Reasonable minds may differ. Historically, New Jersey has followed the wisdom of that maxim in assessing bad faith claims. Following Pickett v. Lloyd’s in 1993, insurers have enjoyed the right to be wrong. If an insurer’s decision to disclaim coverage was “fairly debatable,” an insurer would be protected against charges of bad faith claim handling.
Recently, the “fairly debatable” standard came under attack before the New Jersey Supreme Court in Badialdi v. New Jersey Manufacturers Ins. Grp. There, an underinsured motorist proceeded to arbitration against two of his insurers and obtained an award of $29,148.62, which was to be split by the two insurers. One of the insurers rejected the arbitration award, based on a policy provision, allowing either party to dispute an arbitration award when the award exceeded $15,000. The insurer contended it was entitled to challenge the arbitration award because, while its portion of the award did not exceed the $15,000 threshold, the entire award did. The trial court and later, the Appellate Division, disagreed, and upheld the arbitration award, based on the reasoning that the $15,000 threshold applied to a carrier’s liability, not the tortfeasor’s.
The insured then filed a second action against the insurer for breach of contract and bad faith in delaying payment of the award. In defending the bad faith claim, the insurer argued its reliance on an earlier, non-binding court decision made its position “fairly debatable,” and thus shielded it from a bad faith claim. The trial court and Appellate Division agreed, ruling the existence of the earlier decision precluded a finding of bad faith. The insured then appealed to New Jersey’s top Court.
In an amicus brief filed with the Supreme Court, the “New Jersey Association for Justice” argued the Court should depart from Pickett’s “fairly debatable” standard and permit courts to scrutinize insurers’ behavior more closely during the discovery process. According to the NJAJ, the “fairly debatable” standard serves as a presumption of reasonableness during the claims handling process.
While acknowledging NJAJ’s concerns, the Court refused to dilute the “fairly debatable” standard, suggesting that intractable complications would arise if the rule were different. The court reaffirmed the “fairly debatable” standard, holding that reliance on an earlier published decision, even though flawed, shielded the insurer from a bad faith claim.
New Jersey’s insurers have the right to be wrong, provided the stand taken is “fairly debatable” on the law and existing facts. With Badialdi, New Jersey embraced what is ancient wisdom – – reasonable minds may differ without an ulterior “bad faith” motive. It is always good news when common sense and time-tested wisdom is used to resolve insurance disputes.
Thanks to Michael Gauvin for his contribution to this post.