On certification to the Superior Court, Appellate Division, whose opinion is reported at 252 N.J. Super. 477 (1991).
O'hern, Wilentz, Clifford, Handler, Pollock, Garibaldi, Stein
The opinion of the court was delivered by
The question in this case is whether an insurance carrier's bad-faith failure to pay collision damage benefits to an insured over-the-road trucker for a tractor-trailer truck that was totally destroyed can be the basis of an action for damages in excess of the policy benefits for the value of the truck. We hold that our law does recognize such a cause of action when the failure to pay the policy results from a denial or a withholding of benefits for reasons that are not even debatably valid and the economic losses sustained by the policyholder are clearly within the contemplation of the insurance company.
Were it not for the economic consequences to all parties, this case would be thought to arise from an almost comic mixup in the handling of an insurance claim that everyone involved has described as presenting "nothing unusual." Plaintiff, Burton Pickett, of Branchville, New Jersey lost his 1983 Mack tractor-trailer truck in a highway accident on Interstate 70 in Ohio on January 13, 1987. Another truck had stopped across the lanes of the highway, and Pickett's truck collided with it. As an "owner/operator" who had been hauling freight for Superior Carriers, Inc. (Superior) out of Kenvil, New Jersey for thirty-seven years, Pickett's seniority entitled him to "choice or refusal of the day's work" and thus to the more desirable and lucrative assignments. In case of an accident, Superior usually allows owner/operators a sixty-day grace period in which to replace their damaged vehicles and resume work without losing their seniority status. In Pickett's case, it extended that period for an additional thirty days -- to April 13, 1987.
At the time of the accident, Pickett had a $30,000 physical-damage policy for his truck with defendant Lloyd's, an underwriting syndicate. The insurance policy had been placed by his and Superior's agent, Robert K. Kast Associates (Kast), through defendant Peerless Insurance Agency, Inc. (Peerless), an agent of Lloyd's. The policy provided in part:
5. PROOF OF LOSS. Within sixty (60) days after loss or damage, unless such time is extended in writing by the Underwriters, the Assured shall forward to the Underwriters a statement, signed and sworn to by the Assured, stating the place, time and cause of the loss or damage, the interest of the Assured and of all others in the property, the sound value thereof and the amount of loss or damage thereto, all encumbrances thereon and all other insurance, whether valid and collectible or not, covering said property. * * *
6. PAYMENT OF LOSS. The loss shall in no event become payable until sixty (60) days after the verified proof of loss herein required shall have been received by the Underwriters and, if appraisal is demanded, then not until sixty (60) days after an award has been made by the appraisers.
On the day after the accident, Pickett filled out an accident report and left it with Superior, which sent it to Kast. That same day Pickett telephoned Kast and spoke with Susan Lopes, a claims executive at Kast. Lopes reported the claim to Diane Pavlick of Peerless, who faxed the claim information to Lloyd's in London on January 20. On January 21, Lopez sent Pavlick additional information regarding Pickett's claim with a cover letter that stated: "Please note the insured is out of work until his vehicle is repaired. Please expedite." Lopes said that she had never learned of Superior's seniority arrangement or that Pickett could lose his seniority.
On January 23, at Lloyd's direction, Pavlick mailed the loss information to a John Easterman in Ohio, who seems to have been a non-existent claims adjuster. The envelope was returned to Pavlick on February 4 for lack of a forwarding address. Pickett too had tried and failed to reach Easterman using a telephone number he received from Kast. Pickett tried to tell Peerless that he had been unable to reach the adjuster, but said, "the lady that I spoke to, and I don't remember her name, was very bitter to the fact that I called her personally and she wanted to know where I got her telephone number from." Pavlick (presumably the one he had called) had no recollection of that conversation. Pickett made no further attempt to communicate with Peerless.
On February 6, Lloyd's gave Peerless new telephone numbers for Easterman. Using one of those numbers, Pavlick reached the Michigan Claims Service (Michigan Claims). Believing that Michigan Claims was either Easterman's new employer or an adjuster otherwise selected by Lloyd's, Pavlick provided it with the claim information. Not knowing that Pickett's policy was limited to physical damage, Michigan Claims unnecessarily investigated liability. A month passed before Pavlick received an adjuster's report from Michigan Claims on March 9. She forwarded the report to Lloyd's. Lloyd's telexed back on March 12, asking, "Why are Michigan Claims Service concerning themselves with liability aspect of claim? * * * Policy is physical damage not liability." Neither Pavlick nor Lloyd's had sent Michigan Claims a copy of the Lloyd's policy.
Lloyd's did approve issuance of the Proof of Loss form on March 25, agreeing to pay $29,000, the full amount of the policy less a $1,000 deductible. However, Pickett did not receive the form from Michigan Claims until April 19, six days after he had lost his seniority status. (Apparently the practice is for the adjuster, the body shop, and the insurer to negotiate the agreed amount of the loss before issuing that claim form to the insured for the signature.) Pickett signed, notarized, and returned the form the following day. The form was entitled "PROOF OF LOSS, SUBROGATION AGREEMENT, AND AUTHORIZATION TO PAY ACCOUNTS," and it contained the following release from liability:
In consideration of such payments the said Insurance Company is hereby discharged and forever released from any and all further claim, demand and liability whatsoever for said loss or damage, under and/or by reason of said Policy.
Pickett said that he had "not really" read that paragraph before signing the Proof of Loss.
Michigan Claims received the Proof of Loss on April 23 and forwarded it to Peerless, which sent it to Lloyd's in London, although Pavlick could not remember when. Lloyd's received the Proof of Loss by May 14. Lloyd's waited until June 19 to send the proceeds. Michigan Claims received the check to satisfy Pickett's claim on July 2. However, the check had been made payable to Michigan Claims rather than to Pickett and the National Bank of Sussex County, the lien holder on the truck. Pavlick admitted that normally claim checks are made payable directly to the insured and lien holder. Michigan Claims had to clear the check and issue its own. The bank received its $25,000 in August 1987 and Pickett received the net proceeds of approximately $4,500 around September 15, 1987, nine months after the accident.
Pickett filed a complaint against Lloyd's, peerless, and Kast, alleging negligent handling of his insurance claim, breach of the insurance contract, and unfair and deceptive practices. He claimed loss of income due to both the inability to operate while the claim was being processed and the loss of seniority.
After all the evidence was in, the trial court dismissed the complaint as to the broker, Kast, but denied the motions to dismiss of Lloyd's and its agent, Peerless. The jury awarded Pickett $70,000 and apportioned the negligence 60% against Peerless and 40% against Lloyd's. The jury found that Peerless had been directly responsible to Pickett for a lack of good faith and fair dealing outside of its agency relationship with Lloyd's. The court denied post-trial motions by defendants for judgment notwithstanding the verdict, new trial, and reduction of damages.
The Appellate Division affirmed the jury's award of extra-contractual damages. 252 N.J. Super. 477 (1991). Thus, the Appellate Division held that a first-party insured may recover in tort when an insurer breaches its duty of fair dealing. Id. at 490. The court rejected defendants' arguments that the measure of damages should be limited to the policy benefits under the contract, concluding instead
that a tort action was cognizable based on Pickett's proofs that the insurer failed to act in good faith and that there was a failure of Lloyd's and Peerless to timely resolve his claim. This constituted bad faith in and of itself where Lloyd's and Peerless had notice of the urgency of the claim and the serious impact on Pickett's potential livelihood.
The court also found that Pickett's claims supported an alternative cause of action in contract based on the insurance policy because his consequential damages were reasonably foreseeable at the time the policy was issued. Id. at 490-91. It also ruled, as did the jury, that the release provision in the Proof of Loss did not bar Pickett from recovering damages. Id. at 493-94. Finally, the Appellate Division upheld the damage award as reasonable. Id. at 494-95. We granted defendants' petitions for certification, 127 N.J. 563 (1992).
In Rova Farms Resort, Inc. v. Investors Insurance Co., 65 N.J. 474, 323 A.2d 495 (1974), this Court held that an insured may recover more than the policy limit for a liability insurer's bad-faith refusal to settle a third-party claim against its insured within that limit, when the refusal results in the third party obtaining a judgment against the insured that exceeds the policy limit. The Court emphasized that by virtue of the terms of a liability policy that prevented the insured from settling on its own behalf except at its own expense, the carrier had made itself the agent of the insured in this respect. Id. at 492. "Thus the relationship of the company to its insured regarding settlement is one of inherent fiduciary obligation." Ibid. (citing Bowers v. Camden Fire Ins. Ass'n, 51 N.J. 62, 237 A.2d 857 (1968); Radio Taxi Serv., Inc. v. Lincoln Mut. Ins. Co., 31 N.J. 299, 313, 157 A.2d 319 (1960) (Jacobs, J., Dissenting)). A necessary corollary of that fiduciary duty to act on behalf of the insured is that a decision not to settle within the policy limits
must be an honest one. It must result from a weighing of probabilities in a fair manner. To be a good faith decision, it must be an honest and intelligent one in the light of the company's expertise in the field. Where reasonable and probable cause appears for rejecting a settlement offer and for ...