New Jersey Appellate Division Rejects Bad Faith Claim When Insurer Settles Less Than All Underlying Claims for Policy Limit

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1 NEW JERSEY Bad Faith New Jersey Appellate Division Rejects Bad Faith Claim When Insurer Settles Less Than All Underlying Claims for Policy Limit Masgay-Doitch v. Khatri, 2015 N.J. Super. Unpub. LEXIS 2134 (App. Div. Sept. 3, 2015) The New Jersey Appellate Division upheld the trial court s ruling in favor of the insurer finding the insurer did not act in bad faith by paying to settle multiple claims arising from a single accident within the policy limit. The appellate panel found that the underlying settlement was favorable to the policyholders and that the policyholders knew when they authorized the settlement that any claims not subject to the global settlement would not thereby be resolved. A fire damaged a multi-family dwelling owned by the policyholders, resulting in damage to nearby property as well as serious bodily injury to an upstairs tenant and a firefighter who responded to the fire. The insurer paid to settle these claims for an aggregate sum within the $300,000 policy limit. The insurer, however, did not settle with an additional tenant whose insurer presented a subrogation claim alleging that certain of the tenant s belongings were damaged as a result of the fire. Prior to settling with the plaintiff group, the insurer made the policyholders aware of the additional subrogation claim, but noted that the claim had been denied years earlier and nothing further had been heard from the subrogee insurer. The insurer s retained defense counsel had advised the policyholders in writing that although the global settlement would not dispose of this subrogation claim, the policyholders had the right to assert defenses to the claim should the subrogee insurer further pursue recovery. The policyholders expressly consented to the global settlement even though it did not dispose of the subrogation claim. Eventually the subrogee insurer and the subrogor tenant each filed suits against the policyholders. The policyholders in turn filed a third party complaint against the insurer, demanding that it provide defense and indemnity coverage, and that its failure to do so constituted bad faith. At the trial court level, the Law Division granted summary judgment to the insurer, finding the detailed record showed the underlying global settlement was very favorable to the policyholder and that the policyholders knew when they authorized the settlement that the subrogation claim would not thereby be resolved. The Appellate Division affirmed. The panel rejected the policyholder s argument that the insurer breached its duty when it did not attempt to settle the subrogation claim within the policy limits plus an amount the policyholder was willing to pay. The Appellate Division explained that [w]hen a presumptively valid and adequate award has been made to one of several claimants, the fact that the remaining claimants, or any one of them, have not been taken into the confidence of the settling parties falls far short of establishing an adequate ground for a finding of insurer bad faith. Moreover, the panel deemed the underlying settlement particularly prudent because the Insurer had heard nothing from the subrogee after its claim had been denied. [Please Scroll Down for a Copy of the Full Decision] The cases annexed to this newsletter have been reproduced by Connell Foley LLP with the permission of LexisNexis. Copyright 2014, LexisNexis, a division of Reed Elsevier Inc. No copyright is claimed as to any part of the original work prepared by a government officer or employee as part of that person's official duties Connell Foley. The information contained in this electronic message and any attached document(s) is intended for the personal use of designated recipients. This document is for informational purposes only, and is a means of disseminating general information about judicial insurance coverage law developments. It is not to be interpreted as legal advice, which must always be tailored to individual needs and particular circumstances. Should you wish to unsubscribe from this list, and remove yourself from future Connell Foley mailings, please reply to contact@connellfoley.com, contact@connellfoley.com, with UNSUBSCRIBE in the subject line.

2 Page 1 1 of 1 DOCUMENT SHARON MASGAY DOITCH and STATE FARM FIRE and CASUALTY COM- PANY a/s/o SHARON MASGAY DOITCH, Plaintiffs, v. NARENDRAKUMAR KHATRI, MINAKISHIBEN KHATRI, JAYESH KHATRI and PRETESH KHATRI, Defendants, and NARENDRAKUMAR KHATRI, MINAKISHIBEN KHATRI, JAYESH KHATRI and PRETESH KHATRI, Third-Party Plaintiffs-Appellants, v. NEW JERSEY MANUFACTURERS INSURANCE COMPANY, Third-Party Defendant-Respondent. DOCKET NO. A T1 SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION 2015 N.J. Super. Unpub. LEXIS 2134 July 14, 2015, Argued September 3, 2015, Decided NOTICE: NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION. PLEASE CONSULT NEW JERSEY RULE 1:36-3 FOR CITATION OF UNPUBLISHED OPINIONS. PRIOR HISTORY: [*1] On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L COUNSEL: Maurice McLaughlin argued the cause for appellants (McLaughlin & Nardi, attorneys; Mr. McLaughlin, of counsel and on the briefs; Pauline M.K. Young, on the briefs). Brian G. Steller argued the cause for respondent (Connell Foley, attorneys; Mr. Steller, of counsel and on the brief; Neil V. Mody and Michael J. Creegan, on the brief). JUDGES: Before Judges Kennedy and Hoffman. OPINION PER CURIAM In this third-party action for insurance coverage, third-party plaintiffs, Narendrakumar Khatri, et al., (Khatri or policyholder) as holders of a homeowners' insurance policy with third-party defendant, New Jersey Manufactures Insurance Company (NJM), appeal from the March 8, 2013 order granting summary judgment to NJM. We affirm. I. On July 18, 2008, a fire ignited in the Khatri home, a multi-family dwelling in Jersey City, resulting in damage to the house as well as surrounding properties and serious bodily injury to an upstairs tenant and a firefighter responding to the fire. Khatri had an NJM homeowners' policy with a $300,000 coverage limit per incident. The policy provided in relevant part If a claim is made or a [*2] suit is brought against an insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies we will: 1. Pay up to our limit of liability for damages for which the Insured is legally liable; and 2. Provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit we decide is appropriate. Our duty to settle or defend ends when the amount we pay for damages resulting from the occurrence equals our limit of liability.

3 Page 2 The policy set forth the applicable limit of liability as follows Our total liability under Coverage E for all damages resulting from any one occurrence will not be more than the limit of liability for Coverage E as shown in the Declarations. All bodily injury and property damage resulting from any one accident or from continuous or repeated exposure to substantially the same general harmful conditions shall be considered to be the result of one occurrence. Following the fire, multiple claims and lawsuits were filed against the policyholders. First, in August 2008, Thomas Flagg, owner of a neighboring property, notified Khatri through [*3] his homeowners' insurance carrier of a subrogation claim, in excess of $100,000, for the damage his property sustained as a result of the fire. Then two months later, in October 2008, Dipikaben Patel, Khatri's upstairs tenant, filed a civil complaint in the Law Division in Hudson County, and advised she was seeking $3.5 million in damages for "serious personal injuries" she suffered when "forced to jump out of a window" to escape the fire. In December 2008, Patricia Rivers, owner of another neighboring property, also filed a subrogation claim in the amount of $4, for exterior fire damage to her house. And finally, in November 2009, William Jimenez, a firefighter with the Jersey City Fire Department, also filed a complaint in the Law Division for the injuries he suffered while fighting the fire and sought $4 million in damages. On January 28, 2009, plaintiff, Sharon Masgay-Doitch, a tenant of third-party plaintiffs, by letter from her attorney, notified NJM that, "we are in the process of conducting an investigation to obtain the cause and origin of the fire." The letter requested, "photos of the area where the fire began," and made no mention of a claim for damages. Sometime thereafter, [*4] State Farm asserted a property damage subrogation claim on behalf of its policyholder, Masgay-Doitch, alleging that many of her belongings were damaged as a result of the fire. On August 26, 2009, NJM denied the Masgay-Doitch claim stating that they, "carefully investigated your insured's claim arising out of the accident with our insured and... our insured is not legally responsible under applicable law." Meanwhile, the Patel, Jimenez, and Flagg claims, exceeding $7.5 million, were consolidated and scheduled to proceed to trial in December As for the $4, Rivers' claim, NJM paid the full amount as part of an arbitrated property damage decision. Then on November 19, 2010, approximately a month before trial, NJM notified Khatri by letter that, "they [Patel, Jimenez, and Flagg] are willing to settle their claims for the amount of money remaining available under your $300, liability policy." The November 19th letter acknowledged the Masgay-Doitch claim at issue in this appeal, stating that the insurance company is aware of one other subrogation claim for property damage to the Masgay Doitch residence insured by State Farm Insurance Company. The paperwork indicates a claim [*5] on the order of $36, That claim was denied years ago and nothing further has been heard from State Farm. Ultimately, the letter advised and cautioned Khatri that [t]he prudent course of action appears to us to be to settle the three matters presently in suit for the $290, We believe that there are valid defenses to all of the claims. However, a recovery, if obtained by the plaintiffs on the cases currently in suit, would likely exceed the amount of money available under your policy..... Please understand as well that the $36, subrogation claim by State Farm will not be resolved by this settlement. If that claim is later brought forward, we remain of the opinion that there are strong defenses to the claim. On November 24, 2010, both Narendrakumar and Minakishiben Khatri signed the November 19 letter and, notwithstanding the outstanding $36,000 subrogation claim, agreed to settle the Patel, Jimenez, and Flagg claims exhausting the remainder of their $300,000 policy. 1 1 The Patel and Jimenez claims were settled for $132, each, approximately 3% of the amount demanded. The Flagg claim settled for $29,772.74, which was about 30% of the original demand. Nearly three months [*6] later, by letter dated February 14, 2011, NJM received notice of a complaint

4 Page 3 filed by Masgay-Doitch against Khatri, and then, on April 20, 2012, State Farm Fire and Casualty Company as subrogee of Masgay-Doitch filed a separate civil action against Khatri for the "damage to the contents of the insured's premises...," caused by the fire. Thereafter, these two actions were consolidated. In response to the Masgay-Doitch suit, Khatri filed a third-party complaint against NJM demanding that NJM indemnify Khatri and defend him against the Masgay-Doitch claim. Khatri argued that NJM's failure to do so was a breach of contract and fiduciary duty. Discovery followed and at its conclusion NJM moved for summary judgment. In granting the motion in favor of NJM, the Law Division found that [T]here's no genuine issue of material fact that N.J.M. did not act in bad faith or breach of fiduciary duty owed to defendant Khatri. Instead I'm finding that N.J.M. negotiated and obtained very favorable settlements I would say in the face of claims seeking in excess of 7.5 million. Even further, these settlements were executed with the consent of Khatri and only after explanation of the settlement would not resolve [*7] the ongoing property damage claim by State Farm and Doitch. This appeal followed. II. We begin by reciting our standard of review. A grant of summary judgment is reviewed de novo and we apply the same standard under R. 4:46-2(c) that governs the trial court. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167, 704 A.2d 597 (App. Div.), certif. denied, 154 N.J. 608, 713 A.2d 499 (1998). We ask first whether there was a genuine issue of fact, and if not, we look to whether the lower court's ruling on the law was correct, Walker v. Alt. Chrysler Plymouth, 216 N.J. Super. 255, 258, 523 A.2d 665 (App. Div. 1987), recognizing that the trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference. Manalapan Realty, L.P. v. Twp. Comm. Of Manalapan, 140 N.J. 366, 658 A.2d 1230 (1995)). Next, in turning to the legal issues, third-party plaintiffs argue that before settling the Patel, Jimenez, and Flagg claims, NJM had a duty to initiate and engage in settlement negotiations with Masgay-Doitch. Therefore, as third-party plaintiffs contend, NJM breached its duty when it did not attempt to settle the Masgay-Doitch claim within the policy limit plus an amount third-party plaintiffs were willing and able to pay. We disagree. The matter before us is governed by the general principle that, "absent bad faith, an insurer may settle with one or more claimants, notwithstanding that the settlements may exhaust the policy [*8] limits." Goughan v. Rutgers Cas. Ins. Co., 238 N.J. Super. 644, 649, 570 A.2d 501 (Law Div. 1989) (limiting an underinsured motorist carrier's credit against the tortfeasor's liability insurance policy to the amount that remained available to the injured party after the tortfeasor's insurer made payments to other injured victims of the accident); see also Liguori v. Allstate Ins. Co., 76 N.J. Super. 204, , 184 A.2d 12 (Ch. Div. 1962) (finding that a third-party has no right to interfere with an insurer's settlement with other claimants where the settlements would seriously deplete or exhaust the policy limits). Further, While an insurer may wish to collect data on all the claims before negotiating settlement of any particular one, it is certainly under no legal compulsion to do so. Whether multiple claims are to be treated one at a time or collected and evaluated together, is a choice solely within the discretion of the insurer. Characterizing such a step-by-step approach as "piecemeal" is rhetoric without legal significance. When, as is the case here, a presumptively valid and adequate award has been made to one of several claimants, the fact that the remaining claimants, or any one of them, have not been taken into the confidence of the settling parties falls far short of establishing an adequate ground for equitable relief. This is especially true [*9] where to hold otherwise would interfere with the judicially favored policy of avoiding unnecessary expense and delay through settlement practice. Bona fide settlements between prospective litigants should not be restrained on the basis of speculative claims of mala fides. [Liguori v. Allstate Ins. Co., 76 N.J. Super. 204, 214, 184 A.2d 12 (Ch.Div. 1962).] In the record before us, there is no evidence that NJM acted in bad faith. Rather, NJM negotiated a very favorable settlement within the $300,000 policy limit for

5 Page 4 claims in suit that exceeded $7.5 million and were on the eve of trial. The decision to settle the Patel, Jimenez, and Flagg claims and not the Masgay-Doitch claim was particularly prudent when after denying the claim, NJM had heard "nothing further... from State Farm." Indeed, it is fatuous to suggest, as third-party plaintiff argues, that the better course of action would be for NJM to proactively search for other claims to include in the global settlement with litigation pending on claims which exceeded the policy limit by twenty-five times. In addition, the policyholders were fully aware that the global settlement would exhaust their policy limit and would not include the Masgay-Doitch claim but, nevertheless they agreed to NJM's proposed course [*10] of action. Accordingly, there is nothing in the record before us to suggest that NJM acted in bad faith or breached its fiduciary duty, and summary judgment was properly granted. Affirmed.