In New York, bad faith requires a "gross disregard" of the insured's interests, and a deliberate or reckless failure to "place on equal footing the interests of its insured with its own interests when considering a settlement offer." Selective Ins. Co. of Am. v. Cty. of Rensselaer, 26 N.Y.3d 649, 657 (2016). Bad faith cannot stand as a distinct tort cause of action. However, bad faith allegations may form the basis for a claim for consequential damages beyond the limits of the policy. Meegan v. Progressive Ins. Co., 838 N.Y.S.2d 748, 755 (2007).

At the pleading stage, New York courts hesitate to dismiss claims for bad faith in UIM/UM cases where a complaint contains sufficient factual allegations and supports enough reasonable inferences to sustain a claim for consequential damages. See, e.g., Dubovaya v. Gov't Employees Ins. Co., 63 N.Y.S.3d 305 (N.Y. Sup. Ct. 2017) (denying insurer's motion to dismiss where insured sufficiently alleged insurer improperly denied coverage). Discovery may be required prior to dismissing a bad faith claim in the UIM/UM context. See, e.g. Medina v. State Farm Mut. Auto. Ins. Co., 757 N.Y.S.2d 178, 180 (2003) (summary judgment on bad faith claims premature; discovery regarding insurer's practices and procedures was necessary prior to determination of bad faith). Importantly, however, New York courts have dismissed bad faith claims in UIM/UM coverage cases where insurers thoroughly investigated the claims prior to denying coverage. Jonas v. New York Cent. Mut. Fire Ins. Co., 665 N.Y.S.2d 189, 191 (1997) (reversing lower court's denial of insurer's motion for summary judgment, where evidence showed insurer reviewed police report and interviewed witnesses prior to denying coverage).

In contrast, New Jersey courts apply a less stringent standard than New York for pleading bad faith. An insured must plead, and ultimately prove, an absence of a reasonable basis for denying policy benefits and the insurer's knowledge or reckless disregard of the lack of a reasonable basis for denying coverage. Wadeer v. New Jersey Mfrs. Ins. Co., 220 N.J. 591, 604 (2015). Bad faith also can be shown by pleading and proving that the insurer breached its fiduciary obligations, regardless of any malice or ill will. Badiali v. New Jersey Mfrs. Ins. Grp., 220 N.J. 544, 554 (2015).

Beyond the pleading stage, when determining whether a bad faith claim is viable, New Jersey follows a "fairly debatable" standard, which requires an insured to establish its right to summary judgment on its bad faith claim. Pickett v. Lloyd's, 131 N.J. 457 (1993). In Pickett, the New Jersey Supreme Court held that the insured carries the burden of establishing bad faith by showing that no debatable reasons exist for the denial of coverage. The Court ultimately affirmed the lower court's judgment against the insurer after a jury trial, which found that the insurer's failure to handle a claim for four months after an accident demonstrated bad faith.

In contrast, New Jersey courts have held that there is no bad faith where an insurer's interpretation of a policy is fairly debatable. See, e.g.,Villa Enterprises Mgmt. Ltd. v. Fed. Ins. Co., 360 N.J. Super. 166, 188 (Law. Div. 2002)(dismissing bad faith claims in a summary declaration of rights). Under that standard, courts have dismissed bad faith claims raised with UIM/UM coverage claims where the insurer was deemed to have had a valid reason to deny benefits or delay processing the claim. See, e.g., Williams v. State Farm Indem. Co., No. A-4460-06T1, 2009 WL 112753, at *2 (affirming dismissal of insured's post-trial motion claiming bad faith; denial of coverage based on police reports and accident reconstruction report provided a valid, debatable reason for insurer's action). Contrast Price v. New Jersey Mfrs. Ins. Co., 368 N.J. Super. 356, 365 (App. Div. 2004)(insurer acted in bad faith in failing to explain to insured that uninsured motorist claim is properly submitted through a written demand for arbitration and instead communicated with the insured for six years, misleading insured into believing that a proper claim was submitted; insurer's conduct held to equitably toll applicable statute of limitations, permitting insured to file an arbitration claim). Notably, there are limited examples of New Jersey courts ruling favorably for insureds on bad faith claims in UIM/UM coverage cases, perhaps evidencing that despite the relaxed pleading standard for such claims under New Jersey law, New Jersey courts generally are not receptive to such claims in that context.

Given this case law, carriers are more likely to avoid bad faith claims in New York and New Jersey by ensuring that their investigations into UIM/UM coverage claims are completed promptly and are well-documented, including consideration of all information presented. Further, thorough, well-documented coverage analyses outlining the bases for the carrier's coverage position (including recitation of the facts on which the insurer relied and the policy language bases for any denial of coverage), as well as timely and detailed communication to the claimant regarding the carrier's position, is critical.

¹ Massachusetts, generally requires arbitration of UIM/UM claims. See Mass. Gen. Laws c. 175, § 111D (2020) (dictating that a UIM/UM "policy or endorsement or rider shall provide that determination as to whether the insured or his legal representative is legally entitled to recover such damages, and if so the amount thereof, shall be made by agreement between the insured or such representative and the insurer or, if they fail to agree, by arbitration."). Consequently, there is virtually no Massachusetts trial-level case law on these issues. However, insureds have been permitted to raise bad faith after arbitration, based on the insurer requiring the insured to undergo the arbitration in the first place. See, e.g., Beals v. Commercial Union Ins. Co., 61 Mass. App. Ct. 189, 194 (2004)(reversing trial court's grant of summary judgment for insurer, finding insured's decision not to include bad faith claims in complaint requesting arbitration of underinsured motorist claim did not preclude insured from pursuing such claims in a subsequent action; statutory mandate requiring insured to submit an underinsurance claim to an arbitrator was "narrow in scope and inapplicable to [the insured's] bad faith claims").

² A 2015 study found that New York had the second lowest percentage of uninsured motorists (6.1%) among states with mandatory minimum financial responsibility laws. New Jersey had a substantially higher percentage (14.9%). See Insurance Information Institute, Estimated Percentage Of Uninsured Motorists By State, 2015; https://www.iii.org/fact-statistic/facts-statistics-uninsured-motorists.

Melicent Thompson is a partner with the law firm of Gfeller Laurie, LLP. She has been practicing law for close to 25 years and has developed broad litigation experience in state and federal courts. Her insurance coverage law practice encompasses all areas of coverage advice in both the first- and third- party contexts and related litigation services, including declaratory judgment actions, defense of bad faith claims and reinsurance matters. She is an actively practicing member of the Connecticut and Georgia legal bars and may be reached at: [email protected].

Attorneys Stacey Samuel and Elizabeth O. Hoff represent insurers in coverage counseling matters in both the first- and third-party contexts as well as in all aspects of associated coverage litigation including bad faith claims. They may be reached at: [email protected] and [email protected] respectively.

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