Bad Faith Suit Requires Bifurcation
When an insurance claim is denied the person seeking benefits will usually get upset and seek redress from the courts and a bonus of tort and punitive damages. They also try to obtain evidence from the insurer in the breach of contract suit that will hep prove the tort action. Courts are compelled to do justice and protect both sides.
The U.S. District Court, District of New Jersey, was faced with such a problem in Abiona v. GEICO Indemnity Company, Slip Copy, United States District Court, D. New Jersey, 2016 WL 1046791 (03/16/2016) and found a method to do justice for both sides. Although a relatively small dollar amount involved in the contract action the court’s decision resolves some important issues faced by insurers sued for bad faith.
Abiona asserts that his car insurance provider, Geico Indemnity Company, wrongfully denied him under-insured motorist (UIM) coverage under the parties’ insurance policy.
Presently before the Court is Geico’s Motion to Dismiss, which asserts: (1) this Court’s lack of subject matter jurisdiction for failure to exceed the statutory minimum amount in controversy; and (2) failure to state claims for common law bad faith denial of insurance coverage, and violation of the New Jersey Consumer Fraud Act.
Geico asked the Court to stay and sever the bad faith and consumer fraud claims pending the disposition of Abiona’s claim for breach of the insurance contract.
In March, 2014, Abiona was involved in a car accident in Manhattan, New York. Allegedly, the driver of the other car suddenly, and “at a relatively high rate of speed,” pulled out from the right parking lane, merged into Abiona’s lane, and struck Abiona’s vehicle. Abiona alleges he suffered “severe” injuries to his neck and back as a result of the accident.
It is undisputed, at least for purposes of this motion, that the other driver’s insurance company conceded liability and paid out the policy limit for bodily injury coverage, which was $25,000.
Abiona contends that $25,000 does not cover all of the costs associated with treating his injuries. He asserts that, in addition to epidural steroid and facet block injections, he “require[s] [a] surgical procedure in the future to attempt to eliminate the cause of [his] constant back pain.”
Accordingly, Abiona alleges that he made a claim on his own underinsured motorist policy with Geico. Geico allegedly “completely den[ied] [Abiona] UIM benefits.” Abiona further asserts that Geico has acted in bad faith by declining to participate in non-mandatory binding arbitration and “failing to present [Abiona] with a good faith offer to settle [his] claim,” despite Abiona’s submission of extensive medical documentation supporting his claim that his injuries are severe and permanent. Most notably, such documentation allegedly “include[s] an IME report by [Geico’s] chosen medical professional, Dr. Solomon, who opines that [Abiona] is a surgical candidate from the injuries sustained by this accident if the epidural injection therapy does not resolve the significant pain from the herniated lumbar disc caused by this accident.”
A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. If a complaint is subject to dismissal, a district court must permit a curative amendment unless such an amendment would be inequitable or futile.
Amount in Controversy
Geico’s jurisdictional argument is based on relatively simple arithmetic: Abiona’s policy limit with Geico is undisputedly $100,000; he has been paid $25,000 from the other driver’s insurer; therefore the amount in controversy is $75,000. This amount, of course, does not “exceed” $75,000; thus, according to Geico, this Court lacks subject matter jurisdiction over this suit.
The argument, however, is dependent on Geico successfully obtaining dismissal of the other two claims asserted. If Abiona could possibly recover just one cent in additional damages associated with those other claims, this Court cannot hold with legal certainty that the amount in controversy does not exceed $75,000.
Count 2-Common Law Bad Faith Denial of Insurance Benefits
In a case of denial of insurance benefits, bad faith is established by showing that no debatable grounds existed for the denial of benefits. To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.The lack of a reasonable basis may be inferred where there is a reckless indifference to facts or proofs submitted by the insured.
The Complaint’s allegation that Geico’s own IME opined that “if [Abiona] fails conservative therapy … he could be a surgical candidate” nudges the assertion that Geico recklessly disregarded the lack of a reasonable basis for denying Abiona’s claim “’across the line from conceivable to plausible.
As a result the Court held that the Complaint adequately states a bad faith claim and Geico’s motion in this regard was denied.
Amount in Controversy
Consequential and punitive damages are available for bad faith claims under New Jersey law. Those potential damages, added to the $75,000 of potential damages associated with the breach of contract claim carry the amount in controversy over the statutory threshold of $75,000.
The Court held that the diversity statute authorizes the exercise of subject matter jurisdiction over this suit. Geico’s jurisdictional motion was, as a result, denied. The prevailing practice in both state and federal court is to sever breach of insurance contract claims from bad faith claims, and to proceed with the contract claim before turning to the bad faith claim (if still necessary after adjudicating the contract claim).
Severance of a bad faith claim will often be desirable because, as courts have recognized, there is real potential for prejudice to the insurer should it be required to produce its claim file prematurely. Such premature discovery may also jeopardize the insurer’s defense of the UM or UIM claim by the disclosure of potentially privileged materials.
Indeed, in this case Geico asserts that it will suffer prejudice absent severance. In response, Abiona merely argues that interests of judicial economy weigh against severance— an argument that is undermined by much of the above-cited case law.
The Court concluded that the interests of judicial economy, as well as the avoidance of prejudice to Geico, weigh in favor of severing Counts 2 and 3 (if Abiona successfully amends Count 3) from Count 1. Geico’s Motion to Stay and Sever Counts 2 and 3 pending resolution of Count 1 was granted.
A bad faith claim usually cannot proceed if the insured fails to prove the insurer breached the contract and did so without a fairly debatable reason for breaching the contract or a genuine dispute between the insurer and its insured. In this case, therefore, Abiona must first prove that he was entitled to UIM benefits and that Geico refused to pay those benefits without good or reasonable cause and then the second part of the bifurcated case can be tried. If there was no unreasonable breach of contract there is no reason to proceed to the second part of the trial.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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