Recently, one of my friends in the insurance defense bar told me that he’d been given a very strict standing order by his insurance company client. In any case involving a potential conflict-of-laws situation, he was prohibited from EVER arguing for the application of New Jersey law.
This attitude stems from cases like the New Jersey Supreme Court’s landmark environmental insurance coverage decision in Morton Int’l, Inc. v. General Accident Ins. Co., 134 N.J. 1 (1993). There, the Court held that the so-called “sudden and accidental” pollution exclusion would not be construed as written, because insurance industry representatives had lied to New Jersey insurance regulators about its purpose and intent. (As a result, the exclusion causes a forfeiture of coverage only where the policyholder intentionally discharges a known pollutant.)
But from the policyholder side, the carriers’ fear of New Jersey befuddles me. New Jersey law is, in actuality, pretty lousy for policyholders on a lot of issues. One of those issues is bad faith.
Which brings us to the Appellate Division’s July 28, 2010 decision in Wood v. New Jersey Manufacturers’ Ins. Co. The facts are pretty simple. A mail carrier (Wood) gets mauled by a loose dog, and says she injured her back and neck in the process of trying to escape the beast’s clutches. She sues the dog’s owner (Critelli), his grandmother who owned the premises (Caruso), and the housing complex association. NJM insured Critelli and Caruso with a $500,000 limit.
By the time of trial, Wood had a worker’s compensation lien of $280,281 and NJM’s own lawyer warned the carrier that another scheduled surgery would “certainly place the non-compromisable workers’ compensation lien well into the $400,000.00 [range] and the value of the case will exceed your insured’s policy.” On top of that, Wood had lost-wage claims, which her expert pegged at $561,590. NJM’s adjuster concurred that a dismal result was likely. In nonbinding arbitration through the state court ADR program, the arbitrator issued an award of $600,000.
Despite all of this, NJM refused to settle for more than $300,000, even when plaintiff demanded only $450,000 before the case was sent to the jury.
You can guess what happened next. The jury brought back a staggering $2,422,000 verdict. The 51 percent allocated to Crittelli amounted to $1,235,220, and, with interest, resulted in a $1,408,320 judgment against him.
Is this fact pattern enough to find bad faith on the part of the carrier and require it to cover the entire verdict? No, says the Appellate Division, which reversed the trial court’s summary judgment for the policyholder on that very issue, and ruled that a searching inquiry was needed into the actual mindset of the carrier in refusing to settle. Such an inquiry would require a full-blown separate trial.
The Wood court held that the summary judgment record did not support a finding of bad faith under the landmark case of Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 483-84, 323 A.2d 495 (1974). Rova Farms requires “a consideration of all the factors bearing upon the advisability of a settlement for the protection of the insured. While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured and the witnesses at trial.”
So, under the Wood court’s interpretation of Rova Farms, forget about proving bad faith by an objective standard. If you’re a policyholder, you’d better find the smoking gun.
Mike Marone of McElroy Deutsch represents NJM. Mike’s an excellent lawyer and I’ve known him for many years. He’s quoted in the press as saying that the ruling is a good one for his client, the insurance industry and the public, and that to allow automatic liability for extracontractual verdicts would hamper insurance companies’ ability to negotiate and would cause insurance costs to skyrocket.
I disagree with Mike. When carriers start talking about “skyrocketing insurance costs hurting the public,” they generally mean that the insurance industry’s profit margin might be a little less this year if carriers are held accountable for their actions. Ignoring the advice of your appointed defense counsel and your own adjuster, and rolling the dice with your policyholder’s money, should objectively equal bad faith. The fact that there was no dissenting opinion in Wood is disturbing.