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NJ Supreme Court Decision Defines the Parameters of Acceptable Precedent in Bad-Faith Claims

By Daren S. McNally, Matthew I. Gennaro, John Vieira and James Layman
November 02, 2015

For insurance attorneys and carriers alike, the decision to disclaim coverage is an invitation to enter delicate and uncertain legal territory, situated firmly between a rock and a hard place. On one side of the scale lies the potential contractual obligation to defend or indemnify the insured. On the other is the prudency of avoiding coverage obligations that were never bargained for. The crux of this dilemma arises from the insurer's heightened duty of good faith.

Implicitly written into every insurance contact by operation of law is the obligation to investigate claims with the utmost honestly and sincerity. This obligation runs deep, as reflected by the fact that unlike a typical contract, a showing that an insurer breached its contractual duty of good faith does not always necessarily require a showing of any malice or ill will. Rather, simple proof that the insurer violated its fiduciary obligations to its insured may often be sufficient to make a bad-faith claim. In that regard, nearly every jurisdiction has affixed a “fairly debatable” standard of proof to insurance bad-faith claims.

Under this standard, there must exist some reasonably ascertainable cause for belief that the disputed claim is not covered. If the decision to disclaim coverage is not determined to be a “fairly debatable” one, then the insurer may find itself liable in a tort action for bad faith. Accompanying bad-faith liability is a litany of potential costs, from counsel fees to consequential damages.

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