How to Plead a Consumer Fraud Case for Denial of a Claim

Win Some, Lose Some

When people are unhappy with their insurance company they refuse to limit themselves to a suit for breach of contract and obtain the indemnity promised by the policy. Rather, they file lawsuits seeking tort damages for breach of the covenant of good faith and fair dealing and violation of consumer protection acts, as well as any other cause of action the imagination of the plaintiff’s lawyer can conceive of placing into the complaint. Ignoring the principle that in litigation “less is more,” they insist on overkill. The tort of bad faith should be sufficient to provide damages to an unhappy insured but they insist on also seeking consumer fraud damages from an insurer who fails to pay what the insured wanted.

In Robert J. v. Liberty Mut. Ins., Slip Copy, 2015 WL 4138990 (D.N.J., 7/8/2015), the U.S. District Court for the District of New Jersey was called upon to limit the litigation brought by a victim of Hurricane Sandy against their insurer Defendant Liberty Mutual Insurance (“Liberty Mutual”). Liberty Mutual, attempting to bring the litigation to reasonableness, moved the court to dismiss Plaintiffs’ claims for violations of the New Jersey Consumer Fraud Act, punitive damages, and attorneys’ fees.

FACTUAL BACKGROUND

Plaintiffs Robert and Jaime Ryan, New Jersey residents whose home was damaged during Hurricane Sandy, initiated this action against Liberty Mutual on October 10, 2014. Plaintiffs allege that they purchased homeowners’ insurance from Liberty Mutual, with maximum coverage of $1,635,740, and that their “home and its contents were essentially destroyed by Hurricane Sandy.”

Plaintiffs alleged that “Liberty Mutual has unreasonably and in bad faith denied coverage and underpaid for the damage.”  They assert that Liberty Mutual’s agents “improperly adjusted and denied Plaintiffs’ claims without adequate investigation, even though Plaintiffs’ losses were covered by the Policy.”  They also claim, among other things, that Liberty Mutual was “deceptive in the adjustment of this claim” by “fraudulently creating values and assigning them to the covered loss to increase its own profitability” and by “fraudulently telling its policyholder that the losses were not covered despite evidence that they were.” Plaintiffs further allege that Liberty Mutual’s response to their claim was part of “an ongoing, widespread and continuous scheme to defraud its insureds in the payment of benefits under their policies of insurance.”

Plaintiffs assert claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the New Jersey Consumer Fraud Act (“NJCFA”). They seek compensatory, consequential, punitive, and statutory damages as well as attorneys’ fees and costs. Liberty Mutual moved to dismiss Plaintiffs’ NJCFA claim, their claim for punitive damages, and their claim for attorneys’ fees and costs.

DISCUSSION

Liberty Mutual moves to dismiss Plaintiffs’ NJCFA claim. Def.’s Mem. 5–9. The NJCFA “is remedial legislation” that the New Jersey Supreme Court “construe[s] liberally to accomplish its broad purpose of safeguarding the public.” Furst v. Einstein Moomjy, Inc., 182 N.J. 1, 11–12, 860 A.2d 435 (2004). In relevant part, the statute prohibits “[t]he act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false promise, [or] misrepresentation … in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived or damaged thereby….” N.J. Stat. Ann. § 56:8–2.

There are three elements to an NJCFA claim: “1) unlawful conduct by defendant; 2) an ascertainable loss by plaintiff; and 3) a causal relationship between the unlawful conduct and the ascertainable loss.”   D’Agostino v. Maldonado, 216 N.J. 168, 184 (2013) (citing Bosland v. Warnock Dodge, Inc., 197 N.J. 543, 557, 964 A.2d 741 (2009)).

Liberty Mutual argues that Plaintiffs’ claim must be dismissed because the NJCFA “does not apply to disputes about insurance benefits or coverage.” In the 1980s, the New Jersey Appellate Division held that the NJCFA does not apply to the payment of insurance benefits. The New Jersey Appellate Division has since maintained that “while the [NJ]CFA encompasses the sale of insurance policies as goods and services that are marketed to consumers, it was not intended as a vehicle to recover damages for an insurance company’s refusal to pay benefits.” Myska v. New Jersey Mfrs. Ins. Co., No. A–027514T4, 2015 WL 2130870, at *13 (N.J.Super.Ct.App.Div. May 8, 2015).

Most recently the Third Circuit noted in dicta that “New Jersey courts … have consistently held that the payment of insurance benefits is not subject to the Consumer Fraud Act.” Granelli v. Chicago Title Ins. Co., 569 F. App’x 125, 133 (3d Cir.2014).

Here, Plaintiffs’ NJCFA claim goes to Liberty Mutual’s subsequent performance of its obligations under the insurance contract. Plaintiffs do not merely claim that Liberty Mutual underpaid their benefits, which would amount only to breach of contract, but instead assert that Liberty Mutual acted deceptively and fraudulently when investigating their property damage. Their NJCFA claim accuses Liberty Mutual of “telling its policyholder that the losses were not covered despite evidence that they were,” in “creating values and assigning them to the covered loss to increase its own profitability,” and “in falsely misrepresenting what its responsibilities were under the policy.” By alleging that Liberty Mutual’s investigatory conduct was deceptive, Plaintiffs make clear that their NJCFA claim targets Liberty Mutual’s conduct in performing its contract obligations ̶ which distinguishes their NJCFA claim from the type of mere underpayment allegation that concerns the New Jersey Appellate Division. This Court predicts that the New Jersey Supreme Court would apply the NJCFA to Liberty Mutual’s allegedly deceptive conduct in investigating Plaintiffs’ property damage. Liberty Mutual’s motion to dismiss Plaintiff’s NJCFA claim is denied.

Plaintiffs’ Claim for Punitive Damages Is Insufficient

Liberty Mutual argues that Plaintiffs’ claim for punitive damages must be dismissed because the complaint omits “any allegation of an outrageous intentional tort.” Deliberate, overt, and dishonest dealings, insult and personal abuse constitute torts entirely distinct from the bad-faith claim.  Plaintiffs have not pled facts that rise to the level of egregiousness necessary for punitive damages in an insurance contract case. Their claim for punitive damages is dismissed.

Plaintiffs May Be Entitled to Attorneys’ Fees

Plaintiffs’ complaint includes two requests for attorneys’ fees, in connection with their claim for breach of the implied covenant of good faith and fair dealing and in their Request for Relief. The New Jersey Supreme Court’s holdings bar the recovery of attorneys’ fees in connection with Plaintiffs’ claim for breach of the implied covenant. Plaintiffs’ request for attorneys’ fees arising from their breach of implied covenant claim is dismissed.

Plaintiffs argue that they are still “entitled to attorney’s fees by virtue of their Consumer Fraud Act claims.”

The NJCFA mandates the recovery of attorneys’ fees. As such, the Court denied Liberty Mutual’s motion to dismiss Plaintiffs’ claim for attorneys’ fees in the Request for Relief.

ZALMA OPINION

This is, at best, a Pyrrhic victory for Liberty Mutual. They eliminated a claim for punitive damages for breach of the covenant of good faith and fair dealing only to lose on its claims for statutory based damages. If, as the plaintiffs allege, Liberty acted wrongfully in dealing with the insurance claims, it will be punished. This is, however, just an analysis of pleadings, including an interpretation where there is a split in the district court finding concerning the application of the statute to insurance. It would be useful if the New Jersey Supreme Court clarified the issue and determined that its consumer fraud act either applies to or does not apply to insurance.

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

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