Must a policyholder win its breach-of-contract claim against a carrier before asserting a claim for bad-faith claim handling?  According to a Florida appeals court, the answer is “No.”

We argued as amicus curiae for United Policyholders, LP before the New Jersey Supreme Court on Tuesday September 9, 2014 in a case involving bad faith in the handling of a first-party property insurance claim.  The case is Badiali v. NJM Group, A-48-12.  We argued that, since the NJ Supreme Court’s decision in Pickett v. Lloyds, 131 N.J. 457 (1993), the trial courts and the Appellate Division have slowly but surely eroded the cause of action for bad-faith claim handling in New Jersey very nearly out of existence.  We asked the Court to breathe life back into the claim.

One of the problems with the way courts have been determining bad-faith claims in New Jersey arises from a statement in the Pickett case to the effect that a claimant who could not prevail as a matter of law on a motion for summary judgment on the substantive claim for coverage could not assert a claim for bad faith.  New Jersey courts have used this formulation to establish a bar to a claim for bad faith whenever the insurer disputes coverage.  The bar exists even when the carrier conducts no investigation of a claim or asserts a defense to coverage that is invalid almost to the point of absurdity.  Essentially,any debate about coverage in New Jersey raises an issue of fact that precludes an insured’s motion for summary judgment on the substantive claim and automatically results in the dismissal of the bad-faith claim, no matter how shabbily the carrier has treated its insured during the investigation and claim-handling process.  It is that sorry state of affairs that we hope to convince the New Jersey Supreme Court to rectify.

Recently, the intermediate court of appeals in Florida faced a question that comes up in New Jersey bad faith cases all the time — and that, in accordance with the description above, usually results in the dismissal of the insured’s bad-faith claim.

In contrast to the way bad faith claims are decided in New Jersey, the Florida court held that the policyholder need not establish the carrier’s breach of contract before it could maintain a cause of action for bad faith in handling the claim.

Florida has a statute that, unlike New Jersey, provides a private right of action to an insured for bad-faith failure to pay an insurance claim. (New Jersey has adopted the uniform Unfair Claim Settlement Practices Act but, because of the power of the insurance lobby in New Jersey, it does not provide a private right of action to insureds and is, therefore, routinely ignored by carriers and the courts alike.  Repeated attempts to propose legislation that would give policyholders a private right of action under the UCSPA have died in committee in the New Jersey State Senate.)  The Florida statute says: “Any person may bring a civil action against an insurer when such person is damaged . . . . [b]y . . . [the insurer’s] [n]ot attempting in good faith to settle claims when, under all the circumstances, [the insurer] could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests[.]”  § 624.155(1)(b)1., Fla. Stat. (2011).

The question that came up in the recent case before the Florida District Court of Appeal is whether establishing that the carrier had breached its insurance contract was a prerequisite to the policyholder’s assertion of a claim for bad faith denial of benefits.  In contrast to the way bad faith claims are decided in New Jersey — and in many other states that provide robust protection of insured’s against the bad faith of carriers — the court held that the policyholder need not establish the carrier’s breach of contract before it could maintain a cause of action for bad faith in handling the claim.  Instead, the policyholder need only show that the carrier was, in fact, liable to pay the claim and that the amount of the claim had been established.  The case is Cammarata v. State Farm Florida Ins. Co., No. 4D13-185 (Dist. Ct. of App., 4th DCA, September 3, 2014) (Get a copy here.)

The dispute arose from a claim for damage to the insured’s home as a result of Hurricane Wilma in 2005.  The carrier’s adjuster estimated that the cost to fix the damage was below the policy deductible and it therefore denied coverage.  The policyholder requested that the carrier participate in the appraisal process contemplated by the policy.  The policyholder’s appraiser estimated the damages at above the policy deductible.  A neutral appraiser appointed by the court valued the damage (as neutral appraisers are often wont to do) at a number between that of the insured and the insurer, but above the policy deductible.  The carrier paid the appraised amount after subtracting the deductible and the policyholder thereafter sued for the insurer’s alleged failure to settle the claim in good faith.

State Farm argued that the claim for bad faith was not ripe because the policyholder had not prevailed on a claim for breach of contract, which it argued was a prerequisite to asserting a bad-faith claim.  The trial court agreed with State Farm.  The Court of Appeal reversed.  It found that the insured need only establish the insurer’s liability for the claim and the amount of damages as a condition for asserting bad faith failure to pay; the insured need not first prevail on a breach of contract claim.  What is more, liability and damages need not be determined in litigation.  It was sufficient that the appraisal process resulted in a settlement that established the insurer’s obligation to pay more than it had offered (or, in this case, had declined to offer) when it was adjusting the claim.

In other words, an insurer’s obligation to treat its policyholder fairly and honestly in the investigation and assessment of a claim doesn’t simply evaporate because the policyholder cannot ultimately prevail on a breach of contract claim.  Years ago, the Rhode Island Supreme Court decided a case that established a standard for bad-faith claim handling that the New Jersey Supreme Court then adopted in the Pickett case.  The Rhode Island court held that an insurer would be liable for bad faith in denying a claim whenever it did not have a fairly debatable basis for the denial.  In 2002, the Rhode Island Supreme Court revisited and provided further guidance on the bad faith standard.  It held that, while a fairly debatable claim was a necessary condition for avoiding bad faith liability, it would not always be a sufficient condition.  That case is Skale v. Aetna, 799 A.2d 997 (RI 2002).

Why does this matter?  Shouldn’t a carrier be able to deny a claim for which it has a debatable basis in the facts or policy language to question coverage without always being subject to a bad faith claim?  Here is why it matters.

Lawyers who represent policyholders will immediately recognize the following scenario, particularly in cases involving very large claims — precisely the kinds of catastrophes for which policyholders buy insurance in the first place.

Shouldn’t a carrier be able to deny a claim for which it has a debatable basis in the facts or policy language to question coverage without always being subject to a bad faith claim?

A policyholder makes a claim for coverage.  Instead of actually investigating the claim, the adjuster pushes a button on a word processor and spits out a 3-page, single-spaced, “information request.”  The request contains dozens of categories of documents and information that the carrier claims to need to “evaluate” the claim.  These requests are typically so onerous and unreasonable that no one could respond to them in full.

After getting over the initial reaction — which is usually, “You’ve got to be kidding me” — policyholders will usually try to send in a response together with as much of the information as is reasonably available.  The carrier, however, can always find some request for which the response was inadequate.  So the adjuster sends out another letter, requesting either the same information or coming up with additional categories necessary for the carrier’s “investigation.”  This process can go on for many multiple rounds of requests and responses.  At some point, the carrier will send a letter that “reminds” the insured of the obligation to cooperate and that a failure to comply with that obligation can result in a denial of the claim.

This is plainly a set-up.  In New Jersey, however, it usually works.  When the policyholder eventually concludes that the carrier is never acutally going to investigate the claim in good faith or pay the claim as submitted, a lawsuit gets filed for declaratory judgment, breach of contract, and breach of the duty of good faith and fair dealing.  One of the defenses the carrier will then raise is the insured’s alleged “failure to cooperate.”  The defense is, of course, bogus.  The carrier never had any intention of paying the claim.  But, because it has raised a defense that may require discovery and the resolution of facts to determine whether or not the defense has merit, the carrier has successsfully asserted a “fairly debatable basis” for denial of the claim.  Accordingly, the policyholder’s bad faith claim is subject to dismissal on a motion for summary judgment.

This is not an unusal set of facts.  On the contrary, it is straight out of the insurance industry play book.  I have seen it employed in scores of cases, year after year, for the last twenty-five years.  So have all other policyholder lawyers.  And it is employed by all carriers.  It is as if, at some time in the late 1980s, a creative adjuster, or perhaps the adjuster’s outside lawyer, came up with the “information request” strategy and shared it with all property and liability carriers in the United States.  They have been routinely using it to delay and deny large-dollar claims ever since.

And because in New Jersey any basis for denying a claim — even a bogus one — will usually be considered “fairly debatable,” the strategy has worked to all but eliminate bad faith investigation and claim handling as a cause of action.

Something really needs to be done about it.