reasons for not making a settlement offer or settling the matter in a timely manner. The Appellate Division affirmed the molded verdict.

Plaintiff then filed a separate suit against NJM for bad faith. NJM moved for summary judgment arguing that plaintiff’s bad faith claim was barred by the entire controversy doctrine, res judicata or collateral estoppel. The trial court granted summary judgment to NJM, and the Appellate Division affirmed. The Supreme Court affirmed, ruling that plaintiff’s claim was barred by res judicata because the issue of whether NJM’s actions were "fairly debatable" was raised, fairly litigated and determined in the context of plaintiff’s motion to enter the entire verdict in the first case.

For more information on these cases and the implications for the insurance industry, please contact the author, Matthew M. Haar, at 717.257.7508, or the attorney at the firm with whom you are regularly in contact.

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