The opinion of the court was delivered by: COHEN
This diversity action, in which the plaintiffs, Luciano and Marie DiSalvatore, holders of a homeowner's insurance policy, seek, inter alia, damages against their insurance carrier, is before the Court on a motion by the defendant, Aetna Casualty and Surety Company ("Aetna"), for partial summary judgment pursuant to Fed. R. Civ. P. 56. For the reasons set forth below, the motion shall be granted in part and denied in part.
Reduced to their barest essentials, the facts of this case are not complex. Plaintiffs' home was destroyed by fire on August 27, 1982. At that time, the residence was covered by an insurance policy carried by the defendant. On May 10, 1983, the plaintiffs were notified that their insurance policy was void, and their claim was denied. Thereafter, the plaintiffs filed the instant suit.
The complaint contains claims for breach of contract (Count I), breach of the duty of good faith and fair dealing (Counts II & III), intentional infliction of emotional distress (Count II), fraud in the inducement (Count IV), and negligence (Count V).
Defendant has asserted the affirmative defense of arson and fraud, maintaining that the claim was denied because defendant discovered evidence that plaintiffs were "involved" in the fire.
By its present motion, the defendant seeks summary judgment on the claims for compensatory and punitive damages contained in Counts II, III and IV of the complaint, and on the claim for counsel fees.
Defendant's motion raises a number of important issues regarding the availability of causes of action by an insured to recover extracontractual damages from his insurer. We shall discuss defendant's motion with respect to plaintiffs' claims for damages and for counsel fees separately.
Three of the theories under which the plaintiffs seek damages have been challenged by the defendant herein. With respect to the plaintiffs' claim for damages arising out of the alleged breach of the duty of good faith and fair dealing (Counts II & III), the defendant urges that no cause of action for such a breach exists under New Jersey law. Similarly, with respect to the plaintiffs' claim for damages arising out of an alleged intentional infliction of emotional distress (Count II), the defendant argues that New Jersey does not recognize such a tort. The third theory challenged by the defendant is that contained in Count IV of the complaint, which the defendant reads as an attempt to bring a private cause of action under the New Jersey Consumer Frauds Act, N.J.S.A. 56:8-1 et seq. and the New Jersey Unfair Claim Settlement Practices Act, N.J.S.A. 17:29B-1 et seq.
ACTION FOR BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING
Under New Jersey law there is implied in every contract a duty of good faith and fair dealing. E.g., Onderdonk v. Presbyterian Homes of New Jersey, 85 N.J. 171, 425 A.2d 1057 (1981). Insurance contracts are no exception. E.g., Fireman's Fund Insurance Co. v. Security Insurance Co., 72 N.J. 63, 367 A.2d 864 (1976). The New Jersey Supreme Court, however, has not yet addressed the issue of the availability of a cause of action to redress an alleged breach of this duty in a situation where an insured contends that his insurer has wrongfully failed to pay benefits due him under the contract.
As is not infrequently the case, California courts led the way in recognizing the new tort. In Fletcher v. Western National Life Insurance Co., 10 Cal. App. 3d 376, 89 Cal. Rptr. 78 (1970), a California appeals court extended the well-established duty of an insurer to act reasonably and in good faith in settling third-party claims against its insureds to the first-party situation. In Gruenberg v. Aetna Insurance Co., 9 Cal. 3d 566, 574, 510 P.2d 1032, 1037, 108 Cal. Rptr. 480, 485, (1973), the California Supreme Court followed the Fletcher court's reasoning, and concluded that an independent tort action exists against insurance companies for breach of the implied duty of good faith and fair dealing.
Some of the courts of other jurisdictions, which have considered the issue of recognition of this new tort since Gruenberg, have adopted the California approach, and have recognized the new action, while other courts have refused to do so. See generally, Bess & Doherty, Survey of Bad Faith Claims in First Party and Industrial Proceedings, 1982 Ins. Counsel J. 368 (survey of jurisdictions addressing the existence of the tort). Our role in this diversity action, which the parties agree is governed by New Jersey law, is to attempt to predict whether the highest court of New Jersey would permit an award of extracontractual damages in a first-party insurance dispute. In this regard, we are guided, but not bound, by the rulings of the lower state courts concerning the underlying substantive law. E.g., Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 18 L. Ed. 2d 886, 87 S. Ct. 1776 (1967). See generally, C. Wright, The Law of Federal Courts, § 58 (4th ed. 1983).
This Court believes that the New Jersey Supreme Court would recognize the tort action advanced by the plaintiffs herein. Arguments in favor of adopting the bad faith tort center around the unequal bargaining positions of the parties to a typical insurance contract. See, e.g., Rodgers v. Pennsylvania Life Insurance Co., 539 F. Supp. 879, 883 (S.D. Iowa 1982); Fletcher, supra at 404, 89 Cal. Rptr. at 95. New Jersey has long recognized the superior bargaining power of an insurance company as compared with that of its insured, e.g. Sparks v. St. Paul Insurance Co., 100 N.J. 325, 335, 495 A.2d 406 (1985) and considers insurance policies "contracts of adhesion." Allen v. Metropolitan Life Insurance Co., 44 N.J. 294, 305, 208 A.2d 638 (1965). Recognition of an action permitting an insured to recover damages in excess of the actual amount owed under the contract would provide an effective means of countering the existing incentives for an insurance company to wrongfully delay or deny payment. See Note, The Availability of Excess Damages for Wrongful Refusal to Honor First Party Insurance Claims -- An Emerging Trend, 45 Fordham L. Rev. 164 (1976). We believe that the New Jersey Supreme Court would provide insureds with this avenue for relief when insurance companies withhold payments maliciously and without probable cause. See Polito v. Continental Casualty Co., 689 F.2d 457, 463 (3d Cir. 1982) (concluding that New Jersey courts would recognize claims by insureds for consequential damages for breach of implied duty of good faith and fair dealing). See also Rodgers, supra at 879 (predicting that the Iowa Supreme Court would recognize the new tort).
Nothing in the New Jersey Unfair Claim Settlement Practices Act, N.J.S.A. 17:29B-1 et seq., leads us to believe that recognition of an action in tort based upon breach of the duty of good faith and fair dealing has been precluded by legislative preemption. But cf., D'Ambrosio v. Pennsylvania National Mutual Casualty Insurance Co., 494 Pa. 501, 431 A.2d 966 (1981) (Pennsylvania's Unfair Insurance Practices Act need not be supplemented by a judicially created cause of action). Furthermore, nothing in the New Jersey case law which bears on the distinction between third-party insurance disputes and first-party actions compels a decision against recognizing the action herein. Although it is clear that the insured and his insurer are in an adversarial position in first-party actions, as contrasted with the relationship in cases involving third-party claims, this difference does not require that the courts ignore the difference in bargaining power between the parties. We recognize that a fiduciary relationship exists between an insured and his insurer in cases involving settlements with third-party claimants, Rova Farms Resort Inc. v. Investors Insurance Co., 65 N.J. 474, 492, 323 A.2d 495 (1974) while such a relationship does not necessarily exist in a first-party situation. See Kocse v. Liberty Mutual Insurance Co., 152 N.J. Super. 371, 378, 377 A.2d 1234 ...