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
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.
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
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 ...