Got into a discussion recently with some of my policyholder counsel friends. They were lamenting the death of bad faith law in New Jersey.  When a carrier unreasonably denies or delays paying a claim, the key case is supposed to be Pickett v. Lloyd’s, 131 N.J. 457 (1993), which was written by the late Justice Daniel O’Hern, a true gentleman and scholar.  Pickett holds that carriers that fail to pay valid claims will be subject to extracontractual damages.  The problem is that many New Jersey judges (and all insurance company counsel) read Pickett so restrictively that unless you can win a summary judgment motion on the coverage issues (which is usually pretty difficult), there’s no bad faith.   This means that as long as the carrier performs a perfunctory “investigation,” it’s generally off the hook. 

But not always, and especially not in cases involving wrongful delay instead of outright denial.  (Pickett itself was a case of wrongful delay.)  Recently, down in Burlington County, Merrimack Insurance Company got stung for a $624,000 verdict, all of which was beyond the policy limits, in a case involving damage to a 108-year-old, 210-foot stone retaining wall.  (Merrimack paid in its policy limits before trial.) The facts were as follows:

Policyholder Bello’s home, which included two rental units, was damaged in a windstorm.  The storm knocked down part of the wall, which served as a barrier between the property and the Delaware River.  Merrimack initially rejected the wall-damage claim.  Months later, Merrimack’s appeals panel reversed the denial of coverage and paid Bello the policy limit of $100,750.  The problem is that, while Merrimack was “evaluating” the claim, the wall suffered further deterioration.  Bello argued that his true loss exceeded the policy limits.  He contended that Merrimack had acted in bad faith because its claim representatives knew early on that the claim should have been covered, and the payment delay allowed additional damage.  Merrimack, meanwhile, argued that the wall had been compromised before the storm due to lack of maintenance. 

Now, here’s the exact New Jersey bad faith standard as set forth in Pickett at page 481:  “[A]n insurance company may be held liable to a policyholder for bad faith in the context of paying benefits under a policy.  The scope of that duty is not to be equated with simple negligence.  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.  In either case (denial or delay), liability may be imposed  for consequential economic damages that are fairly within the contemplation of the insurance company.” 

The Bello trial took ten days.  Bello’s counsel showed how, during the lengthy claims process, deterioration in the wall caused the repair cost to go from $85,000 to $625,000, of which $425,000 was for replacement and $200,000 was to correct erosion. Meanwhile, the insurance company presented evidence from a lawyer-expert on how it had not committed bad faith in its claim-handling.  So, what the jury saw was a local resident whose property had been destroyed, pitted against the gray flannel suits from the insurance company.  Not good for Merrimack. 

The jury took two hours to come back with a 6-0 verdict against the carrier.  The trial court also awarded attorneys’ fees and costs, in excess of $230,000, as additional extra-contractual damages.  The carrier has appealed.

The Bello matter shows that, in the appropriate case – especially one involving delay rather than denial – bad faith lives in the Garden State.

Joel Garber of Voorhees, N.J. handled the case for the policyholder.