July 6, 2011
By: John M. Clark, Erin Nulty and Elena B. Zuares
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
Recently, in Wood v. New Jersey Manufacturers Insurance Company, 2011 WL 2314492 (N.J. 2011), the New Jersey Supreme Court issued an opinion that will impact insurers facing bad faith claims in a Rova Farms action for failure to settle a case within the insured's policy limits prior to trial. In a case of first impression, the Court determined that the bad faith claim in a Rova Farms action represents a traditional contract claim that the insurer breached the implied covenant of good faith and fair dealing; therefore, insurers are entitled to a trial by jury. Prior to this decision, most Rova Farms actions were decided by a judge via motions practice or bench trial.
Under New Jersey law, when an insurer fails to exercise good faith in attempting to settle a claim against an insured within the policy limits and an excess verdict is entered against the insured, the insurer may be found liable to the insured for the amount of the excess judgment. Referred to as a "Rova Farms" claim, this type of insurer bad faith has been recognized since the Court's decision in Rova Farms Resort, Inc. v. Investors Insurance Co. of America, 65 N.J. 474 (1974). However, since Rova Farms, no reported cases in New Jersey have clarified whether bad faith claims in this context should be heard by a judge or by a jury.
Generally, most Rova Farms actions are brought in the context of a request for a declaratory judgment. The law governing declaratory judgments does not specify when the right to a jury trial arises, but instead provides that the court must look to the basis of the cause of action and the relief requested to determine whether an action is legal or equitable in nature. Legal claims are subject to trial by jury, but equitable ones are not. Declaratory judgment actions addressing insurance issues usually involve questions of coverage under the policy, and such issues are equitable in nature. As Rova Farms claims are typically brought in declaratory judgment actions, they were placed into that equitable category and adjudicated by a judge.
To determine whether a Rova Farms bad faith claim is legal or equitable in nature, the Court looked to the basis for the claim and focused on the type of relief requested. The Court found that a Rova Farms claim is a simple breach of contract claim that the insurer, by failing in bad faith to settle a claim within the policy limits prior to trial, has breached the implied contractual covenant of good faith and fair dealing that is a part of every contract in New Jersey. A breach of contract claim is triable by a jury. In addition, the Court observed that the relief sought by the claimant in Wood is payment of the judgment recovered against the insured in excess of the insured's policy limits, which is solely legal in nature. Accordingly, the Court concluded that the Rova Farms claim is an action at law for which a right to a jury trial exists, as opposed to a coverage issue under the policy for which no jury right attaches.
Now that the right to jury trial exists in Rova Farms cases, insurers as well as policyholders will have the option of having a judge or jury determine the existence of bad faith. There are pros and cons to either choice and the determination is best made on a case-by-case basis depending on the facts involved. Procedurally, it is important to note that a demand for a jury trial must be made at the outset of a case or it is waived. Once a demand is made, however, the parties can still consent to a bench trial later in the proceedings.
For further insight on this matter or other complex litigation and coverage issues impacting the insurance industry and surplus lines insurers, contact John Clark at 856-665-8502 or via email at jclark@nldhlaw.com.
