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August 28, 1991


The opinion of the court was delivered by: Gerry, Chief Judge.



Plaintiff Leanora Carfagno filed the present action against defendant, The Aetna Casualty and Surety Company ("Aetna"), on February 24, 1983. Plaintiff purchased a homeowners insurance policy from defendant. On March 22, 1982, a fire occurred at the insured premises, and plaintiff thereafter filed a claim under the policy to recover damages caused by the fire. Ultimately, defendant disclaimed liability on the grounds that the fire was intentionally set. Plaintiff alleges that defendant acted unreasonably and in bad faith with regard to various aspects of its refusal to pay her claim. In addition to seeking recovery under the policy for the damage to the property and its contents, plaintiff seeks to recover consequential and punitive damages for defendant's alleged wrongful, bad faith conduct. The parties are presently before the court upon defendant's motion for judgment on the pleadings with regard to plaintiff's claim for consequential and punitive damages.


As a federal court sitting in a diversity, we must apply the substantive law of the forum state to plaintiff's claims. Our role is to predict what that state's highest court would decide if presented with the facts in our case. Aetna Casualty & Surety Co. v. Farrell, 855 F.2d 146, 148 (3rd Cir. 1988). In making that prediction, "[i]n the absence of an authoritative pronouncement by a state's highest court, we may give serious consideration to the opinion of an intermediate appellate court and look to that source for an indication of how the state Supreme Court would likely decide the question presented." Id. at 148-149 (citations omitted). See also McGowan v. Univ. of Scranton, 759 F.2d 287, 291 (3rd Cir. 1985) (concluding that appellate court decisions are "indicia of how the state's highest court might decide the issue"). In fact, the United States Supreme Court has held that "an intermediate appellate state court . . . is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise." West v. American Tel. & Tel. Co., 311 U.S. 223, 237, 61 S.Ct. 179, 183, 85 L.Ed. 139(1940).

The sole issue to be decided in this motion is whether or not a cause of action is permitted under New Jersey law to recover consequential compensatory damages and/or punitive damages where an insurance company wrongfully, and in bad faith, refuses to pay a first-party claim under an insurance contract. The New Jersey Supreme Court has never reached this issue; however, we are not the first federal court to consider it.

In Polito v. Continental Cas. Co., 689 F.2d 457, 463 (3rd Cir. 1982), the Third Circuit recognized that an "insured is generally denied consequential damages for failure to pay [a claim], because in a suit for money due under a contract, recovery is limited to the debt plus interest", and that "New Jersey . . . does not . . . appear to depart from the general rule excluding consequential damages." Id. at 461. Nonetheless, based on the general contract doctrine in New Jersey that there is an implied covenant of good faith and fair dealing in every contract,*fn1 the Third Circuit predicted that New Jersey courts would find an implied contractual duty upon insurance companies to act in good faith and to deal fairly in the settlement of claims. Id. at 463. Further, it predicted that a breach of that implied duty would support a claim for consequential damages. Id.

At the time Polito was decided, there were no reported New Jersey cases directly on point. However, since then, a line of New Jersey Appellate Division cases have held that New Jersey law does not permit punitive or consequential damages in the context of insurance contracts.*fn2

In Wine Imports, Inc. v. Northbrook Property & Cas. Ins. Co., 708 F. Supp. 105 (D.N.J. 1989), the court reviewed that line of cases and held that, because those cases repudiated the predictions made in Polito on this issue,*fn3 Polito was no longer controlling. The court based its holding on the Third Circuit decision in Farrell, supra. That case involved interpretation of an uninsured motorist provision in a car insurance policy. Since New Jersey courts had not previously addressed the issue, the district court predicted how those courts would interpret the provision. The case was appealed, and, before the Third Circuit rendered its decision, the New Jersey Appellate Division issued an opinion reaching the opposite result from the district court. The Third Circuit thereafter reversed the district court because it found that the Appellate Division case was a reasonable prediction of what the New Jersey Supreme Court would do. Based on Farrell and the line of Appellate Division cases diverging from Polito's predictions, the court in Wine Imports granted the defendant insurance company's motion for partial summary judgment as to the punitive and consequential damage claims of the plaintiff insured.

We agree with the reasoning in Wine Imports. There is, however, one issue not dealt with in that case which we feel merits discussion. A couple of the Appellate Division decisions relied upon in Wine Imports were based, at least in part, on those courts' perception of the limitations on the Appellate Division's authority. For example, in Garden State, 191 N.J.Super. at 226-227, 465 A.2d 1225, the court stated that

  On this appeal, we conceive that the Watsons are
  contending for the creation of a new cause of action
  in this State, namely, the right to recover
  consequential compensatory damages for emotional and
  physical distress and punitive damages where an
  insurance company wrongfully refuses to pay a
  first-party claim. . . . Appellant's attempt to
  establish what we perceive as a new cause of action
  for damages for breach of an insurance contract must
  be directed to our highest court.

(Emphasis added.) See also Milcarek, 190 N.J.Super. at 370, 463 A.2d 950. As discussed above, our role is to predict what that state's highest court would decide if presented by the facts in our case, Farrell, supra, and intermediate state court appellate decisions are relevant for our consideration because they are "indicia of how the state's highest court might decide the issue," McGowan, 759 F.2d at 259. To the extent the Appellate Division decisions in this instance are based upon the Division's lack of authority to create a new cause of action, they are not "indicia" of whether or not the Supreme Court — who does have the power — would create such a new cause of action. Unfortunately, it appears that New Jersey does not have any statute or rule which authorizes us to certify the issue in this case to the New Jersey Supreme Court. Consequently, we must decide the issue one way or another.

We hold that plaintiff may not recover consequential or punitive damages in this action. We think that a federal court should be very reluctant to create a new state law cause of action — especially where an intermediate state appellate court has found that, within its system, the state's highest court is the only court with authority to do so. Furthermore, we are particularly reluctant to create a judicial cause of action in the context of this case because the New Jersey legislature has passed a statute regulating unfair insurance practices, N.J.S.A. 17:29B-1, et seq., which does not provide for such a remedy. As the court said in Milcarek,

  this act punishes insurance companies for unreasonably
  denying claims, thereby . . . serving as a deterrent.
  Hence, with the other remedies available in this state
  with respect to insurance companies, we do not think
  it is necessary or wise to subject ...

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