A Lurking Danger in New Jersey’s Embrace of "Fairly Debatable" Standard for Bad Faith Claims
As reported last month, insurers took comfort when the New Jersey Supreme Court, in a pair of cases decided on the same day, reaffirmed the state’s “fairly debatable” standard for bad faith claims. So long as an insurer’s rationale for denying a claim is fairly debatable, “bad faith” is not proven or even inferred because the court later disagrees with its decision to deny coverage. But, as is the case with many wins, this victory may carry a hidden danger.
While the court refused to abandon the “fairly debatable” standard in Badialdi v NJ Manufacturers, and applied that standard in Wadeer v. NJ Manufacturers, the court referred other issues to the New Jersey Civil Practice Committee, which may have the potential to heighten exposure in the future.
The first issue is whether New Jersey Rule 4:42-9(a)(6), which permits an award of attorneys’ fees to insureds who prevail in coverage litigation against their insurer in third-party cases, should be expanded to apply to first-party claims. The second is whether court rules should be amended to allow insureds to bring a separate first-party bad faith claim against their insurers after the resolution of an underlying UM motorist claim.
The discussion of these proposed changes is still in early stages. Yet the prospect of new rules– allowing an award of attorneys’ fees in the first party cases and the prospect of separate, post UM lawsuit bad faith litigation– may pose a greater risk down the road. Judicial adherence to the reasonable “fairly debatable” standard for bad faith damages is good news. But the potential for rule changes is troubling. Dare we say the devil is truly in the details? Thanks to Mike Gauvin for his contribution to this post. Please email Dennis Wade with any questions.