July 10, 2008

TO THE COMPANIES IN INTEREST:

In Taddei v. State Farm Indemnity, A-3806-06T2 (June 30, 2008), the Superior Courtof New Jersey, Appellate Division addressed the issue of bad faith in the context of anuninsured motorist (UM) claim. Mr. Taddei was injured in a vehicular accident allegedlycaused by the negligence of the unknown driver of another vehicle. Mr. Taddei was insuredby State Farm Indemnity Company and his policy included UM coverage in the amount of$100,000 per person and $300,000 per accident.

Mr. Taddei demanded UM arbitration. A panel of three arbitrators conducted a UMhearing on March 21, 2005. They found the unknown driver 100% at fault and awarded Mr.Taddei $92,500 for his injuries. On April 1, 2005, State Farm voluntarily paid plaintiff$50,000, thus reducing the available coverage by that amount. On April 15, 2005, StateFarm formally rejected the arbitrators’ decision and advised Mr. Taddei if he wished topursue the matter further he would have to file a Superior Court action.

Mr. Taddei filed his complaint in the Superior Court on April 16, 2005. TheComplaint sought only compensatory damages. It contained no allegations of bad faithagainst State Farm. Mr. Taddei did not raise the issue of bad faith until pretrial motions.

On May 24, 2006, a mandatory, non-binding arbitration was conducted in the SuperiorCourt. The arbitrator found the unknown driver 100% at fault and awarded the plaintiff $87,500. On July 19, 2006, State Farm rejected the arbitrator’s award and requested a trial denovo. Shortly before trial, Mr. Taddei expressed a willingness to settle for $87,500. StateFarm offered $25,000 in addition to the $50,000 that it had already paid. The parties againreached an impasse and the case proceeded to trial in January 2007. The jury rendered averdict of $2,500,000 for Mr. Taddei and $100,000 for his wife. Over Mr. Taddei’s objection, the Judge molded the verdict to reflect the UM coverage limits and enteredjudgment for $100,000.

On appeal, Mr. Taddei argued that because State Farm acted in bad faith by delayingthe resolution of his UM claim and refusing to pay the full policy limits to settle the claim,State Farm should be liable for the full $2,500,000 awarded by the jury, plus pre-judgmentinterest on that amount. Mr. Taddei further argues that there is no court rule or otherauthority authorizing a trial court to “disregard or reduce” a jury verdict by molding it in thematter done here.

In essence, Mr. Taddei asked the court to create a cause of action providing a remedyin the UM context similar to that provided on third party claims by Rova Farms, Inc. v.Investors Insurance Company of America, 65 N.J. 474 (1974). Rova Farms generally standsfor the proposition that an insurer may be liable over its policy limits if it has an opportunityto settle within the policy limits and fails to do so. The court noted that the Rova Farmsmodel does not apply in the first party coverage context. The remedy in Rova Farms wasbased on the unique fiduciary relationship that arose out of a general liability insurancepolicy. The court reasoned that an insurer choosing not to settle within the limits of coverageshould not be permitted to gamble with its insured’s money. That rational does not carryover to the first party context as the insured’s assets are not placed at risk for failure to settlewithin the policy limits.

The Taddei court then addressed the law regarding first party bad faith in New Jersey.The lead New Jersey case on first party bad faith is Pickett v. Lloyds, 131 N.J. 457 (1993).The court agreed with Mr. Taddei that Pickett stands for the proposition that an insured hasa right to assert a claim against his UM carrier for breaching the covenant of good faith andfair dealing implied in the insurance contract. However, the court distinguished Pickettbecause Mr. Taddei’s claim involved an unliquidated bodily injury claim which, by itsnature, is subjective. Pickett involved a property damage claim, the amount of which wassusceptible of objective determination. In fact, the amount of the claim in Pickett wasundisputed. It was undisputed in Pickett that the plaintiff’s damages exceeded the availablepolicy limits. In addition to distinguishing Pickett, the Taddei court also noted that twoarbitration panels made up of individuals with experience in evaluating personal injuryclaims, assessed plaintiff’s damages below the policy limit.

The Taddei court agreed that an insured, in the appropriate case, has the right to asserta bad faith claim against his UM carrier for breaching the covenant of good faith and fairdealing. However, the measure of damages would be any foreseeable consequential damages. This might typically include costs of litigation, including expenses for experts andcounsel fees, and pre-judgment interest. The court also noted “in an exceptional andparticularly egregious case” the insured may even be permitted to pursue punitive damages.However, the insured’s damages are not measured by the amount of damages determined bythe jury for the insured’s injuries. Accordingly, the court upheld the trial court’s decisionto reduce the jury’s damages award to reflect the policy limits. The court did award1prejudgment interest.

In short, if the insured is able to establish bad faith conduct by the insurer, theinsured’s damages will be limited to any foreseeable consequential damages and possiblypunitive damages. However, the amount of the damages determined by the jury for theinsured’s injury is not the measure of damages. Based on this ruling, I suspect that UMclaimants will routinely add a bad faith count when asserting a UM claim.

If you should have any questions or would like a copy of Taddei, please do nothesitate to contact Glendon E. Danks, Esquire (856) 751-5285 or by e-mail at danks@bbs-law.com.