The opinion of the court was delivered by: ORLOFSKY
ORLOFSKY, District Judge:
Plaintiff, Polizzi Meats, Inc. ("PMI"), filed this action against Aetna Life and Casualty Company ("Aetna"), seeking a declaratory judgment that PMI was covered for losses arising out of a fire at its place of business, under a policy of insurance issued by Aetna.
Jurisdiction is based upon diversity of citizenship and an amount in controversy in excess of $ 50,000.00, exclusive of interest and costs. See 28 U.S.C. § 1332.
The parties have filed the following motions: (1) Aetna has moved for partial summary judgment on PMI's claims for bad faith damages and/or punitive damages; (2) alternatively, Aetna has moved for separate trials on the coverage issue and PMI's bad faith/punitive damages claims; (3) PMI has filed a cross-motion for partial summary judgment on the coverage issue; (4) plaintiff-intervenor, New Jersey National Bank ("NJNB"), which holds a mortgage on the property insured by Aetna, has moved for partial summary judgment against Aetna on the issue of Aetna's loss payment obligations under the Aetna-PMI policy; and (5) NJNB has also moved for a separate trial pursuant to Fed. R. Civ. P. 42(b).
This case requires this court to determine the circumstances under which an insurance carrier doing business in New Jersey may be exposed to punitive and "bad faith" damages for its refusal to pay a "first-party" fire damage claim, when the fire appears to be of suspicious origin.
In Pickett v. Lloyd's, 131 N.J. 457, 621 A.2d 445 (1993), the New Jersey Supreme Court held, for the first time, that an insurer's "bad faith" refusal to pay "first-party" benefits to its insured could be the basis of an action for damages, including consequential damages, in excess of the policy limits. Although Pickett involved a claim for collision damage benefits for the total destruction of the insured's tractor-trailer, I conclude that the rationale and logic of Pickett apply with equal force in the context of a fire damage claim.
I. Facts and Procedural History
Plaintiff, Polizzi Meats, Inc., is a wholesale meat purveyor. PMI was owned and operated by Salvatore Polizzi ("Polizzi"), his wife, Mary Ann Polizzi, and his daughter, Toni Polizzi. Mary Ann Polizzi owned 55% of the common stock of PMI, and Polizzi owned the remaining 45%. Memorandum of Law in Support of Plaintiff, Polizzi Meats, Inc.'s, Motion for Partial Summary Judgment and in Opposition to Defendant, Aetna Life and Casualty Company's, Motion for Partial Summary Judgment ("PMI's Rule 56 Brief") at 3. Until Thursday, January 21, 1993, PMI conducted its business, including a small retail operation, at 200 Hamilton Avenue, Trenton, New Jersey. Id. Plaintiff-Intervenor, NJNB, held a first mortgage on the Hamilton Avenue property.
On January 21, 1993, a fire substantially destroyed the edifice, much of PMI's equipment and all of the inventory at the Hamilton Avenue address. Id. Valerie Williams, who lived at 214 Hamilton Avenue, testified that, at about 9:20 p.m., on January 21, she saw Salvatore Polizzi leaving the Polizzi Meats building and that this was unusually late for him to be working. Brief in Support of Defendant, Aetna Life and Casualty Company's, Motion for Partial Summary Judgment Pursuant to Rule 56 of the Federal Rules of Civil Procedure, exhibit GG (Dep. of Valerie Williams), at 18, 27. At about 10:55 that night, Ms. Williams' son told her there was a fire at the meat market and to call 911. Id. at 29. While still on the phone with the 911 operator, Ms. Williams heard fire trucks approaching. PMI's Rule 56 Brief, exhibit C (Dep. of Valerie Williams) at 30. When firefighters first arrived on the scene, PMI's building was securely locked. PMI's Rule 56 Brief at 6; see also Aetna's Rule 56 Brief, exhibit CC (Dep. of Firefighter Gennello) at 14.
PMI promptly reported the fire to its insurer, Aetna. Aetna assigned Jeffrey F. Ciaramella ("Ciaramella") to adjust the claim on its behalf. Aetna also asked Peter Rincones ("Rincones"), of Aetna's Special Investigation Unit, to investigate the fire. Memorandum of Law in Support of Plaintiff Intervenor's Motion for Partial Summary Judgment ("NJNB's Rule 56 Brief") at 3. At the same time, Detectives Thomas Keegan ("Keegan") and Edgar Rios ("Rios") undertook an investigation of the fire on behalf of the Economic Crimes Unit of the Trenton Police Department. As part of the investigation, Rios collected ten samples from various locations at the fire scene and sent them to the New Jersey State Police Forensic Science Bureau to be tested for the presence of accelerants. PMI's Rule 56 Brief at 5-6. The laboratory detected "no volatiles characteristic of a known accelerant." PMI's Rule 56 Brief, exhibit I.
In the course of adjusting the claim, Ciaramella maintained "running notes" on the progress of the investigation. NJNB's Rule 56 Brief, exhibit E. Ciaramella's entry for January 26, 1993 states that Ciaramella spoke to Rincones, and that Rincones "indicates it's a very suspicious fire." Id. On the same day, January 26, 1993, Aetna issued a reservation of rights letter signed by Joseph Wolliard ("Wolliard") of the Property Claim Department. NJNB's Rule 56 Brief, exhibit F. This letter was addressed to Chuck Lumio, of Anthony J. Rocca & Associates ("Rocca"), PMI's public adjuster, and was copied to PMI and Aetna's file.
On March 1, 1993, Ciaramella made the following entries in his "running notes:" (1) that Rincones had taken a sworn statement from Salvatore Polizzi and that Polizzi "appears to be clean;" (2) that the Trenton Police Department was not pursuing the insured as a suspect in the arson investigation; and, (3) that Rincones recommended immediately beginning to "adjust the claim & perhaps issue an advance." NJNB's Rule 56 Brief, exhibit E. On March 2, 1993, Detective Keegan reported to Rincones that he had learned that PMI had not made payroll withholding payments to the IRS for about ten months prior to the fire. Aetna's Rule 56 Brief, exhibit HH, index 1, at 17-18. Keegan also confirmed that, although the building was equipped with a central station monitor alarm system, the central station had received no alarm on the night of the fire. Id. at 18. On March 3, 1993, Aetna issued a check in the amount of $ 100,000.00 payable to PMI, Rocca and NJNB. NJNB's Rule 56 Brief, exhibit E.
On March 8, 1993, Rincones issued a Structural Fire Investigation Report, in which he stated that the fire had at least two distinct points of origin. Aetna's Rule 56 Brief, exhibit HH, index 1, at 5-6. One origin was around some boxes of business records kept in the front, west half of the basement of the building. Id. The other point of origin was determined to be a storage room on the first floor. Id. Rincones noted that the burn patterns appeared to be those of "normal" combustibles and that there was no evidence of "flammable liquid burn patterns." Id.
On March 11, 1993, Ciaramella noted that Rincones was "still developing his investigation" and that the facts might "still warrant an [examination under oath]." Id. On March 15, 1993, Ciaramella wrote to Rocca asking if Rocca had received the $ 100,000.00 check, reserving certain rights, and requesting various proofs of loss. Id.
A proof of loss for the building claim was timely filed, but the deadline had to be extended for the equipment damage claim, due to difficulty in securing a temporary electrical permit to allow testing the machinery at the Hamilton Avenue property. Id.
On April 28, 1993, Aetna's attorney, Michael Scannapieco, took the depositions of Mary Ann Polizzi, PMI's majority stockholder and Polizzi's wife, and Toni Polizzi, Polizzi's daughter, the office administrator and a sales representative for PMI. Aetna's Rule 56 Brief, exhibit HH, at 2.
The policy at issue, provides, in pertinent part, that:
2. We will not pay for any loss or damage caused by or resulting from any of the following:
h. Dishonest or criminal acts by you, or any of your partners, employees, directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.
1. Acting alone or in concert with others; or
2. Whether or not occurring during the hours ...