Our New Jersey disability lawyers can assist you with questions you have regarding your claim, no matter what insurance company is administering your case. Use the contact form located on our website to tell us about your claim and we will respond within 24 hours. Or, you may call us to give us the information over the telephone. Our sensitive, caring staff is eager to provide assistance. Disability lawyer Bonny Rafel handles ERISA(group)long term disability and individual disability insurance cases filed throughout the country. She is nationally recognized by her peers for her outstanding knowledge and experience in this specialty of law. Her high demand as a lecturer demonstrates her talent, see Articles and Engagements Section for some of her appearances and papers published on disability issues.

Up and Coming Bad Faith States: Why Bad Faith is Alive and Well in States with the Fairly Debatable Standard

Insurers pronounce since the claim for benefits was debatable, they cannot be held liable for bad faith and are entitled to summary judgment. However, if the law protects an insurance company from extra-contractual exposure simply because it announces it was debating the issues, then the law in its application must be scoured for it cannot be sensible. Its literal application cloaks and insulates an insurance company from bad faith as a matter of law. The incentive for an insurance company to deal fairly with its policyholder is the real threat of extra contractual liability, but if that is merely illusory and procedural law insulates it from that concern, the insurance company will continue its bad acts with impunity. 
The Wearing Away of the Fairly Debatable Standard: Bad Faith is Alive and Well
Consumers purchase insurance to seek protection against calamity and to buy peace of mind and security.  Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 819 (Cal. 1979); Mariscal v. Old Republic Ins. Co., 42 Cal. 4th 1617, 1623 (Cal. Ct. App. 1996).  The insurance company starts out as the generous benefactor selling something to the consumers that they really need.  Consumers are made to feel that insurance is a necessary purchase in order to protect themselves against disaster, if it strikes. In the disability arena, ads proclaim:
"If you get sick or hurt and can't work, will your income stop or be reduced?
How much money will your family need to maintain your current lifestyle? 
Where will you get that money and is that source guaranteed?  The risk of
disability is great.  Disabled people are the largest single minority in the
United States...approximately 10-15% of the American population is
disabled."

If an insurer adopts a construction of policy language in favor of denying coverage, its decision to do so may establish bad faith liability, since insurance companies are required to construe ambiguous policy language in favor of coverage, and to construe the facts and circumstances in the light most favorable to coverage.   See, 2 Eric Mills Holmes & Mark S. Rhodes, Holme’s Appleman on Insurance, 2D Section 6.1 at 147 (1996).  A carrier is not entitled to draw inferences against its policyholder and disregard favorable evidence for coverage.  To do so evidences bad faith.  Lucas v. State Farm Fire & Cas. Co., 963 P.2d 357 (Idaho 1998); Aetna Life Ins. Co. v. Lavoie, 505 So. 2d 1050 (Ala. 1987).   The “good faith standard requires more than proof of sincerity; the evaluation of the case by the insurance company must be honest, intelligent and objective”.  U.S. Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306, 310 (3d Cir. 1985)
For decades policyholders were deprived of recovering their costs of litigating claims for denial of coverage or termination of benefits. All the insurers risked if they lost the case was the payment of benefits. Insurers, blessed with this protective blanket, successfully hid from judicial scrutiny of their actions.  Wrongful and unreasonable claim practices of insurers ran amuck and the courts’ hands were tied from providing effective redress for policyholders, until the birth of Fletcher v. W. Nat’l Life Ins. Co., 10 Cal. App. 3d 376, 89 Cal. Rptr. 78 (Ct. App. 1970) and Gruenberg v. Aetna Ins. Co., 510 P. 2d 1032 ( Cal. 1973). These cases paved the way for the courts to hold insurers financially liable for their bad faith claim actions.
Since then, courts have further defined how the covenant of good faith must be integrated into everyday claim practice. An insurance company may not unreasonably withhold benefits.   An often cited forefather of first party bad faith law is  Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 271 N.W. 2d 368 (1978).  In Anderson, the court assessed the “fairly debatable standard” and stated, “It was the duty of the insurer to assess claims as a result of an appropriate and careful investigation and that its conclusions should be the result of the weighing of probabilities in a fair and honest way…for an insurance company’s decision on a claim to be one made in good faith, it must be based upon a knowledge of the facts and circumstances upon which liability it predicated.” Id. at 375.  The court further stated:
“Whether a claim is fairly debatable also implicated the question of whether the facts necessary to evaluate the claim are properly investigated and developed or recklessly ignored and disregarded. “bad faith” is defined as “deceit; duplicity; insincerity” American Heritage Dictionary of the English Language. (1969), p. 471. The same dictionary defines “deceit” as deceptiveness in behavior or speech”. Id. at 376-377.

The court in the Anderson case outlines the test for bad faith:
“Bad faith is the absence of honest, intelligent action or consideration
based upon a knowledge of the facts and circumstances upon which a decision
with respect to liability is predicated…the knowing failure to exercise an honest and informed judgment constitutes the tort of bad faith.”  It is appropriate, in applying the test, to determine whether a claim was properly investigated and whether the results
of the investigation were subjected to reasonable evaluation and review.  Id. at 377… 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 disregard of a lack of a reasonable basis for denial or a reckless indifference to facts
or to proofs submitted by the insured."

Anderson v. Continental Ins. Co., 271 N.W. 2d at 377.

    Therefore, once the policyholder has fully performed, the insurer must evaluate the performance in good faith, deal fairly with its insured and fulfill its promise of coverage. The insurer must not look for ways to insulate itself from paying the claim. Nor may the insurer fabricate extraneous reasons, not set forth in the policy terms for keeping the benefits from its insured. Once the tables are turned, and the stage lights are turned onto the insurance company, it must perform. Unfortunately, by then, the insurance company, rich with its premium dollars, often looks for ways to prevent disgorgement of its capital and keeps far too tight a fist around those dollars. The economic power imbalance in insurance relationships is a ‘paramount consideration in adopting a first party bad faith remedy. Kransco v. Am.Empire Surplus Lines Ins. Co., 2 P. 3d 1 (Ca. 2000) The insurance company starts as the generous benefactor selling something to the consumers that they really need. Consumers were made to feel that disability insurance was a necessary purchase in order to protect themselves against the disaster that would strike if they, a professional were unable to provide for their families. Like a tornado, the relationship swiftly twists from one of friendly service, e.g., “we are here when you need us, protecting everything you work for, “(UnumProvident logo), to one of an adversary relationship.  “The insurer’s promise to the insured to ‘simplify his life’, to put him ‘in good hands’ to back him with a ‘piece of the rock’, or to be ‘on his side’ hardly suggests that the insurer will abandon the insured in his time of need”. D’Ambrosio v. Pa. Nat’l Mut. Casualty Ins. Co., 396 F.2d 780, 785 (Pa. Super. Ct. 1978)
    If the guardians of the money, invested by the insureds for protection against potential calamity, are trained to find ways to support non-payment, the process is biased against the now vulnerable, financially deprived investor. The promises made to protect the investor requires that the insurance company promptly investigates the pays benefits, denying coverage only where it has proper cause and a reasonable basis to do so. Chateau Chamberay Homeowners Ass’n. v. Associated Int’l Ins. Com. 108 Cal. Rptr. 2d 776, 784 (Ct. App. 2001)
As a recent scholarly law review article reasoned:
“Compensating insured separately for their damages from unreasonable clam denials is consistent with imposing the costs of externalities on the party best in the position to avoid the unreasonable conduct in the first place:  As between the insurance company and an innocent policyholder whose claim was improperly denied, the costs imposed by the claims handler’s unreasonable withholding of benefits more properly are borne by the insurance company employer. This is especially true for benefits unreasonably withheld pursuant to company policy or approval by management. See, e.g. Hudson Universal. Ltd, v. Aetna, Ins. Co., 987 F. Supp. 337, 342 n. 4 (D.N.J. 1997) noting “the court caution, however, that an insurer may not “create a debate by denying coverage on an issue for which it consistently declines coverage as a matter of policy.”)  Ordinarily, such would provide the basis for the imposition of punitive damages against the insurance company in many states. See generally, Trinity Evangelical Lutheran Church and School-Freisteadt v. Tower Ins. Co., N.W. 2d No. 01-1201, 2003 WL 21205367 (Wis. May 23, 2003); Neal v. Farmers Ins. Exch., 582 P. 2d 980 (Cal. 1978).

    Importantly, the question of bad faith is to be tested at the time of the denial.  Thus, the insurance company’s attempts to create a fairly debatable claim are limited to the proof in its possession at the time the claim was denied. Aetna Life Ins. Co. v. Lavoie, 505 So. 2d 1050, 1053 (Ala. 1987); Erwin v. State Farm Fire & Cas. Co., 618 F. Supp. 1040, 1042 (E.D. Mo. 1985); Amato v. Mercury Cas. Co., 61 Cal. Rptr. 2d 909, 914 (Ct. App. 1997); Chateau Chamberay Homeowners Ass’n. v. Associated Int’l. Ins. Co., 108 Cal. Rptr. 2d 776 (Ct. App. 2001); Skaling v. Aetna Ins. Co., 799 A.2d 997, 1008  (R.I. 2002).  The insurer is limited to introducing evidence that it actually relied upon and communicated to the insured when it denied the claim, and may not seek to enhance its defense by pointing to extraneous facts or arguments that it did not communicate to the insured when it refused payment.  The reasonableness of an insurer's decision is measured at the time it is made, and information that is gathered by the insurer after it has denied benefits is inadmissible to show the insurer's good faith.  Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 340 (Tex. 1995); Wetherbee v. United Ins. Co. of America, 18 Cal. App. 3d 266, 270 (1971) (emphasis supplied). 
Based on the preceding caselaw and legislation, the standards of fair claim practices and substantive legal rules require an insurance company to deal fairly with its policyholders, and may be liable for extracontractual damages if it fails to do so.  Ultimately, the covenant of good faith extends to the "assertion, settlement and litigation of contract claims and defenses," and the covenant is breached by "conduct such as conjuring up a pretended dispute, or asserting an interpretation of the contract contrary to one's own understanding." Riveredge Assoc. v. Metropolitan Life Ins. Co., 774 F. Supp. 897, 900 (D.N.J. 1991) (citing Comment e to Restatement § 205, entitled "Good faith in enforcement").
THE JURY SHOULD DECIDE BAD FAITH, NOT THE COURT ON A DIRECTED VERDICT

Case law and decisions of various jurisdictions demonstrate rejection of the harsh application of the directed verdict rule in favor of a far fairer procedural remedy, thus allowing a plaintiff's claim for bad faith to proceed forward.  The directed verdict rule involves a blend of both substantive law and procedural law.  Its harsh application requires that unless the policyholder is entitled to a directed verdict on his coverage claim, the insurance company’s denial of coverage cannot constitute bad faith as a matter of law.  States are now backing away from a strict construction of the directed verdict rule in favor of a far fairer procedural remedy. 
RHODE ISLAND: 
In Skaling v. Aetna Ins. Co., 799 A. 2d 997 (R.I. 2002), the court evaluated the directed verdict rule, confronted with the question of whether, in the context of first-party claims, “an insurer is insulated from a claim of bad faith simply because plaintiff was unable to obtain a judgment as a matter of law in the underlying breach of contract action.”  The court reasoned:
The issue is particularly compelling in cases in which the issue rests upon a disputed fact or the claim is denied based upon a disputed oral conversation between the insured and the claims examiner.  These factual disputes cannot be determined as a matter of law.  We are of the opinion that the directed verdict standard of proof in this context is unworkable and unjust, a situation that has been recognized in other jurisdictions. 

Id. at 1002 (emphasis supplied).

The court further reasoned, “It makes little sense that an insurance company may deny a
claim, assert a coverage issue in a reckless and oppressive fashion, fail to timely respond to its obligations, or otherwise behave in a manner inconsistent with its implied duties of fair dealing and be insulated from tort liability for its bad faith conduct because it fortuitously survives a motion for summary judgment as a matter of law, yet is ultimately found to have breached the insurance contract.”  Id. at 1005.  "We decline to hold that a plaintiff, to litigate his bad faith claim, must establish entitlement to a JML on the breach-of-contract claim…That is, bad faith is established when the proof demonstrates that the insurer denied coverage or refused payment without a reasonable basis in fact or law for the denial.”  Id. at 1010.
ALABAMA

Likewise in Alabama, the courts have restricted the application of the directed verdict
rule on a contract claim to normal or ordinary bad faith acts and articulated that a different standard be applied in certain unusual or extraordinary cases.  Nat’l. Ins. Ass'n. v. Sockwell, 829 So.2d 111 (Ala. 2002).  The court emphasized that not all bad faith claims are estopped by an inability to obtain a directed verdict. In Alabama, “the plaintiff in a ‘bad faith refusal case has the burden of proving:  (a) an insurance contract between the parties and a breach thereof by the defendant; (b) an intentional refusal to pay the insured's claim; (c) the absence of any reasonably legitimate or arguable reason for that refusal (the absence of a debatable reason); (d) the insurer's actual knowledge of the absence of any legitimate or arguable reason; ... . In short, [the] plaintiff must go beyond a mere showing of nonpayment and prove a bad faith nonpayment, a nonpayment without any reasonable ground for dispute. Or, stated differently, the plaintiff must show that the insurance company had no legal or factual defense to the insurance claim." National Sec. Fire & Casualty Co. v. Bowen, 417 So. 2d 179, 183 (Ala. 1982) (emphasis in original). The plaintiff's burden in making a bad-faith claim is a "heavy" one. Liberty Nat'l Life Ins. Co. v. Allen, 699 So. 2d 138, 142 (Ala. 1997).    The Alabama Supreme Court  has divided bad-faith claims into two categories: "normal" bad-faith claims and "unusual" or "extraordinary" bad-faith claims. In "normal" bad-faith cases, the Court has applied a "directed-verdict-on-the-contract-claim" standard whereby "the proof offered must show that the plaintiff is entitled to a directed verdict on the contract claim and, thus, entitled to recover on the contract claim as a matter of law. Ordinarily, if the evidence produced by either side creates a fact issue with regard to the validity of the claim and, thus the legitimacy of the denial, the plaintiff loses his right to submit his tort claim to the jury.   National Sav. Life Ins. Co. v. Dutton, 419 So. 2d 1357, 1362, (           )  In that setting, summary judgment would be granted.  See, e.g., S & W Properties v. American Motorists Ins. Co., 688 So. 2d 529, 533 (Ala. 1995) ("All of the evidence ... suggests a dispute over a genuine issue of material fact. Therefore, the plaintiffs did not show that American Motorists had no legal or factual defense to the insurance claim....[and] the judge properly entered the summary judgment for the insurer." ) Fortunately, the directed -verdict standard does not apply to an "unusual" or "extraordinary" bad-faith claims.  See National Ins. Ass'n v. Sockwell, 829 So. 2d 111, 128 (Ala. 2002). The courts define "unusual”  bad-faith claims to four types: "those instances in which the plaintiff produced substantial evidence showing that the insurer (1) intentionally or recklessly failed to investigate the plaintiff's claim; (2) intentionally or recklessly failed to properly subject the plaintiff's claim to a cognitive evaluation or review; (3) created its own debatable reason for denying the plaintiff's claims; or (4) relied on an ambiguous portion of the policy as a lawful basis to deny the plaintiff's claim." Id. at 129-30 (citing State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293 (Ala. 1999)). It is the plaintiff's burden to establish that her bad-faith claim is an "unusual" one. Id. at 129.  In Nobles v. Rural Community Insurance Services, 2004 U.S. Dist. LEXIS 2807 (M. D. Ala. 2004), Nobles and Hales asserted the insurance company failed altogether to investigate their insurance claim. However, the court declined to permit the plaintiff to overstep the directed verdict threshold, because they did not argue that any part of their bad-faith claim should be categorized as "unusual." The court reasoned, “In fact, beyond asserting in their complaint that RCIS failed to investigate their insurance claim, Nobles and Hales have nowhere argued nor provided any evidence that RCIS failed to investigate their claim, and have presented no evidence whatsoever to support their failure-to-investigate claim. As such, the court will treat both Nobles and Hales's "refusal to pay" claim and their failure-to-investigate claim as "normal" bad-faith claims under Alabama law, subject to the directed-verdict-on-the-contract-claim standard.” *39. To the contrary, defendants produced affidavits from its employees documenting the investigation that indeed occurred. The lesson here is that the plaintiff must prove the substance of its bad faith claim before petitioning the court to pass through the “directed verdict” threshold without proving bad faith as a matter of law.
ARIZONA
In Zilisch v. State Farm Mut. Ins. Co., 196 Ariz. 234, 995 P.2d 276 (2000), the court held that the insured is not required to establish a right to directed verdict on the breach of contract claim.  The court reasoned, “the appropriate inquiry is whether there is sufficient evidence from which reasonable jurors could conclude that in the investigation, evaluation and processing of the claim, the insurer acted unreasonably,” and whether there is proof that the insurer “either knew or was conscious of the fact that its conduct was unreasonable”. Id at 280.  Following Zilisch’s lead, the Supreme Court of Kentucky rejected the fairly debatable claim standard and held that the existence of jury issues on the contract claim does not defeat the bad faith claim. Farmland Mut. Ins. Co. v. Johnson, 36 S.W. 3d 368, 375 (Ky. 2000).
IOWA
In Chadima v. Nat'l. Fidelity Life Ins. Co., 848 F. Supp. 1418 (8th Cir. 1995), where the court reasoned, “the insurer’s interpretation of Iowa law as requiring the Court to first decide whether the insurer had an objectively reasonable basis for denying a claim is really only the flip-side of whether the insured has met its burden of producing evidence that the insurer has no reasonable basis for denying the claim.  Only when there is no evidence from which a reasonable juror could make a necessary finding, is the insurer entitled to judgment as a matter of law.  Otherwise, the question goes to the jury.”  See in accord, Nassen v. Nat'l. States Ins. Co., 494 N.W. 2d 231, (Iowa 1993) where the insurer had ignored crucial information in the company’s own claim files, and had “shunned any information that plaintiff’s representatives sought to provide on this question,” the court held the question of bad faith was for the jury to decide; and Kiner v. Reliance Ins. Co., 463 N.W. 2d 9 (Iowa 1990) where the court held that if a reasonable factfinder could conclude that the insurer failed to exercise an honest and informed judgment in denying the claim, a jury question is generated on the bad faith issue because such a conclusion would support a finding that the insurer’s denial was not fairly debatable.
NEW JERSEY
New Jersey courts have moved away from applying the directed verdict rule in cases alleging that  insurance companies have committed the tort of bad faith toward their insureds.  In Massachusetts Mut. Life Ins. Co. v. Orenyo, 1998 WL 1297799 (D.N.J. July 24, 1998) (unpublished opinion) the court refused to dismiss the bad faith claim arising out of the denial of disability policy benefits, even though the insured could not establish a right to summary judgment on his substantive claim against the disability insurer. Mr. Orenyo was an attorney who filed for disability benefits due to a psychiatric condition.  Massachusetts Mutual, after paying benefits for some time, contested Mr. Orenyo’s truthfulness in his initial application for the disability policy, claiming material misrepresentations.  The court denied Mass Mutual’s motion for summary judgment on the bad faith claim, reasoning:
Giving Orenyo the benefits of all favorable inferences, there is a question of fact whether Mass Mutual had a reasonable basis for denying benefits. Mass Mutual argues that its decision to suspend, reinstate and then terminate benefits was supported by a “fairly debatable” reasons...Orenyo argues that Mass Mutual acting in knowing and reckless disregard of the facts supporting his claim…. The jury could find that Mass Mutual would have lacked a reasonable basis for its actions. A reasonable jury could also find that Mass Mutual’s failure to pay was in knowing or reckless disregard of the facts. Id. at *8. 

Judge Bassler also denied Mass Mutual's motion to dismiss Orenyo’s punitive damages claim, citing as authority, Pickett, 131 N.J. at 476. Mass Mutual, supra at *9 (and pg. 26 of the Court Opinion).  See also, Nestle Foods Corp. v. Aetna Cas. & Sur. Co., 842 F. Supp. 125 (D.N.J. 1993), where Judge Fischer refused to dismiss a bad faith claim arising out of a denial of liability policy benefits, even though the insured could not establish a right to summary judgment on its substantive claim against the liability insurer.   
The judiciary have expressed exasperation over the draconian application of the directed verdict rule in New Jersey.  In Tarsio v. The Provident Ins. Co., 108 F.Supp.2d 397 (D.N.J. 2000), the District Court articulated its extreme displeasure with the standard established in Pickett 131 NJ 457 (1993), calling it "peculiar" at best. Tarsio v. The Provident Ins. Co. at 401.  Judge Wolin’s reasoning resonates the decisions of other jurisdictions that have rejected a procedural application of directed verdict:
"The Court points out it can envision other valid methods of determining
 'bad faith' and considers the New Jersey Supreme Court's rule somewhat
 anomalous.  Indeed such a rule is odd in that it requires the Court to examine
a cause of action (plaintiff's first cause of action) which is not the subject of the
instant motion.  Moreover, and more significantly, the jury may ultimately reject
the insurer's evidence and find that the insurer possessed no basis to reject plaintiff's claim.  Certainly, after rejecting such evidence, other evidence may suggest that the insurer acted in 'bad faith.'  Yet, the jury is precluded from deliberating 'bad faith' simply because the trial court finds an issue of fact as to the underlying claim."

Tarsio v. The Provident Ins. Co., 108 F. Supp. 2d at 401 (emphasis supplied).  The Court concluded by reasserting its displeasure with the Pickett standard stating, it "doubts the wisdom of this standard". Id. at 401. 
In Miglicio v. HCM Claim Management Corp., 288 N.J.Super. 331 (1995), the court held that since a jury could conclude that no reasonable basis existed for denying the claim, the issue of bad faith should go to the jury.  Miglicio further held that extracontractual damages could be awarded as consequential damages and punitive damages as well.   The court recognized that limiting liability to the amount of loss plus interest encouraged insurance companies to take advantage of the insured by delaying payments.  Id. at 340 (citing Polito v. Continental Cas. Co., 689 F.2d 457, 461 (1982)).  The Miglicio court notes that egregious circumstances surrounding an insurer's actions warrant the award of punitive damages. Miglicio v. HCM Claim Management Corp., 288 N.J.Super. at 339. 
    Recently, in Kelly v. Equitable, Judge Russello denied defendant’s motion for summary judgment on bad faith, determining the jury should decide whether the facts supported a finding of bad faith.  As reported in the New Jersey Lawyer in September, 2003,
    “A Bergen County judge has served notice to insurance companies that if they look more at the bottom line than at honoring their polices, therer may be ahefty price to pay. In a ruling that opens up the possibility of punitive dmages, Judge Mark M. Russello redently denied a motion by insurance company defendants for summary judgment against a chiropractor who claims she is disabled but wsa denied disability benefits because of a focus on corportate profits, not in the nature of her injury. The judge let two counts in the case go forward One alleges the defenedatns acted egregiously in their denial. The other alleges the denial was made in bad faith.”

The case subsequently settled.  The aforesaid caselaw and decisions of the various jurisdictions, including New Jersey, demonstrate rejection of the harsh application of the directed verdict rule in favor of a far fairer procedural remedy, thus allowing a plaintiff's claim for bad faith to proceed forward for consideration by a jury of his peers.