In handling first party claims in New Jersey, there are times when the policyholder and the insurer cannot resolve their differences. Often, the policyholder will file a lawsuit against the insurer that includes counts regarding breach of contract and alleged "bad faith" claim handling. This is often done for leverage by the policyholder not only for the lawsuit in question, but also for negotiation purposes. When handling bad faith claims in New Jersey, we encourage the insurer to consider filing a motion to bifurcate the bad faith counts early in the litigation stage in order to limit the foregoing perceived leverage. It also will result in a limitation to discovery, along with the associated savings in costs. Under New Jersey Rules of Court, 4:38-2, the Trial Court may order a separate trial of any claims or issues "for the convenience of the parties or so to avoid prejudice."
In New Jersey, there can be no bad faith claim if the insurance company can provide a reasonable basis for denying the insured benefits under the contract. Wood v. New Jersey Manufacturers Insurance Company, 206 N.J. 562, 577 (2011). As such, "wrong but reasonable" is a defense. Moreover, an insured should not obtain complete discovery of an insurance company's claim file simply by bringing simultaneous breach of contract and bad faith claims. Rather, an insured must first show that he or she is entitled to recovery on the contract before he or she can prove the insurer dealt with him or her in bad faith. Procopio v. GEICO, 433 N.J. Super, 377 (App. Div. 2013).
New Jersey courts have also viewed "bad faith claims as separate and distinct actions promotes judicial efficiency and economy." Wadeer v. New Jersey Manufacturers Insurance Co., 220 N.J. 591 (2015). Many courts have held that breach of contract claims and bad faith claims are significantly different from one another and should be severed. Bridgewater Wholesalers, Inc. v. Pa. Lumbermens Mutual Insurance Co., 2015 U.S. Dist. LEXIS 148551 (November 2, 2015). In Bridgewater, the claimant brought breach of contract and bad faith claims stemming from losses sustained during Superstorm Sandy. Subsequently, the defendant insurer sought to sever the bad faith claims. In granting the motion, the Court found the discovery related to the bad faith claim was distinct from that related to breach of contract claim, and to allow the claims to proceed together would "undoubtedly delay the resolution of the primary focus of the case, i.e. whether the contract claim should b e paid the amount of the claim or at all." Id. at 4. Further, the Court found Bridgewater would suffer no prejudice from the severance, whereas the risk of prejudice to the insurer was great. Id.
Comment: By bifurcating the bad faith counts, the parties can save significant expenditures of time and money, generally rendered needless if the insurer prevails on the plaintiff's counsel coverage claim. This also protects the insurer's privileged materials, such as investigative reports and company decisions, while continuing to move the case forward. Accordingly, counsel for the insurer should consider bifurcating the bad faith counts from the remainder of the lawsuit early in the litigation process.