A recent case illustrates that proving insurer bad faith in New Jersey will take a back seat to the resolution of the coverage issue.  By way of background, a cause of action for bad faith in first party coverage actions was first recognized in New Jersey in 1993. See Pickett v Lloyd, 131 N.J. 457 (1993) At that time, the New Jersey Supreme Court held that bad faith would be found where the basis for the insurer’s denial was determined by a court to be not even “fairly debatabl

If bad faith is established, an insured can recover consequential damages from an insurance company that extend beyond what the policy may provide, and can also recover punitive damages.  These consequential damages can include interest payments on loans taken by insureds to pay bills that should have been paid by the insurance company with the policy proceeds and even damages caused by the insured’s inability to operate its business because timely payment of benefits under the policy had not been made.

The resolution of the bad faith issue will not occur quickly, however.  Indeed, significant activity may need to occur in the litigation before the bad faith issues will even be addressed. For example, the New Jersey Supreme Court clarified this year that an insured must prevail on the substantive claim for coverage as a matter of law before being able to establish bad faith under the “fairly debatable” standard.  Badiali v. New Jersey Manufacturers Insurance Group, 220 N.J. 544 (2015).

In another case just decided by an appellate court in New Jersey, Alden Leeds, Inc v. QBE Specialty Insurance Company, et al (A-2034-14T1), the court applied Pickett and Badiali to hold that pretrial discovery on the issue of bad faith should await the determination of whether the insured is entitled to prevail on the substantive claim for coverage.  In doing so, it vacated a trial court ruling requiring the carrier to provide documents to the insured which the insurance company contended were privileged.

While pursuing a bad faith claim is often warranted and can be of enormous benefit to an insured, there are significant hurdles and costs. Understanding those hurdles and costs can best lead to the successful pursuit of a bad faith claim.

Questions? Let Mitchell know.

Mitchell Kizner is a New Jersey focused attorney in Flaster Greenberg PC’s Litigation and Environmental Law departments. He represents clients in insurance, environmental, construction and other commercial matters as part of his active litigation and commercial law practice. He is also General Counsel to the firm. He can be reached at mitchell.kizner@flastergreenberg.com or 856.382.2247.