Here’s a question that perhaps should be posed to a magician:  How can an insurance company turn an $85,000 claim (on a policy with a $100,750 applicable limit) into an $850,000 bad faith verdict?  If you’re Merrimack Mutual, apparently it’s quite easy. 

I wrote about this case some time ago when the jury verdict first came down.  The verdict has now been affirmed on appeal, and the Appellate Division’s decision is here.

Boiled down to its essence, the case involved a claim for damage for a 100-year-old retaining wall following a severe windstorm.  Merrimack sent an investigator out to inspect the damage.  The investigator did not have any background in engineering, but nevertheless concluded that the damage to the wall was not caused by the windstorm, but by faulty maintenance; specifically, vegetation that had grown around and under the wall.  Unlike the carrier, the policyholder then obtained and submitted a report from an actual engineer, certifying that the vegetation growth behind the two failed areas of the wall was “not significant,” and that the wall had been properly maintained.  The policyholder also obtained an $85,000 estimate to repair the wall, in which the contractor noted that the damage to the wall was increasing with each passing day as the two breached areas in the wall became increasingly destabilized.  This was apparently ignored by Merrimack, and the damage to the wall and the surrounding property did in fact multiply while Merrimack fiddled around with the claim.  

In an effort to get Merrimack to see the light, the policyholder filed an internal appeal.  Merrimack reversed the denial, but offered only $62,549.46, which it said was its adjuster’s estimated cost of repair ($108,813), “depreciated by 43% because of the wall’s age.”  The policyholder rejected the check and filed suit. Merrimack then moved to commence the appraisal process specified in the policy, which the Court allowed.  At the conclusion of that process, Merrimack tendered $100,750, the policy sublimit, for the damaged retaining wall.  But the policyholder then amended his complaint to include a claim for bad faith in delaying the resolution of the matter, in part arguing that due to the carrier’s delay in paying the valid claim, the wall had deteriorated further and that additional damage had resulted to the wall and his yard. 

The case went to trial on the issue of Merrimack’s bad faith. At the 10-day trial, the policyholder offered expert testimony that the 43% “depreciation” penalty imposed by the carrier had no support in the claim file or in any published standards.   The jury ultimately came back with a $624,023.20 award, representing the total estimated cost to replace the wall and landscape the policyholder’s yard, and without setoff for sums previously paid by the carrier.  (On a bad faith claim, the finder of fact is not constrained by policy limits; it can award consequential damages stemming from the carrier’s bad behavior.)   The trial judge added $195,583.34 in attorneys’ fees, and $31,346.41 in costs.

In affirming the jury verdict, the appeals court wrote:  “Although a fairly debatable claim is a necessary condition to avoid liability for bad faith, it is not always a sufficient condition.  Rather, we are satisfied that the appropriate inquiry is whether there is sufficient evidence from which reasonable minds could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable.” (Citations omitted.) 

This seems to expand upon the definition of bad faith laid out in Pickett v. Lloyd’s, 131 N.J. 457 (1993), where the Supremes wrote: “In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits. In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.” It will be interesting to see what happens if Merrimack petitions the Supremes for certification.

In any event, in the Merrimack case, the appeals court confirmed that the carrier had acted unreasonably because (A) Merrimack knew that the damage had been caused at least in part by wind and was therefore covered, yet denied the claim anyway; (B) one of the adjusters on the file had noted that the “investigator” sent out by the carrier was not an engineer, and that he (the adjuster) “did not like doing business that way”; and (C) another adjuster on the file testified that he intended to have an actual engineer re-inspect the wall damage, but did not do so prior to denying the claim a second time.

A couple of takeaways here.  First, note that this policyholder affirmatively obtained his own engineering reports and submitted them to the carrier for consideration. From a practical standpoint (as viewed by a finder of fact), that can effectively (if not procedurally) shift the burden of proof to the carrier at trial…not a bad idea.  Second, from the carrier’s perspective, what’s going on here?  You’re really going to go to the mat on a case worth $85,000, based on the report of a guy who has no engineering background?  That’s pretty dumb.  

The policyholder’s counsel on this one was Joel Garber.