In a case of first impression, New Jersey's highest court has determined that policyholders' bad-faith claims against their insurance company for failure to settle within policy limits are traditional contract claims that give insureds the right to a trial by jury.  Wood v. New Jersey Manufacturers Insurance Co., No. A-44-10, 2011 WL 2314954 (N.J. June 14, 2011).  For a complete copy of the decision click, here.

"Fundamentally, and regardless of how it is couched or what label is affixed to it, a Rova Farms bad-faith claim is and always has been a breach-of-contract claim, and it is beyond question that a breach-of-contract claim was at common law and remains today an action triable to a jury,” the court said in the unanimous decision.

A Rova Farms claim stems from Rova Farms Resort v. Investors Insurance Company of America, 65 N.J. 474 (N.J. 1974).  In that case, the state Supreme Court held that an insurer's bad-faith failure to settle a claim within policy limits can render the carrier liable for the entire judgment, including that in excess of the policy limits.  For a complete copy of the decision click, here.

Parties off by $150,000

The dispute began in March 2001, when letter carrier Karen Wood was attacked by a dog while delivering mail in a Shrewsbury, N.J., housing development. She said she had to have multiple back and neck surgeries.

Wood filed suit in the Monmouth County Superior Court against the housing association, the dog's owner and the owner of the unit where the dog lived.

The dog owner and unit owner were insured under a policy issued by New Jersey Manufacturers Insurance Co. (“NJM”) with a coverage limit of $500,000.

Following nonbinding arbitration, an arbitrator set Wood's total damages at $600,000, finding the unit owner 90 percent responsible and the association 10 percent responsible.

New Jersey Manufacturers disagreed and requested a jury trial.  Before trial NJM offered Wood $300,000 to settle, which she rejected and requested $450,000.

Insured on the hook for $1.4 million

The jury found the unit owner and the association negligent in preventing the attack; it assigned 51 percent liability to the owner and 49 percent to the association.

The jury awarded more than $2.4 million, including $1.4 million against the unit owner, NJM's insured.

NJM subsequently paid Wood its policy limit of $500,000.Wood sued the insurer for bad faith in the Superior Court and sought the entire excess judgment.

The trial judge granted Wood's request for summary judgment, agreeing that NJM had acted in bad faith when it failed to offer more than $300,000 to settle the case.

The insurance company appealed.

Trial court failed to consider all factors

Saying the trial court “acted too swiftly,” the Superior Court Appellate Division vacated the summary judgment order and remanded the bad-faith claims for trial or plenary hearing.

The three-judge appellate panel pointed out that the jury's $1.4 million award against the unit owner greatly exceeded the NJM policy's $500,000 limit and that Wood had offered to settle for less, but it said a failure to settle does not always constitute bad faith.

Citing Rova Farms, the panel said other factors must be considered, including:

  • The range of foreseeable verdicts.
  • The strengths and weaknesses of each side's evidence.
  • Prior verdicts.

The court added that there were “countervailing factors” that supported NJM's failure to increase its settlement, such as Wood's credibility, the dispute over causation and the association's responsibility for the dog attack.  The appeals court also noted that the arbitrator's $600,000 award, if split with the association, equaled NJM's $300,000 settlement offer. Unsure of whether the case should be heard by a judge or jury, the appeals court said the trial court should determine the appropriate finder of fact.

'Label' doesn't determine whether jury trial attaches

Here, the New Jersey Supreme Court granted Wood's request for certification.

Wood had argued that NJM has no right to a jury trial against a Rova Farms claim. She said such a claim sounds in strict liability and involves issues that fall outside the scope of knowledge possessed by an average juror.

She had couched her claim as one seeking declaratory judgment.

“The determination of whether a jury trial attaches to a plaintiff's cause of action cannot be driven by the label a party affixes to its pleading; it is the obligation of the judiciary to transcend superficialities and reach the substance of what is alleged and sought,” the high court said.  It added that not every Rova Farms bad-faith suit must be tried by a jury. Parties can waive the right to a jury trial by declining to demand a jury or consenting to a trial without a jury at a later date, the court said.