New Jersey Federal Court Allows Bad Faith Claim in Superstorm Sandy Case and Finds State Consumer Fraud Act Applies to Payment of Insurance Benefits
In February 2015, the U.S. District Court for the District of New Jersey refused to dismiss a homeowner’s claim against her insurer for breach of the implied covenant of good faith and fair dealing, finding that the question of whether the coverage decision was “fairly debatable” was a fact-specific inquiry requiring further discovery. The Court also followed the U.S. Court of Appeals for the Third Circuit in predicting that the New Jersey Supreme Court would find that the New Jersey Consumer Fraud Act (“CFA”) applies to the payment of insurance benefits and, therefore, denied the insurer’s motion to dismiss the homeowner’s CFA claim. Bannon v. Allstate Ins. Co., No. 14-1229(FLW) (LHG) (D.N.J. Feb. 24, 2015).
In her Second Amended Complaint, plaintiff Susanne Bannon (“Plaintiff”)
alleged that defendant Allstate Insurance Co. (“Allstate”) wrongfully denied coverage and underpaid for damage to her home caused by Superstorm Sandy. Allstate moved to dismiss Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing, arguing that there can be no claim against an insurer for bad-faith refusal to pay when “the claims decision is ‘fairly debatable.’” Allstate further moved to dismiss Plaintiff’s claim for violation of the CFA, citing a long line of New Jersey cases holding that the CFA does not apply to the payment of insurance benefits.
In addressing Allstate’s motion to dismiss the “bad faith” claim, the Court found that “the question of whether the claim is ‘fairly debatable’ is, clearly, a fact-specific question.” Moreover, the Court noted that it was not obvious from the face of the Second Amended Complaint that Allstate’s denial of coverage for alleged wind damage was “fairly debatable.” Accordingly, the Court concluded that the Second Amended Complaint stated “sufficient facts to permit the claim to go forward” and denied Allstate’s motion.
With respect to the CFA claim, Plaintiff argued that the cases upon which Allstate relied have been called into question by more recent New Jersey Supreme Court and Third Circuit decisions. The Court agreed, noting that, in Lemelledo v. Benefit Mgmt. Corp., 696 A.2d 546, 551 (N.J. 1997), the New Jersey Supreme Court found that the CFA encompasses “the sale of insurance policies as goods and services that are marketed to consumers,” and specifically declined to rule on the validity of lower court decisions finding that the payment of insurance benefits is not subject to the CFA. The Court further recognized that, in Weiss v. First Unum Life Ins. Co., 482 F.3d 254, 266 (3d Cir. 2007), the Third Circuit “overturned a District Court decision finding that the CFA did not apply to an alleged scheme to defraud insureds of their benefits” and that District of New Jersey judges have since followed Weiss in declining to dismiss insurance payment claims based on the CFA. Although the New Jersey Appellate Division has continued to hold that the payment of insurance benefits is not subject to the CFA, the Court “follow[ed] the Third Circuit’s lead by predicting that the New Jersey Supreme Court would find that the . . . CFA applies to the payment of insurance benefits.” As a result, the Court denied Allstate’s motion to dismiss Plaintiff’s CFA claim.