On February 18, 2015, the Supreme Court of New Jersey issued separate opinions in two first-party, uninsured motorist cases against the same auto insurer.  Plaintiffs in both cases alleged that the insurer had acted in bad faith by forcing the insured to trial after losing an arbitration.  The insurer won both cases, on the ground that its position each time had been “fairly debatable” as a matter of law.  But New Jersey’s high court also suggested, in both cases, that aspects of the applicable law might have to change.  In the future, insurers would be well-advised not to rely on either case while handling UM claims in the Garden State.

Wadeer I

The plaintiff in Wadeer v. N.J. Manufacturers Ins. Co. (N.J., Feb. 18, 2015) lost control of his car after being cut off by a minivan that left the scene of the accident and could not be identified.  Mr. Wadeer was insured under a policy that provided $100,000 of uninsured and underinsured motorist coverage.  When the claim was submitted to arbitration under the policy’s terms, the arbitrators found the insured 30% responsible for his accident; after calculating his damages at $125,000, they awarded him 70% of that amount, or $87,500.  Exercising its rights under a policy term that permitted the parties to dispute any arbitration award over a certain amount, the insurer rejected the award and demanded a trial.

The trial court sent the parties to mandatory, non-binding arbitration, in which the insured was found to be 50% responsible for the accident, but received a net award of $162,500.  The insurer rejected that award, as well.  The plaintiff then submitted an Offer of Judgment for $95,000, pursuant to N.J. Court Rule 4:58-2, but the offer was declined.  The case went to trial, and the jury—finding that the insured bore no responsibility for the accident—awarded damages of more than $255,000.

Although his policy limit was $100,000, the insured moved to enter judgment in the full amount of the jury’s award, and he also sought prejudgment interest and attorneys’ fees.  In support of that motion, the plaintiff, who had not asserted a separate cause of action for bad faith, argued that he had nevertheless proved bad faith under New Jersey law.  Based on the arbitration awards, however, the trial court ruled that the question of plaintiff’s responsibility for the action had been “fairly debatable.”  In New Jersey, a plaintiff claiming bad faith must show that “no debatable reasons existed for the denial of benefits.”  Pickett v. Lloyd’s, 621 A.2d 445 (N.J. 1993).  Under this standard, an insurer’s actions do not amount to bad faith if the insured “could not have established … a right to summary judgment on the substantive claim.”  Id.

The court therefore reduced the jury’s verdict to conform to the $100,000 policy limit, but it also awarded an additional $93,000 for attorneys’ fees under the Offer of Judgment Rule.  On appeal, an intermediate appellate court reversed the award of attorneys’ fees, on the ground that the plaintiff’s Offer of Judgment had to be compared to the amount of the modified judgment, not the original jury award.  Under Rule 4:58-2, the difference between plaintiff’s $95,000 Offer of Judgment and the trial court’s $100,000 judgment was insufficient to trigger an award of attorneys’ fees.

Wadeer II

One year later, Mr. Wadeer brought a second lawsuit against his insurer, asserting claims for common law and statutory bad faith.  The trial court dismissed the complaint, finding that it ran afoul of the “entire controversy doctrine,” as codified in N.J. Court Rule 4:30 A.  That doctrine precludes claims that “arise from related facts or the same transaction” as a prior lawsuit.  DiTrolio v. Antiles, 662 A.2d 494 (N.J. 1995).  The Appellate Division affirmed.  Plaintiff’s appeal from that decision was taken up by New Jersey’s Supreme Court.

The Supreme Court Addresses Wadeer

The New Jersey Supreme Court gave the insurer a victory: it affirmed dismissal of the bad faith suit under the doctrine of res judicata, because the insured had asserted the same claim during the oral argument of his motion to enter judgment in the coverage action.  The victory may, however, have been a Pyrrhic one:  after finding for the insurer, the court proceeded to make clear that it believed the law should have permitted an entirely different result, and it took affirmative steps to make that happen.

First, it referred the entire controversy rule, N.J. Court Rule 4:30, for review by the court’s Civil Practice Committee.  The court explained:

Plaintiff maintains that his bad faith claim … should not have been barred by the entire controversy doctrine, because … [the insurer’s] bad faith, for the most part, came to light during the course of the underlying litigation … . We agree that barring such bad faith claims on the basis of the entire controversy doctrine is inappropriate in the UM context. …

[T]he nature of first-party bad faith claims warrants exemption from a harsh application of this rigid doctrine.  Acts of first-party bad faith in the UM context can, and often will, continue throughout the course of the underlying legal proceeds; that is, an insurance carriers’ acts of bad faith may often not cease until a verdict is returned … .

The court also took the opportunity to direct a similar review of the Offer of Judgment Rule, N.J. Court Rule 4:58-2:

[T]he rule, as currently written, does not explicitly provide whether the jury’s verdict is the trigger for the sanctions … or, conversely, whether the molded judgment [i.e., the judgment after the verdict has been modified to conform to policy limits] controls. …

“[I]n the UM/UIM context, where reduction is based not on the tortfeasor’s comparative negligence but instead on the policy limits of a given carrier, … the current construction of Rule 4:58-2 provides no incentive for such carriers to settle.  Rather, … carriers are prone to take their chances at trial where the offer of judgment is somewhat near their policy limits, because they have relatively little to lose in doing so. … [T]he aims of Rule 4:58-2 … are ill-achieved in the UM/UIM context

Finally, the court observed that, under N.J. Court Rule 4:42-9(a)(6), attorneys’ fees may be awarded “in an action upon a liability or indemnity policy … in favor of a successful claimant,” but that the rule does not apply to first-party UM/UIM claims. The court referred that issue to the Civil Practice Committee, as well.

Badiali I

The plaintiff in Badiali v. N.J. Manufacturers Ins. Group (N.J. Feb. 18, 2015), was injured when his vehicle was rear-ended by an uninsured driver.  He filed a UM claim under both his personal auto policy with NJM and his employer’s policy with another carrier.  Like Mr. Wadeer, Mr. Badiali initially arbitrated his claim and received an award of $29,148.62.  The second carrier paid one half of that award.  But because Mr. Badiali’s personal policy permitted either party to dispute any arbitration award over $15,000 (the limit of his UM/UIM coverage), the insurer rejected the arbitration and demanded a trial.  Once in court, the insured received judgment for $14,574 in a summary proceeding.

Badiali II

Like Mr. Wadeer, Mr. Badiali then sued his insurer a second time, asserting that its rejection of a $29,000 arbitration award had constituted bad faith.  In response, the insurer explained, in essence, that it had done it all before—and that its position had been upheld in an unpublished appellate court decision from 2004, Geiger v. N.J. Manufacturers Ins. Co., No. A-5135-02 (N.J. App. Div. Mar. 22, 2004).  Consequently, the insurer argued that its actions with respect to Mr. Badiali had been “fairly debatable” as a matter of law.  The trial court agreed, awarding summary judgment to the insurer, and an appellate court affirmed.

The Supreme Court Addresses Badiali

Once again, the Supreme Court ruled for the insurer:

[T]his Court has never considered whether the mere existence of an unpublished opinion will allow a party to avoid a finding of bad faith for actions taken in accordance with its holding.  In the context of the case before us, we find that it does; however, we limit our holding to the in-house, business context present here.  In our view, it is illogical to suggest that … any corporation … cannot rely on previous unpublished opinions—especially those in which they were specifically involved—in forming their business decisions.

Once again, however, the ruling was clearly issued through gritted teeth:

[W]e now hold that any reference in a policy of insurance to the statutory $15,000 policy limit as the basis for rejecting an arbitration award applies only to the amount that the insurance company is required to pay, not to the total amount of the award.  To allow that total amount … to be the determining factor … would frustrate the legislative intent of expediting resolution of smaller cases …, easing congestion in our courts, and limiting jury trials to the larger cases.

Unlike Wadeer, therefore, the Badiali decision actually changed the law.  But more change is clearly on the way.