The Development of New Jersey Bad Faith Law

Issue 8, 2000
Lynda A. Bennett

Mealey's Litigation Report

New Jersey bad faith insurance law is relatively underdeveloped compared to most states.1 Indeed, the skyline is dominated by two Supreme Court cases.2 There is no obvious reason why New Jersey bad faith law has not progressed further. The theoretical underpinnings in both general contract and insurance law certainly exist.3 The absence of more cases on point seems to be a historical accident. In any case, the skyline has now dramatically changed with the comprehensive decision by the trial court in Princeton Gamma-Tech, Inc. v. Hartford Insurance Group [hereinafter PGT].4 The policyholder’s overwhelming triumph on bad faith in PGT has spurred increased attention to the issue, and bad faith counts have become a staple of coverage actions.

Historical Roots Of Bad Faith

The roots of bad faith law in New Jersey lie in an extraordinary series of decisions on insurance law by the state Supreme Court between 1960 and 1972. Prior to 1960, New Jersey insurance jurisprudence had teetered between two conflicting paradigms. On the one hand, courts re-affirmed that insurance policies were contracts to which general principles of contract law applied, an approach that normally aided the insurer.  On the other hand, courts recognized that insurance policies were adhesion contracts, controlled by the rules of contra proferentem; this led to liberal constructions of policy language that favored policyholders. The tension is captured in Precipio v. Insurance Co. of Pennsylvania.5

In Precipio, the Court of Errors and Appeals, then New Jersey’s highest court, affirmed a decision for the insured. On the one hand, the Court cited at length from a New York Court of Appeals case that held that an insurance contract “was a contract which, like any other contract, should be enforced according to its plain provisions.”6 Following this quote, the New Jersey Court stated that “this fully expresses the law upon the subject in general, and is in accord with our views upon it.”7 However, the Court then stated that this statement of the law “neither repeals the law that such policies are to be liberally construed to uphold the contract between the parties, nor that conditions contained in them which create forfeiture are to be construed most strongly against the insurers.”8

Precipio was then cited in the 1930s and 1940s to support both paradigms. In Vozne v. Springfield & Marine Fire Insurance Co.,9 a case decided for the insurer, the Court stated:

The policy provision is clear and unmistakable. Quite as clear and unmistakable is the existence, at the inception of the contract, of the factual contingency upon which the entire policy was, according to its terms, to be void. An insurance contract, like any other contract, should be enforced in accordance with its plain provisions. Precipio v. Insurance Company of Pennsylvania, 103 N.J.L. 589.10

In Evans v. London Assurance Corp.,11 though, the Court of Errors and Appeals affirmed a Supreme Court decision in favor of the insured. That decision cited Precipio for the proposition that “[t]he effect to be given those provisions is to be determined in the light of the law that conditions in insurance contracts which create forfeitures are to be construed most strongly against the insurer.”12

In the 1950’s, the reported decisions by the New Jersey Supreme Court tended to be opposed to the adhesion contract paradigm. In 1961, however, in two landmark cases, the New Jersey Supreme Court decisively determined that the rules of contra proferentem controlled New Jersey insurance law. The Court fully broke with earlier law and formulated a new insurance paradigm with Kievit v. Loyal Protective Life Insurance Co.13 and Mazzilli v. Accident and Casualty Insurance Co..14 In Kievit, the issue was whether the policyholder’s disability resulted “independently of all other causes” as set forth in the policy. After a detailed discussion of the facts, the Court noted that “this issue has been extensively litigated elsewhere and has resulted in many divergent expressions and holdings.”15  The Court took the opportunity to set forth a new canon of insurance policy construction:

When members of the public purchase policies of insurance they are entitled to the broad measure of protection necessary to fulfill their reasonable expectations. They should not be subjected to technical encumbrances or to hidden pitfalls and their policies should be construed liberally in their favor to the end that coverage is afforded “to the full extent that any fair interpretation will allow.” Where particular provisions, if read literally, would largely nullify the insurance, they will be severely restricted so as to enable fair fulfillment of the stated policy objective. See Richards, supra, p. 742, where the author notes that the common clause to the effect that the death or disability must result from accident “independently of all other causes” would, if taken literally, be so unreasonable and repugnant to the main purpose of the policy “that the courts construe it very strictly against the insurers, and sometimes really seem to disregard it altogether.”16

In Mazzilli, the court addressed the phrase “resident of the household” in a homeowners policy.17 The insurance company argued that the phrase unambiguously applied only to a resident living in the house, while the policyholder asserted that the phrase “is legitimately open to a broader interpretation which would qualify a member of the family as such a resident even though the same roof did not cover their heads.”18

As in Kievit the Court commenced its legal discussion with a lengthy statement of the rules that it would use to interpret the provision:

Solution of a problem of construction of an insurance policy must be approached with a well settled doctrine in mind. If the controlling language will support two meanings, one favorable to the insurer, and the other favorable to the insured, the interpretation sustaining coverage must be applied. Courts are bound to protect the insured to the full extent that any fair interpretation will allow. Kievit v. Loyal Protective Life Ins. Co., etc., 34 N.J. 475 (1961). Moreover, in evaluating the insurer’s claim as to the meaning of the language under study, courts necessarily consider whether alternative or more precise language, if used, would have put the matter beyond reasonable question; also whether judicial decisions appear in the reports attributing a more comprehensive significance to it than that contended for by the insurer.  Mahon v. American Cas. Co. of Reading, Pennsylvania, 65 N.J. Super. 148 (App. Div. 1961). Insurance contracts are unipartite in character. They are prepared by the company’s experts, men learned in the law of insurance who serve its interest in exercising their draftsmanship art. The result of their effort is given to the insured in printed form upon the payment of his premium. The circumstances long ago fathered the principle that doubts as to the existence of coverage must be resolved in favor of the insured.19

The Court found that the term “household” was ambiguous and affirmed the Appellate Division.

The following year the Court reviewed a case involving construction of a term in an automobile insurance policy.20 The Court first recognized that a policyholder is chargeable with the knowledge of the policy.21 However, the Court then noted that the concept of “good faith is the essence of insurance contracts, and this means that good faith is required of the insurer as well as of the insured. Good faith demands that the insurer deal with laymen as laymen and not as experts in the subtleties of law and underwriting.”22

Rova Farms: The Genesis Of Bad Faith

These seeds of bad faith law grew explosively in the seminal decision, Rova Farms Resort, Inc. v. Investors Insurance Co. of America.23 Rova Farms concerned an insurance company’s refusal to settle a case against its policyholder within the policy limits, thereby exposing the policyholder to liability in excess of the policy limits. Curiously, the Supreme Court had addressed this issue twice before and found on both occasions that the insurance company had a duty of good faith to its policyholder.24 Neither case, though, had the palpable impact on the way insurance companies conducted themselves in New Jersey that Rova Farms did.

Rova Farms demonstrates that, for the insurance industry, bad facts make bad law; it was a case designed to tug at the heart-strings and portray the insurance company as a villain. As a result of a diving accident, a patron of Rova Farms Resort became almost a total quadriplegic. Rova had a $50,000 liability policy with Investors, pursuant to which Investors had total control over settlement of the case. Investors appointed counsel to defend Rova in the suit that followed. Since the complaint alleged wanton and willful conduct by Rova in addition to the allegations of negligence, Rova also retained its own independent counsel. Despite repeated urging by both of the attorneys to offer to settle for the policy limit, Investors refused to increase its settlement offer above $12,500.  Investors was advised that the jury verdict could expose its policyholder to liability in excess of the policy limit, and sure enough, the verdict was for $225,000. Even during the appeal, Investors would not raise its settlement offer. Its chief defense in the coverage action was that since the plaintiff had never made a firm settlement demand of $50,000, it had no good faith obligation to make the offer on its own.  

In rejecting Investors’ position, the Court specifically referred to the revolution in insurance jurisprudence over which it had presided in the preceding fifteen years:

When Investors suggests that no conflict of interest can exist, in law, under any circumstances until there has been a formalized offer within policy limits by plaintiffs, it may be thinking of older concepts, before the emergence and development of those principles of equity, fair dealing and good faith (such as in the very cases Investors cites) which breathed new lifegiving honesty into the bare contractual relationship sometimes mentioned as existing between insured and insurer.25

The Court declared that the relationship of the insurance company to its policyholder regarding settlement is “one of inherent fiduciary obligation.”26 In Rova Farms, the Court recognized that when an insurance company faced settlement at the policy limit, it had nothing to lose by going to trial.27 The insurance company’s liability was capped in any case, leaving only the policyholder exposed. The Court established that the insurance company could not gamble on the possibility of an excess verdict when that verdict would come at the policyholder’s expense. In a classic formulation, the Court held that “the carrier can justly serve its interests and those of its insured only by treating the claim as if it alone might be liable for any verdict which may be recovered.”28

The Court recognized that enforcing such a standard was difficult. Any time an insurance company refused to settle within the policy limit it was potentially protecting itself at the risk to the policyholder. On the facts before it, the Court had little difficulty in finding that Investors had breached its duty of good faith. However, the Court recognized that much more difficult cases would arise in deciding whether the insurer had acted in good faith in refusing to settle within the policy limit.29 The Court noted that this issue was not before it, yet opined at considerable length that it may be necessary to create the rule that whenever the insurance company failed to settle within the policy limits, it would automatically be liable for any verdict in excess of the policy limit.30

Rova Farms had a monumental effect on insurance companies in New Jersey. The lack of case law interpreting Rova Farms is a tribute to its effectiveness in forcing insurers to settle within the policy limits. Insurance companies prefer to read Rova Farms narrowly, limiting an insurer’s good faith obligation to the specific circumstance of settlement within the policy limits. This is a mistake, as will be discussed more fully in the remaining two sections. Rova Farms must be reviewed in the context of Kievit, Mazzilli and Merchants; in that context, Rova Farms is not an isolated case, but rather represents an integral step along the path of re-defining the relationship between insurance company and policyholder.

Pickett And Griggs: Refining The Parameters Of Bad Faith

Following the Supreme Court’s decision in Rova Farms, the floodgate for bad faith claims did not spring open. Rather, New Jersey courts collectively seemed to agree that while insurance companies owe a duty of good faith and fair dealing to their policyholders, bad faith awards were going to be reserved to punish only the most egregious cases of insurance company misconduct where the policyholder suffered extraordinary damages. The New Jersey Supreme Court provided two key decisions to serve as the guideposts for implementing this philosophy.31 Pickett is the seminal decision where the Supreme Court firmly established the existence of an independent bad faith cause of action for non-payment of claims and adopted a “fairly debatable” standard by which to measure bad faith claims.32 The Griggs decision laid the groundwork for establishing claims handling practices that an insurance company must follow to conduct a good faith claims investigation.

Pickett v. Lloyds

In Pickett, a truck driver was involved in an accident that caused significant damage to his tractor trailer. The truck driver promptly put his first party insurer on notice of the accident and his claim. Through a series of colossal blunders, and even though all agreed that the claim should be paid, the truck driver did not receive payment for his trailer until nine months after the accident. Because his livelihood depended on use of the trailer, the truck driver suffered severe financial difficulty as a result of the insurance company’s delay in paying the claim. Accordingly, the truck driver brought a bad faith claim against the insurance company. The insurance company challenged the policyholder’s ability to pursue such a cause of action.

The Court held that a bad faith cause of action could lie against the insurance company provided that no “fairly debatable” reason existed to deny, or otherwise delay the processing of, the claim.33 However, to maintain such a cause of action, the policyholder also must demonstrate that the insurance company was actually aware that no “fairly debatable” reason existed — or simply did not care whether such a reason existed — to deny the claim:

To show a claim for bad faith, a [policyholder] must show the absence of a reasonable basis for denying benefits of the policy and the [insurance company’s] knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one. [. . .] implicit in that test is our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless [. . .] indifference to facts or to proofs submitted by the [policyholder].34

Likewise, in the case of processing delay, the Court held that “bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.”35

Perhaps in an effort to stem an onslaught of bad faith claims, the Court further explained that the “fairly debatable” standard may be viewed in the context of a summary judgment, indicating that a policyholder must demonstrate an entitlement to coverage as a matter of fact and law:

Under the “fairly debatable” standard, a [policyholder] who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad faith refusal to pay the claim.36

Moreover, the Court made clear that merely establishing a violation of the fairly debatable standard may not translate into a multi-million dollar bad faith damage award.   While not foreclosing the possibility of a punitive damage award where an insurer’s misconduct was particularly egregious, the Court found that in most cases the policyholder’s recovery would be limited to only those damages that naturally and foreseeably resulted from the insurance company’s breach of its duty of good faith and fair dealing.37 Thus, in the case of Pickett’s claim, the Court held that the truck driver was clearly entitled to damages for any lost income directly attributable to the loss of his truck, but the Court seemed uncomfortable with the evidence offered — or lack thereof — to substantiate those damages.38 Accordingly, the Court admonished:

In future cases, courts should carefully scrutinize the proofs of extra-contractual damages to insure that juries are not given potentially misleading items of evidence, such as Pickett’s withdrawal from pension funds. These withdrawals may have been used for unrelated needs, such as house repairs.   Such withdrawals should only be admissible to the extent that they are connected with the provable losses that were fairly within the contemplation of the insurance company when it made its breach of good faith in processing the claim.39

Griggs v. Bertram

Although not framed as a classic bad faith cause of action, the Griggs case was also significant because it prompted the Supreme Court to establish certain benchmark claims handling practices that an insurance company must follow to conduct a claims investigation in good faith. In Griggs, a teenage boy was involved in a fight with another minor. Expecting to be sued for the injuries suffered by the minor, the teenager placed his insurance company on notice of the potential claim. Thereafter, the teenager received notice of an actual claim and, more than a year later was served with a personal injury lawsuit. The teenager kept his insurance company informed of these events as they occurred.

During the 17 months between receiving notice of the potential claim and service of the lawsuit, the insurance company conducted a half-hearted claims investigation, never indicating that coverage may be in jeopardy. It was not until the teenager was served with the lawsuit that the insurance company denied coverage for the claim on the grounds that it involved intentional conduct. The teenager assumed control of his own defense and eventually settled the claim. Following the settlement, the teenager brought suit against the insurance company seeking defense and indemnity for the claim, asserting that the insurance company was estopped from denying coverage because of its lengthy delay in conveying a coverage position.

The Supreme Court agreed, finding that an insurance company’s duty to act in good faith extends to its investigation of a policyholder’s request for coverage:

Upon receiving notice of a possible claim against its insured, an insurer has the duty to investigate the matter within a reasonable time. (C)onsiderations of good faith and fair dealing require that the insurer make . . . investigation(s) [of any claim] within a reasonable time.40

The Griggs Court further held that the insurance company must fully disclose the results of any investigation to the policyholder:

The insurer’s obligation to deal in good faith also includes a duty of fair and full disclosure between the insured and his insurer. This duty necessarily requires that an insurer communicate to the insured in a timely fashion the results of any investigation.41

In reaching its holding, the Court was significantly impacted by the fact that the teenager was placed in an extremely precarious position as a result of the insurance company’s conduct.42 The insurance company’s silence and inaction coupled with the teenager’s duty to cooperate and obligation to avoid taking any action that may undermine the insurance company’s right to control the defense and investigation of the claim led the Court to conclude that the teenager had a reasonable expectation of coverage.43 The Court summarily rejected the insurance company’s argument that a policyholder must demonstrate prejudice resulting from the delay or inaction before the company’s conduct may be sanctioned. Indeed, the Court held that prejudice must be presumed because of the policyholder’s duty to cooperate and inability to take any affirmative action.44   Accordingly, the Court found that the only way for the insurance company to avoid a breach of its good faith obligation to the policyholder is to provide timely notice of a possible disclaimer of coverage and disclose the results of its claims investigation in a timely manner.45

The Progeny Of Pickett And Griggs

In the years following the Pickett and Griggs decisions, policyholders have sought — with some success — to expand the scope of New Jersey’s bad faith law by applying the principles set forth in those decisions to the investigation and payment of claims. For example, in Colonial Foods, Inc. v. Aetna Cas. & Sur. Co., et al.46 a policyholder argued that its insurance company breached its duty of good faith and fair dealing by failing to properly investigate an environmental claim involving waste allegedly sent to a third-party landfill and denying coverage for the claim for reasons neither based in fact or law. Aside from establishing that the insurance company had spent a mere $38 to investigate its multi-million dollar claim, the policyholder was armed with several insurance company generated documents (i.e., claims manuals and claims investigation notes) and deposition testimony that directly contradicted the positions taken by the company in denying the claim. Relying exclusively on the Pickett decision, the court found that the insurance company had breached its duty of good faith and fair dealing because there was no fairly debatable reason for the company’s denial. Indeed, the court specifically found that:

Aetna was looking for a way to deny coverage in this particular situation because of the large claims in these environmental cases because it appears as though they sent [a denial] letter out with total reckless disregard of their internal memos and what they knew to be the facts.47

The court’s finding of bad faith was further influenced by the insurance company’s failure to conform its coverage position, and specifically interpretation of its policies, to existing New Jersey precedent on key coverage issues such as trigger.48

In Miglicio v. HCM Claim Corp.49 a policyholder brought a bad faith cause of action against its insurance company’s claims handling agent alleging that the agent breached its duty of good faith and fair dealing by failing to comply with the mandates of Griggs — namely failing to promptly and properly handle the policyholder’s claim. More particularly, the policyholder established that the insurance company attempted to coerce a full release and settlement of all claims, including certain bad faith allegations, by offering only the actual amount of a judgment previously entered against the policyholder. In essence, the policyholder showed that the insurance company was holding back payment of an undisputed portion of the claim until the policyholder agreed to release all of its other valid claims.

In denying the claims handling agent’s motion to dismiss, the court strictly followed the principals set forth in Pickett and found that there was no “fairly debatable” reason to justify the insurance company’s delays and failure to pay the claim.50 More importantly, the Miglicio court went a step further towards flushing out the precise type of conduct that would constitute “bad faith” by adopting the Unfair Claim Settlement Practices Statute as an appropriate standard by which to measure an insurance company’s conduct in investigating and settling claims:

N.J.S.A. 17:29B-4(9), addresses unfair claim settlement practices as to all insurers. Unfair practices include:

b.   Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

* * *

e.   failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;

f.   Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear;

g.   Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds;

* * *

m.  Failing to promptly settle claims, where liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage;

n.   Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.51

The Court proclaimed that “dependent upon the underlying reasons for non-compliance, any deviation from the standards may be considered as evidence of bad faith.”52

Notwithstanding these policyholder successes, other New Jersey courts interpreted the Pickett and Griggs decisions more narrowly, taking to heart the idea that bad faith claims should be few and far between. For instance, several courts strictly applied Pickett’s reference to summary judgment proofs by requiring policyholders to succeed on such a motion, thus proving an actual entitlement to coverage, before a bad faith claim may be pursued.53 In Polizzi Meats, a policyholder filed a declaratory judgment action seeking coverage for damages arising out of a fire that took place at its place of business. The policyholder also sought consequential and punitive damages arising out of the insurance company’s alleged bad faith during the claims handling process. During the course of the declaratory action, the court denied the policyholder’s motion for summary judgment on indemnity and granted the insurance company’s motion on the “bad faith” damages and punitive damages issues.

The policyholder moved for reconsideration only on the “bad faith” damages issue, arguing that the court misinterpreted Pickett’s reference to summary judgment proofs. The policyholder contended that, even though its motion for summary judgment was unsuccessful, it should still be permitted to make an offering of proof on the bad faith claim.   The court maintained its previous ruling because the policyholder failed to establish the insurance company’s liability by summary judgment proofs which the court characterized as the “polestar of the Pickett analysis.”54

Addressing the flip side of the summary judgment proofs issue, the court in Hudson Universal, Ltd. v. Aetna Insurance Co.55 found that an insurance company may not be sued for bad faith where it has improperly denied coverage for a claim so long as there are “fairly debatable” reasons to support the denial. In Hudson, a policyholder sued its insurance company because the insurance company denied a claim involving allegations of patent and trademark infringement. A coverage litigation ensued and the court entered   a split summary judgment order, finding that the insurance company had improperly denied coverage for the trademark infringement claim while it had properly denied coverage for the patent infringement claim.

The policyholder sought damages stemming from the insurance company’s “bad faith” denial of the trademark infringement claim. The insurance company countered that it had at least “fairly debatable” reasons for denying the claim because there was no existing precedent that conclusively established an entitlement to coverage. Accordingly, the insurance company argued that it should not be penalized for its coverage position even though a court ultimately found the position to be incorrect.

The court agreed and refused to allow the policyholder to pursue a bad faith claim, again relying heavily on the Pickett standards:

This “fairly debatable” standard is premised on the idea that when an insurer denies coverage with a reasonable basis to believe that no coverage exists, it is not guilty of bad faith even if the insurer is later held to have been wrong. The rationale for this legal principle is based upon the potential in terrorem effect of bad faith litigation upon the insurer. An insurer should have the right to litigate a claim when it feels there is a question of law or fact which needs to be decided before it in good faith is required to pay the claimant.56

Significantly, the court held that the mere fact that the policyholder had obtained summary judgment on the trademark infringement claim did not create an absolute right to a bad faith award.57 In so holding, the court specifically rejected the policyholder’s argument that Pickett required such a result. Explaining the Pickett court’s reference to summary judgment proofs, the court stated:

What the Pickett court said is that an insurer’s disclaimer of coverage cannot be held to be in bad faith unless the insured is granted summary judgment on the issue of coverage.  Even then, if the coverage issue was “fairly debatable” at the time of the coverage decision, the insurer’s decision would not constitute bad faith.58

In addition to these decisions analyzing the scope of the Pickett decision, at least one lower court has tried to keep a lid on the casual assertion of bad faith claims by requiring a substantial evidentiary showing before a bad faith claim may even be pled:

there has to be some reasonable demonstration to the Court, and perhaps not even summary judgment but some clear showing that coverage is so significantly impacted that the failure of the carrier to provide coverage or indemnification or defense would warrant the necessary lengthy exploration of the bad faith issues.59

Indeed, in H.M. Holdings, the court denied a motion to amend because, two years into the case, the policyholder could not offer sufficient facts to demonstrate that it was entitled to coverage or that the insurance company had acted in bad faith:

one would think at this stage of the game that more than a conclusory reference that bad faith existed would be in the hands of the persons who brought the claim. I have yet to see the type of allegation or factual support or nexus which would make that so sure and so clear as to warrant the exploration of a bad faith claim and lack of fair dealing claim.60

As will become evident in the next section, the courts’ collective efforts to carefully, and in most cases narrowly, define the scope of bad faith in the years following Rova, Pickett, and Griggs came to an abrupt end with the PGT decision. For all intents and purposes, PGT represented a giant step along the road to full fledged bad faith in New Jersey that commenced with Kievit and Mazzilli.

PGT: The Policyholder’s Bad Faith Battle Cry

In Princeton Gamma-Tech, Inc. v. Hartford Insurance Group,61 the Honorable Robert E. Guterl scrutinized the claims-handling procedures of three insurance companies. He held that those procedures, as applied to the handling and processing of a policyholder’s claims, constituted a breach of the insurance companies’ respective fiduciary obligations of good faith and fair dealing. Moreover, the breaches were so egregious that the trial court awarded the policyholder both compensatory and punitive damages.62 In a thorough, detailed decision, the trial court made clear that an insurance company’s obligations extend to all aspects of the claims-handling process from receipt to payment of the claim.

Relying on principles set forth in Rova Farms, Pickett, Griggs, and the Unfair Claims Settlement Act, N.J.S.A. 17:29B-4, Judge Guterl held that no fairly debatable reason can exist to deny a claim where the insurance company: (1) employs a system that prohibits the claims handler from devoting an adequate amount of time to the claims for which he or she is responsible; (2) engages in irrelevant and non-responsive communications with its policyholder; (3) fails to conduct a meaningful search for missing policies; or (4) does not undertake an independent investigation to determine the facts material to the claim.63

The mandate of PGT extends beyond these seemingly intuitive, common-sense requirements.   Because of the fiduciary relationship an insurance company has with its policyholder, the trial court examined the spirit of the claims-processing “philosophy.” If that philosophy is inconsistent with New Jersey law and the application of that philosophy to the claims-handling process impairs the rights of the policyholder to benefits under the insurance agreement, the insurance company may have effectively repudiated its fiduciary duty and good-faith obligations to the policyholder.

Judge Guterl’s opinion, although unpublished, energizes New Jersey’s settled law that an insurance company’s failure to exercise good faith gives rise to a cause of action against it for bad faith64 and sends a message to every insurance company that its “claim denied” stamp had best be applied with scrupulous attention to the interest of its policyholders, the factual circumstances giving rise to the alleged liability, industry standards and pertinent statutory and case law. An insurance company that fails to do so may be guilty of the same “deliberate, malicious and egregious” bad faith as the insurance companies in PGT and, hence, subject to punitive as well as compensatory damages.

The Facts

Princeton Gamma-Tech, Inc. sought defense and indemnification from various insurance companies for potential liabilities arising out of contamination at four sites in Somerset County, New Jersey. The Hartford Insurance Group (“Hartford”), North River Insurance Co. (“North River”) and Federal Insurance Co. (“Federal”)65 (collectively “the insurance companies”), among others, had issued commercial general liability (“CGL”) policies to PGT for the period 1968 to 1986.

In October 1989 the United States Environmental Protection Agency (“EPA”) notified PGT that it was a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) at the Higgins Farm Superfund site, and, as such, was responsible for implementing necessary remediation and reimbursing the EPA’s costs at the site to date. The EPA further informed PGT that it would be subject to legal action if it failed to comply with the EPA’s requirements.  By letters dated November 27, 1989, PGT gave notice of the EPA’s claims to Hartford, North River and Federal and requested defense and indemnification from each carrier.

In March 1990 the EPA notified PGT that it was considered a PRP under CERCLA at the Higgins Disposal Service site and that PGT was responsible for remediation and reimbursement of the EPA’s costs at the site. Again, the EPA made clear that PGT would be subject to legal action if it failed to comply with its responsibilities. On May 23, 1990, PGT notified the three insurance companies of the EPA’s claims and requested coverage from each. Here, as with the Higgins Farm site, PGT informed the insurance companies that it had no knowledge of PGT’s wastes being disposed of at either site and that it had retained defense counsel.

On February 28, 1990, Hartford sent a modified standard form letter to PGT denying liability at Higgins Farm. The denial was based on the fact that neither PGT nor Hartford had located copies of the policies issued to PGT, although PGT had furnished Hartford with secondary evidence of its policies.66 Subsequently, Hartford disclaimed coverage at the Higgins Disposal Service site for the same reason. Hartford had conducted no investigation of either site before issuing its denials.67

On June 22, 1990, Federal issued a standard form letter containing boiler-plate language declining coverage for the Higgins Farm site.68 In a similar letter dated March 31, 1991, Federal denied PGT a defense and indemnity for the Higgins Disposal Service site on the basis that: compliance costs in response to government directives did not constitute claims for “property damage” within the meaning of the policy; PGT had not proven that the discharge was sudden and accidental and, thus, the pollution exclusion applied; there was no “occurrence” at the site.69

On September 11, 1990, North River, in a belated response to PGT’s notices of claims, reserved its rights on the issue of indemnity, but denied a defense to PGT on the basis that the PRP letter from the EPA did not constitute a “suit” under the policy.70 North River conducted no investigation of PGT’s claims.71 Its letters relied on specific policy provisions that were inapplicable to PGT’s claims, and the letters were devoid of specific facts to support the denials.72

After a bench trial that spanned more than three months, Judge Guterl articulated a four-prong standard by which he measured whether Hartford, North River and Federal had met their good-faith obligations to PGT: (1) whether they had complied with Pickett’s “fairly debatable” standard in connection with their processing delays, and (2) in their denials of PGT’s claims;73 (3) whether the insurance companies’ efforts to investigate PGT’s claims and the extent of the investigation were objectively adequate;74 and (4) whether they had made an honest and intelligent decision not to assist PGT in settling with or defending against the EPA after “a weighing of probabilities in a fair manner.”75

PGT had the initial burden of proof as to whether or not the insurance companies had met the four-part standard. The burden then shifted to the companies to demonstrate their good faith; a reasonably imposed onus, given that they possessed the facts relevant to the disputed issues.76 PGT produced evidence sufficient to meet its initial burden. The insurance companies, however, failed to convince the trial court that good-faith reasons existed for the “inadequacies” in their responses to and handling of PGT’s claims.  The facts adduced by the trial judge in his exhaustive inquiry into the insurance companies’ claims-handling procedures “dramatically and forcefully illustrate” the basis for the conclusion that the companies breached their respective duties under the implied covenant of good faith and fair dealing, failed to act in good faith and acted egregiously in responding to PGT’s claims for coverage.77 Accordingly, the trial court awarded PGT compensatory and punitive damages.

The Evaluative Standards Of PGT

After PGT it may no longer necessary that an insurance company act with “evil” purpose in order to find a breach of the duty of good faith: The mere failure by the insurance company to timely, reasonably and fairly process a policyholder’s claim may constitute bad faith. PGT makes clear that every aspect of the claims-handling process informs the inquiry into the existence of good faith, from the number of claims for which a claims handler is responsible to the content of the insurance company’s correspondence with the policyholder. Where those procedures are routinely antithetical to the insurer/insured relationship and a fair and honest evaluation of the claim, the insurance company is vulnerable to a sustainable claim for bad faith.

1.   The Role Of The Claims Handler

During the claims-handling process, the insurance company has an obligation to treat the policyholder’s interest as at least equal to its own.78 In PGT, however, the trial court found that the insurance companies had elevated their own interests to the detriment of PGT and, thus, breached their respective fiduciary duties. Rather than approach PGT’s claims in the spirit of honest inquiry to fairly determine coverage, they had engaged in obstructionistic procedures that impeded the process and frustrated PGT’s attempts to obtain coverage. The trial court discerned that part of the problem is imbedded in the corporate structure of the insurance company, which depends on inadequately trained personnel assigned an impossible work load to handle claims and make coverage determinations.

For the years 1985 to 1992, Hartford, for example, delegated responsibility for over 1000 New Jersey environmental claims to one claims handler. Given his other responsibilities, the claims handler effectively had less than two hours per year to devote to each individual claim. Hartford had furnished him with minimal or no training in preparation for the position and provided him with little guidance in processing environmental claims throughout his tenure. The claims handler had no substantive contact with other Hartford personnel processing similar claims, and he was unaware whether the procedures he established for handling environmental claims were consistent with those of other regional offices.79

The claims handler described the system by which he processed and then periodically reviewed each claim.80 At best, that system was cumbersome, inefficient and anomalous to what would be expected from a sophisticated institution with responsibility for multimillion dollar claims matters. At worst, it perpetuated a continuing disservice to Hartford’s policyholders by fostering inconsistent claims-handling procedures. PGT fell victim to that system. For example, Clifford Higgins, the operator of both Higgins sites, was also a Hartford policyholder and had been named a PRP.81 When Mr. Higgins sought coverage from Hartford, the same claims handler who processed PGT’s claims made requests to government agencies for information regarding the sites; the claims handler made no such requests on behalf of PGT and, in fact, required PGT to provide the information to him. The claims handler retained an environmental consultant to investigate the sites on behalf of Mr. Higgins. However, he did not retain a consultant for PGT and did not share the results of the Higgins investigation with PGT, including test results that indicated no evidence of PGT’s wastes at one site.82 Further, although information in the Higgins file indicated to Hartford that a sudden discharge had caused contamination at one site, Hartford relied on the pollution exclusion in its reservation-of-rights letter to PGT — in direct contradiction to the information in its file.83

The claims handler exercised total authority to determine the necessity for and scope of any investigation of a claim for environmental liability.84   In addition, the claims handler had sole responsibility for issuing a reservation of rights letter or declining coverage to a policyholder. Despite the exertion by the claims handler of virtually exclusive control over the outcome of PGT’s claims, his conduct was remarkable for its inattention to the details of those claims and an abiding lack of interest in cooperating with and servicing the needs of Hartford’s policyholder. As the claims handler admitted, the standard form letter sent in response to PGT’s original notice of claim for the Higgins Farm site was “used to end pollution matters.”85 Apparently, from the outset Hartford had no intention of extending coverage to PGT.86 It is not surprising, then, that the trial court found that the claims handler’s efforts evidenced a “glaring and willful failure to process PGT’s claims in accordance with standard industry procedures” and that Hartford had shown an “arrogant disregard” of its fiduciary obligations to PGT.

2. The Generation Of Meaningless Correspondence

An insurance company cannot fulfill its fiduciary duty to its policyholder if it does not communicate clearly, honestly and promptly with its policyholder. Generating nonresponsive coverage letters that merely “advise” the policyholder of potential coverage issues or parrot standard policy provisions and defenses to environmental claims is inconsistent with the duty of good faith and fair dealing and may, as in PGT, rise to the level of bad faith. To fulfill its obligation, the insurance company must (a) conduct a continuing fact investigation; (b) avoid leaving coverage issues open indefinitely; and (3) itemize in a timely manner the precise reasons for any declination of coverage.87

In PGT the insurance companies repeatedly generated meaningless form letters that variously demanded information from the policyholder, declined coverage and/or asserted pro forma reservations of rights unrelated to PGT’s claims. For example, North River’s letters to PGT declining coverage for its claims relied on policy provisions not applicable to those claims; made no reference to specific facts that would support the carrier’s denial; questioned without any basis in fact whether there had been an “occurrence” or “property damage”; and “advised” PGT of the potential effect of various definitions and provisions of the policy.88 Contrary to its good-faith obligation to make a reasoned coverage determination, North River never conducted an investigation or elicited information from PGT to determine whether, in fact, the “advisory” language was applicable.   89 More importantly, the claims handler never itemized the information he would require from PGT in order to resolve the potential coverage issues recited in his letters.

As the trial court noted, North River, with its superior knowledge of insurance contracts and greater resources, employed a boiler-plate letter referring to numerous standard potential coverage issues to deny coverage and abandon PGT in its dispute over liability with the EPA.90 Implicit in this observation is the recognition by the trial court that the claims handling process itself affords the insurance company abundant opportunity for overreaching, to the disadvantage of its policyholder. Indeed, the use of standard forms enables the insurance company to “create” coverage issues which, by virtue of their theoretical nature, impair the ability of the policyholder both to adequately respond and to reap any benefit from the insurance agreement.

3. The Inadequate Search For Missing Policies

Two important propositions emerged from PGT with respect to missing policies: first, the burden to locate missing policies does not rest solely with the policyholder; and, second, an insurance company’s refusal to reconstruct the terms and conditions of its own insurance policy on the basis of secondary evidence constitutes a breach of the implied covenant of good faith and fair dealing.

PGT’s expert articulated the industry standard for a search by the insurance company for missing policies. Such efforts, cited with approval by the court, include:   contact with the carrier’s underwriting department to determine who produced the policy; a search of the underwriting records either within the insurance company itself or with the producing agent; a review of the agent’s daily;91 contact with the insurer’s claims department to determine whether the insured had presented a prior claim under the same policies; and, if all else fails, a search for secondary evidence of the insurance policies that might exist in any location, including underwriting files, claims files, the agent and the insured.92

In addition, our courts allow the use of secondary evidence by a policyholder to prove the existence, terms and conditions of lost or missing policies.93 Such secondary evidence might include invoices reflecting premiums paid by the policyholder, endorsements and binders.94 When secondary evidence demonstrates that the carrier issued the policy on standard policy forms, a claims handler can reconstruct the lost policy.95

PGT was unable to locate any of the policies issued to it by Hartford. Hartford’s efforts to locate PGT’s policies — characterized by the trial court as “feeble” — fell far short of the industry standard when Hartford, among other things: placed the burden on PGT to produce information on Hartford’s own agent/producer; failed to request that a search be undertaken of the company’s underwriting files; failed to contact the company’s agent or broker, underwriter, excess carrier or reinsurer for information pertaining to the existence, terms and conditions of the policies issued to PGT; and failed to follow up on its requests for information for which no response had been received.96

PGT supplied Hartford with a manuscript endorsement countersigned by a Hartford agent and issued on Hartford stationary as secondary evidence of the existence of a policy in effect in 1968. PGT provided Hartford with a copy of a general liability insurance binder, countersigned by Hartford’s agent, as proof of a policy effective September 2, 1980. In addition, PGT submitted invoices and accounting records from Hartford’s agent which, according to trial testimony from a Hartford representative, constituted secondary evidence of coverage. Thus, the trial court held that although Hartford failed to make a good-faith attempt to locate PGT’s missing policies, Hartford had ample evidence to confirm the existence of PGT’s policies.97 Still, the claims handler refused to inform PGT of facts revealed by his search of Hartford’s records department and insisted that PGT produce actual copies of the policies before Hartford would act on PGT’s claims. Further, Hartford made no attempt to match the secondary evidence to its standard policy forms for the years 1968 to 1975 in order to reconstruct PGT’s policies, even though the claims handler was experienced and familiar enough with Hartford’s policy forms to do so.98

Judge Guterl’s opinion stops just short of holding that Hartford’s document-destruction policy — given Hartford’s position of “no policy-no coverage” — constituted a breach of its duty of good faith and fair dealing.99 As he pointed out, Hartford was the only beneficiary of such a policy. The judge made clear, however, that the insurance company shares the burden of either finding the policy or reproducing its terms. An insurance company may not relinquish its fiduciary duties merely because the original insurance agreement creating that duty is not available. It must participate with its policyholder in an honest, diligent effort to recreate the likely terms of that agreement.100

4. The Failure To Conduct A Proper Investigation

PGT supplied the insurance companies with information which supported coverage.   Nonetheless, the insurance companies failed to undertake a “real investigation,” rejecting PGT’s evidence without comment and without providing PGT with a meaningful coverage determination. Judge Guterl held that the duty to investigate a claim is not axiomatic; it is a component of the inquiry into whether the insurance company processed the policyholder’s claims “fairly, honestly and promptly” as required by New Jersey law, industry standards and common sense.101 Simply put, the carrier must do at least one of the following: a) agree to provide coverage; b) set forth the specific facts in support of a determination not to cover; or c) discover in a timely manner those facts which resolve the issue of whether to support or deny coverage. Only then can the integrity of a system that is largely in the insurance company’s control be ensured.102

What an insurance company may not do — and still expect to meet its good-faith obligations — is to passively refuse to process claims where questions of coverage may exist.103 Where a policyholder does not or is unable to provide sufficient facts to the carrier to enable it to make a coverage determination, the fiduciary duty mandates that the carrier assist in the gathering of such additional information sufficient to enable it to make a fair assessment of its coverage obligations.104 Moreover, if an insurance company’s investigation reveals factual information which will enable its policyholder to better defend itself against or mitigate the effects of third-party claims for liability, the insurance company must provide that information to its policyholder.105

The scope of the insurance company’s investigation should include, among other things, the ownership of the contaminated site, whether its use was permitted and whether the contamination resulted from a sudden and accidental discharge.106 The court enumerated possible components of a proper investigation: a visit to the allegedly contaminated site to determine the nature, use and location of the site; an interview with the owner of the site to determine whether it has the necessary operational permits and whether the policyholder disposed of waste at the site; a request for information about activities at the site from other insurance companies who insured the same policyholder; a FOIA request to either the EPA or DEP for information; and the hiring of an environmental consultant to assist the claims handler in his or her evaluation of the facts pertaining to the site.107 As the court held: “In order to make a proper coverage determination with respect to damages, the claims adjuster must know what occurred, who suffered damage, the nature and extent of the damage and the monetary value of current and future damages.”108

Despite the insurance companies’ failure in PGT to investigate and determine the facts material to PGT’s claims, their coverage-determination letters are “replete with assumptions that contradict the facts that PGT did provide.”109 The trial court held that a coverage letter that bears no relationship to actual facts constitutes evidence that an insurance company’s investigation was objectively inadequate.110 For example:

1. although one insurance company relied on the pollution exclusion to deny coverage, the claims handler acknowledged that no facts indicated that a non-sudden or non-accidental discharge occurred at the Higgins sites to justify a denial of coverage;

2. an insurance company denied PGT coverage based on the owned property exclusion, but the claims handler admitted that he had no facts to indicate that PGT owned, occupied or rented either of the sites at issue; and

3. although no facts emerged to indicate that PGT expected or intended damage to occur at the Higgins Farm site, a claims handler quoted the policy definition of the term “occurrence” as a basis for denying PGT’s claim.111

The record in PGT leads inescapably to the conclusion that the insurance companies failed to conduct an adequate investigation. Equally inescapable is PGT’s notice to insurance companies that where coverage issues exist, an insurer’s decision not to independently investigate facts is done so at its own peril.112

5. The Insurance Company’s Corporate Philosophy And Adherence To Its Claims-Procedures Manual

An insurance company is vulnerable to a claim of bad faith if its claims-processing “philosophy” is inconsistent with New Jersey case law. The trial court, focusing on Federal, held that Federal’s philosophy, together with its conduct in handling PGT’s claim, “constitute[d] an egregious refutation of its fiduciary relationship to PGT and of its affirmative good-faith obligations to its insureds.”113

Between 1989 and 1991, Federal processed approximately sixty environmental-contamination claims each month. During that same period of time, it provided a defense for only ten to twenty environmental claims under a full reservation of rights, and even then only after the policyholder was forced to bring suit.114 Federal routinely disclaimed coverage for environmental-contamination claims made under a standard CGL policy because of the following legally insupportable theories: (1) costs for the remediation of environmental contamination do not constitute property damage; (2) the “care, custody and control” and “owned property” exclusions apply to property “used” by the policyholder; (3) the word “sudden” in pre-1986 pollution exclusions has a temporal meaning; (4) a government directive does not entitle a policyholder to coverage; and (5) the manifestation theory governs the trigger date for coverage, that is, the date that contamination was first discovered at the site.115 Even Federal’s own representative could not provide the trial court with examples of losses that would be covered under Federal’s philosophy and its interpretation of property damage.116

In a related inquiry, the trial court found that North River processed claims in a manner inconsistent with industry standards and its own published claims-handling manual.117   For example, although the claims manual instructs that coverage issues should not remain open indefinitely, North River failed to make a timely response to PGT’s notice of claim, in one instance taking twenty-nine months to convey its decision not to defend.118  And although the claims manual explained that a policyholder is subject to strict joint and several liability by virtue of a PRP letter, North River took the position that the letter did not constitute a “suit” under its policy.119 Even after the EPA instituted suit against PGT for one site, North River did not rescind its original denial of a defense obligation.120

North River’s claims manual instructs the claims handler to seek information about the claim from sources other than the insured. However, the bulk of its investigation centered on evaluating the information submitted to it by PGT. Furthermore, the claims handler failed to initiate a search of North River’s storage facility in an effort to locate PGT’s missing policies as required by the North River manual; it also failed to use the standard ISO forms to reconstruct the policies which it had issued to PGT.121 By ignoring its own procedures, North River, in effect, placed the burden on PGT to produce enough information so that North River would eventually have a basis upon which to disclaim coverage.122 The court held that North River’s “wanton conduct” was calculated to deprive PGT of the benefits under its insurance contracts.123

The court’s analysis of North River’s handling of PGT’s claims and Federal’s corporate philosophy leaves no doubt that, first, an insurance company’s manual as well as its claims-handling philosophy must provide for reasonable claims-handling procedures, grounded in the laws of this State; and, second, the insurance company must follow those procedures. Otherwise, insurance companies may face — as did North River and Federal — a judicial finding of reckless disregard of an affirmative duty to fairly and reasonably process a policyholder’s claims and a judgment for punitive damages.

6. Bad Faith Generally

The PGT court held that “a bad faith cause of action exists in New Jersey for either: (a) the delay in processing claims without a valid reason; (b) the failure to conduct an objectively adequate investigation; (c) the denial of benefits without “fairly debatable” reasons; or (d) a decision not to settle that was not an honest and intelligent one reached after the fair weighing of probabilities.”124 The judge succinctly summarized his findings as follows:

Here, the reckless disregard of each carrier’s affirmative duty to honestly, fairly and promptly process PGT’s claims clearly amounts to wanton conduct. The carriers’ decision to treat environmental claims by undertaking no affirmative investigation; failing to furnish timely responses; responding with form letters that refer to policy provisions that do not relate to the facts; refusing to accept trial and appellate court holdings that their coverage decisions are wrong; and forcing insureds to sue in order to obtain contractual benefits plainly evidence an institutional bias against entire classes of claims. Their systematic treatment of environmental claims violates every notion of professional and fiduciary responsibility.125

PGT represents a long-awaited quantum leap not in the principles underlying bad faith law in New Jersey but rather in the application of those principles to the realities of today’s “big ticket” liability coverage disputes. Judge Guterl examined the insurance companies’ obligations to their policyholder, PGT. He then took a practical, no-nonsense look at the methods used by Hartford, Federal and North River to process PGT’s claims for coverage under their policies. He correctly found that an insurance company may not cloak its reservation of rights or denial letter with an assertion that coverage was “fairly debatable” without first having made a good-faith effort to determine whether coverage exists. In his detailed opinion, Judge Guterl simply reiterates what our courts have been saying all along, that is, regardless of the adversarial nature of coverage issues, an insurance company may not cavalierly abandon its insured; rather, it must assist its policyholder to find insurance coverage where it is reasonably thought to exist.

Conclusion: Moving Beyond PGT

The stonewall-like behavior of the insurance companies in PGT is, in part, testimony to the ferocity of the war between insurers and policyholders over coverage for environmental liability. In the face of a potential trillion dollar exposure, many insurance companies took strict no-pay postures. The insurers’ lack of investigation or explanation for their coverage disclaimer in PGT may reflect their conviction that environmental liability absolutely was not covered for numerous reasons, and did not deserve further consideration.  What is distressing is that this attitude, originating in environmental claims that did raise unique coverage issues, has now permeated the insurers’ handling of many other claims as well.

Insurance companies defend themselves by asserting that in view of the tens of thousands of claims they handle, it is not surprising that a handful of claims drop through the cracks. However, attorneys who represent policyholders cannot help but wonder if the erroneous denials of coverage that constantly cross their desks do not represent a more systemic problem. Too frequently, claims submitted by a policyholder seem to be routinely turned down, only to have the insurer reverse itself when an attorney steps in and threatens suit. Indeed, it sometimes takes the threat of a bad faith claim to produce results. Unfortunately, in our legal system, many individuals who have their claims wrongfully denied do not have the wherewithal to fight a billion dollar insurance company in the courts, and must abandon their rightful claims to coverage.

Systemic responses are necessary, such as bad faith statutes with teeth in them, including award of attorneys’ fees and punitive damages. For now, bad faith has become an integral part of insurance coverage litigation in New Jersey, and one that is dynamic and fast — developing. A federal judge just criticized the New Jersey “barely debatable” standard as “somewhat peculiar” and “odd.” The court went so far as to say that it “doubts the wisdom of the standard. . . . ” Indeed, it is unusual to see a federal judge so critical of state law as established recently by the state’s Supreme Court: “The [federal] court points out that it can envision other valid methods of determining “bad faith” and considers the New Jersey Supreme Court’s rule somewhat anomalous.” Tarsio v. The Provident Insurance Co., Civ. Act. No. 98-1894 (D N. J. Aug. 7, 2000). Any attorney representing a policyholder denied coverage must weigh the insurer’s conduct, and determine if a bad faith count is necessary.


1. While multi-million dollar bad faith awards seem common in some states, there is no reported New Jersey case awarding punitive damages against an insurance company for bad faith.

2. See Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474 (1974); Pickett v. Lloyd’s, 131 N.J. 457 (1993).

3. See e.g., Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 425 (1997) (holding that the implied covenant of good faith and fair dealing in New Jersey’s common law is breached where one party’s conduct destroys the other party’s reasonable expectations and right to receive the fruits of the contract).

4. No. SOM-L-1289-91 (N.J. Law Div., June 5, 1997).

5. 103 N.J.L. 589, 137 A. 549 (E.&A. 1927).

6. Id. at 592 (citation omitted).

7. Id. at 593.

8. Id.

9. 115 N.J.L. 449 (E.&A. 1935).

10. Id. at 451.

11. 107 N.J.L. 183 (E.&A. 1930).

12. Id. at 185-86 (quoting Precipio, 103 N.J.L. 589).

13. 34 N.J. 475, 482-3 (1961).

14. 35 N.J. 1, 7-8 (1961).

15. Kievit, 34 N.J. at 482.

16. Id. at 482-83 (citations omitted).

17. 35 N.J. at 7.

18. Id.

19. Id. at 7-8.

20. See Merchants Indemnity Corp. v. Eggleston, 37 N.J. 114 (1962).

21. Id. at 121.

22. Id. at 122 (citation omitted); see also Fireman’s Fund Ins. Co. v. Security Ins. Co. of Hartford, 72 N.J. 63, 72, 367 A.2d 864, 869 (1976) (doctrine of implied covenant of fair dealing is fully applicable to insurance contracts).

23. 65 N.J. 474 (1974).

24. See Radio Taxi Serv., Inc. v. Lincoln Mut. Ins. Co., 31 N.J. 299 (1960); Bowers v. Camden Fire Ins. Ass’n, 51 N.J. 62 (1968).

25. Rova Farms, 65 N.J. at 491.

26. Id. at 492; see also Tannerfors v. American Fidelity Fire Ins. Co., 397 F. Supp. 141, 159 (D.N.J. 1975) (even a settlement offer in excess of an insurer’s coverage “does not abrogate the fiduciary duty it owes to its insured in the settlement area”); Venetsanos v. Zucker, Facher & Vol. 14, #40 August 22, 2000 Zucker, 271 N.J. Super. 459, 475, 638 A.2d 1333, 1340 (App. Div. 1994) (“insurer has a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy coverage”); Yeomans v. Allstate Ins. Co., 121 N.J. Super. 96, 102, 296 A.2d 96 (Cty. Ct. 1972), aff’d. 130 N.J. Super. 48, 324 A.2d 906 (App. Div. 1974) (insurer acts in bad faith where it fails to negotiate to reduce initial settlement demand).

27. Rova Farms, 65 N.J. at 493, 498.

28. Id. at 493.

29. Id. at 496-97.

30. Id. at 502.

31 See Pickett v. Lloyd’s, 131 N.J. 457 (1993); Griggs v. Bertram, 88 N.J. 347 (1982).

32. Pickett adopted the rule set forth in Bibeault v. Hanover Ins. Co., 417 A.2d 313, 319 (R.I. 1980), which was enunciated earlier in Anderson v. Continental Ins. Co., 693, 271 N.W.2d 368, 376-77 (Wis. 1978).

33. Pickett, 131 N.J. at 461.

34. Id. at 473 (citations omitted).

35. Id. at 481.

36. Id. at 473.

37. Id. at 474-76.

38. Id. at 481.

39. Id.

40. Griggs v. Bertram, 88 N.J. 347, 360 (1982).

41. Id. at 360-61 (citations omitted).

42. Id.

43. Id. at 362.

44. Id.

45. Id.

46. Docket No. MON-L-0392-93, (N.J. Super. Ct. Law Div., April 21, 1995) [reported in Mealey’s Litigation Report: Insurance (hereinafter Mealey’s), May 9, 1995], appeal denied, (N.J. Super. Ct. App. Div. June 20, 1995) [reported in Mealey’s, July 3, 1995].

47. Transcript at 10.

48. Id. at 6-8.

49. 288 N.J. Super. 331 (Law Div. 1995).

50. Id. at 342-43.

51. Id. at 340-41.

52. Id. at 341.

53. See Polizzi Meats, Inc. v. Aetna Life & Cas. Co., 931 F. Supp. 328, 341 (D.N.J. 1996); A&S Fuel Oil Co., Inc. v. Royal Indem. Co., Inc., 279 N.J. Super. 367 (App. Div.), cert. denied 141 N.J. 98 (1995).

54. Polizzi, 931 F. Supp. at 340.

55. 987 F. Supp. 337 (D.N.J. 1997).

56. Id. at 341 (citations omitted).

57 Id. at 342.

58. Id. (emphasis in original).

59. H.M. Holdings, Inc. v. Liberty Mutual Ins. Co., Docket No. Mid-L-11532-94 (N.J. Super. Ct. Law Div.), reported in Mealeys, Vol. 11 (May 14, 1997) at 14.

60. Id.

61. No. SOM-L-1289-91 (N.J. Super. Ct. Law Div., June 5, 1997).

62. Id. at 316.

63. Id.

64. See id. at 372.

65. Federal, a subsidiary of Chubb Corporation, has no employees; all claims made on Federal policies are processed by Chubb. (PGT at 361).

66. Princeton Gamma-Tech, at 327.

67. Id. at 342.

68. Id. at 364.

69. Id. at 364-65.

70. Id. at 348, 356.

71. Id. at 351.

72. Id. at 352.

73. Id. at 323.

74. Id. (citing High Voltage Engineering Corp. v. Liberty Mutual Ins. Co., No. MID-L-3721-91 (Law Div., Dec. 14, 1992)).

75. Id. (citing Rova Farms).

76. Id. at 324.

77. Id. at 347-48.

78. Id. at 322.

79. Id. at 336-38.

80. Id. at 337-38.

81. Id. at 338.

82. Id. at 339.

83. Id. at 339-40.

84. Id. at 338.

85. Id. at 340.

86. See id. at 347.

87. Id. at 360.

88. Id. at 352-54.

89. Id. at 352-54.

90. Id. at 355.

91. A “daily” is a copy of a policy face sheet and endorsements.

92. Id. at 328 (footnote added).

93. Id. at 333.

94. Id. at 334.

95. Id. at 334.

96. Id. at 331-32.

97. Id. at 334-35.

98. Id. at 336.

99. Id. at 347-48. Hartford’s document destruction policy provided that CGL policies were to be destroyed three years after the end of the policy term, unless the company was requested to retain them. (PGT at 329).

100. See id. at 336, 379.

101. Id. at 376-77.

102. Id. at 382.

103. Id. at 378.

104. Id. at 377.

105. Id. at 346-47.

106. Id. at 360.

107. Id. at 365.

108. Id. at 322.

109. Id. at 377-78.

110. Id. at 381.

111. Id. at 341.

112. Id. at 378.

113. Id. at 369.

114. Id. at 367-68.

115. Id. at 366. It was not until two years after the Supreme Court’s decision in Owens-Illinois that Federal changed its philosophy regarding the trigger of coverage. However, the home office instructed the Federal representative that the holdings in Owens-Illinois were inapplicable to the company’s procedure for handling environmental claims. As Judge Guterl pointed out, this philosophy enabled the insurance company to choose the option that resulted in a denial of coverage until such time (or beyond) as the Supreme Court held that a position was wrong. Id. at 367-68.

116. Id. at 366.

117. The manual referred to is Crum & Forster’s Environmental Claims Unit Manual.

118. Id. at 349-50.

119. Id. at 348.

120. Id. at 350.

121. Id. at 357.

122. Id. at 359.

123. Id. at 358.

124. Id. at 373.

125. Id. at 371.

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