Right now, I’m preparing for a coverage trial involving aspects of both New Jersey and Massachusetts law.  I was reviewing the Unfair Claims Settlement Practices Acts (“UCSPA”) adopted in both states, and I noticed the following. 

The New Jersey version of UCSPA prohibits certain bad behavior if committed “with such frequency as to indicate a general business practice.”  This includes “[r]efusing to pay claims without conducting a reasonable investigation based upon all available information.”  It also includes “[n]ot attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”  

The Massachusetts version of UCSPA forbids carriers from behaving badly in the same ways – but it doesn’t contain the onerous requirement that the carriers’ misbehavior constitute a “general business practice.”  

I guess the industry had better lobbyists in Trenton than in Boston.  (That’s probably the only thing that’s better in Trenton than in Boston.  Oops, I shouldn’t have said that.)  

Also, while Massachusetts provides procedures for a private right of action under UCSPA (Massachusetts General Laws Ch. 93A), New Jersey does not.  In Pickett v. Lloyd’s, 131 N.J. 457, 468 (1993), however, the New Jersey Supreme Court has stated that UCSPA “declare[s] state policy.”  Therefore, as the court did in Pickett, courts may use the guidelines of UCSPA to determine whether a carrier has engaged in bad faith.  

I encourage all policyholders having difficulty with a claim to review the provisions of UCSPA for possible help.  (I also encourage all claims personnel, if they want to avoid bad faith litigation. to train themselves in the provisions of UCSPA.)

By the way, there’s a good discussion of UCSPA below the Mason-Dixon line over at the Tennessee Insurance Litigation Blog. 

 

 

Over at Settlement Perspectives, they have some good advice about working with your insurance carrier to resolve disputes.  These include: “Insurers hate surprises.  Communication is key.” 

I will add the following.  You must observe the rules of the ritual.  Insurance companies are huge bureaucracies, and like all bureaucracies, they have their sometimes arcane procedures for getting things done.  Veer away from the procedures at your own peril.  

Here’s a war story to illustrate what I mean.  A few years back, I was involved in trying to resolve a major claim.  Shortly before going into the negotiation session, I read an article in Trial Magazine about negotiating with carriers.  The article recommended not making a demand, but instead forcing the carrier to make an offer.  The gist of the article was that this novel strategy would throw the claims representative off balance, leading to a good settlement.   Armed with this brilliant piece of advice, I confidently strode to the table…and spent the next four hours arguing about who should make the first move.  I left with no resolution, although we later were able to settle.  That was stupid. 

I’ve also had a couple of first-party claims go off the rails because we didn’t strictly comply with the proof of loss requirements required by the carrier (even though not specified in the policy), such as by providing detailed schedules itemizing the amounts sought and tying them to specific policy coverages.  Was the carrier’s behavior appropriate?  That’s irrelevant.  All that matters is that by not following the (ridiculous) requirements imposed by the carrier, we gave the claims representative an excuse to delay payment.  

Don’t make things harder than they need to be.

Recently, in a major environmental insurance coverage claim, I had a carrier refuse to provide coverage based on something that it described as the “intentional acts” defense.    Since all “acts”  are intentional, an  “intentional acts” defense would mean that liability insurance coverage does not exist – for anything.  Intentional harm, of course, is generally not covered.  That’s not the same thing – one is a cause, and the other is an effect.  

The intentional harm defense was spelled out by the New Jersey Supreme Court in Voorhees v. Preferred Mutual Insurance Co., 128 N.J. 165 (1992), and SL Industries Inc. v. American Motorists Insurance Co. , 128 N.J. 188 (1992). In SL Industries, for example, the Court said that if the wrongdoer subjectively intends to cause some sort of injury, that intent will generally preclude coverage, unless the extent of the injury was improbable. If there is no intent to cause the improbable injury, the injury is deemed accidental and coverage must be provided.  The SL Court elaborated that “[a]bsent exceptional circumstances that objectively establish the insured’s intent to injure,” involving acts that are particularly reprehensible, such as sexual abuse of children in a day care center, “we will look to the insured’s subjective intent to determine intent to injure.” 

Which brings us to the strange case of Joshua Thomas.  Joshua is a diagnosed paranoid schizophrenic.  He got into a heated argument with his parents over whether he was taking his meds or not, and then jumped into a car.  While going 65 miles per hour in a 50 mile per hour zone, he apparently saw a car coming in the opposite direction, and he intentionally let go of the steering wheel.  He crossed the center line and plowed into the other car, seriously injuring William Hammer.  He told the state trooper that he “wanted to hit the other car” and that he “wanted to end it all” to get back at his parents.  Later he recanted these statements, signing an affidavit in which he claimed not to remember the statements he made to the trooper, and contending that he did not intend to hurt Hammer, only himself.

Question:  Does Joshua lose his liability coverage because he intentionally caused harm?  In affirming summary judgment for the carrier, the Appellate Division says yes: “By letting go of the wheel only after he saw the oncoming car, as opposed to driving off the road at any time before, Thomas clearly manifested an intention to injure the other motorist in the car. NJM has sufficiently demonstrated that Thomas harbored a subjective intent to cause some injury and that Hammer’s injury was an inherently probable consequence of Thomas’ conduct.”

In disregarding Joshua’s affidavit, the Court said: “Thomas’ concluding statement in his affidavit that he ‘did not intentionally injure [ ] Hammer’ and that Hammer’s ‘injuries . . . were the unintended consequences of [his] careless driving’ was the first time Thomas ever stated that he had no intention to injure Hammer. These statements are self-serving bare assertions contained in an affidavit submitted in connection with a summary judgment motion and framed in legal language. Under the circumstances of this case, these statements fail to create a genuine issue of fact.”

But from an insurance perspective, is the Court’s decision supportable?  Hard to say.  For one thing, how can a Court so breezily conclude that Joshua intended to cause harm to Hammer, when apparently Joshua was not properly taking the drugs that had been prescribed to control his mental condition?  For another, isn’t Joshua at least entitled to a trial on the question of whether he intended to cause harm, since he submitted a sworn statement (“self-serving and bare” or not) that he doesn’t remember talking with the trooper, and did not intend to injure Hammer, only himself?  Finally, the Court refers to the incident as an “automobile accident.”  If this was an “accident,” how could the harm have been intentional? 

These are not easy questions to answer. The facts of the case are horrendous, and no one wants to reward a person for nearly killing an innocent bystander.  But if the real purpose of insurance is to insure, then maybe Joshua should have been given his day in court, instead of having potential factual issues decided against him on a summary judgment motion.

The case is Hammer v. Thomas, and the full decision can be seen here.

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.

Absent a specific law or contractual provision, American courts generally follow the “American Rule,” meaning that each side pays its own legal fees.  Seems unfair that when a company buys a liability insurance policy, it still may have to hire lawyers to sue the carrier and secure the paid-for defense of an underlying action.  New Jersey addresses this problem in R. 4:42-9 (a) (6), which provides for the recovery of legal fees “[i]n an action upon a liability or indemnity policy of insurance, in favor of a successful claimant.”

Question:  Why doesn’t the rule also allow for recovery of legal fees in actions upon first-party policies, such as property insurance policies?  Answer:  It’s sort of like the origins of the Feast of the Seven Fishes.  No one really seems to know.   

In any event, the New Jersey Supreme Court has now held that the rule applies even when coverage litigation takes place out of state. The Court adopted the Appellate Division’s opinion in Myron Corp. v. Atlantic Mutual Insurance Co., 407 N.J. Super. 302 (2009). The decision allows Myron Corporation, a business-to-business personalized gift company based in Maywood, New Jersey, to recover around $160,000 in legal fees incurred battling its liability carrier, Atlantic Mutual, in federal court in Illinois.  Underlying the coverage dispute was a putative class action filed in 2003 by Stonecrafters Inc., an Illinois business that claimed Myron had blasted it with junk faxes in violation of the federal Telephone Consumer Protection Act of 1991 and Illinois consumer protection law.   Myron notified Atlantic Mutual of the claim, seeking protection under the policy’s “advertising injury” provisions. The carrier agreed to defend under a reservation of rights.

Atlantic Mutual then sued in Illinois for a declaration of no coverage.  Myron countersued in New Jersey to enforce coverage.  Game on.  Ultimately the Illinois court stayed the coverage case there on the ground that New Jersey had more significant contacts to the matter, Myron being based in New Jersey.  The parties settled, but Atlantic Mutual refused to reimburse Myron for the legal fees incurred in the Illinois coverage case. 

Under the Supreme Court’s decision, the Illinois fees were incurred as part of larger “battles in a war that Myron ultimately won” and thus “an integral part of the entire controversy over coverage.”