Before Judges Havey, Keefe and Lintner.
The opinion of the court was delivered by: Havey, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
On appeal from Superior Court of New Jersey, Law Division, Essex County.
The central issue raised by this appeal is whether defendant Federal Insurance Company (Federal), a second-tier excess insurance carrier, owes a duty to defendant North American Specialty Insurance (NAS), a third-tier excess carrier, to negotiate and settle in good faith an insureds' first-party property loss claim in accordance with the principles enunciated in Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474 (1974). We hold that no such duty exists in the context of a first-party claim. Rather, to show a claim of bad faith, NAS must demonstrate the absence of a reasonable basis for Federal's refusal to settle. NAS fails to meet that burden. Accordingly, we affirm the trial court's order dismissing NAS's cross-claim for damages against Federal.
On February 11, 1994, an apartment complex in Irvington was destroyed by fire. In May 1994, parties claiming an insurable interest in the apartment complex instituted an action to recover insurance proceeds for the loss. The property was insured by a primary insurer and four tiers of excess coverage insurers: (1) General Star Indemnity Company (General Star) issued the primary policy with a coverage limit of $250,000; (2) Fireman's Fund Insurance Company (Fireman's Fund) issued the first-tier excess policy, covering up to $250,000 for losses exceeding $250,000; (3) Federal issued the second-tier excess policy, covering up to $1.5 million for losses exceeding $500,000; and (4) NAS issued the third-tier excess policy covering up to $2.5 million for losses exceeding $2 million.*fn1
The policy issued by Federal provided for payment based on the actual cash value of the subject property immediately prior to the loss. However, the insureds had purchased optional "replacement cost" coverage. Under the replacement cost endorsement, Federal pays either the replacement cost of the covered property or the cost actually expended in repairing it, whichever was less. The policy provides that the insured could recover based on the actual cash value basis and reserve its right to make a further claim based on replacement cost. The insured was required to satisfy the following condition precedent in order to recover replacement cost:
3. The Company shall not be liable under this endorsement for any loss unless and until the damaged or destroyed property is actually repaired or replaced by the insured with due diligence and dispatch.
Federal was aware that the insureds were considering purchasing, rather than rebuilding a replacement structure. During discovery, the parties exchanged replacement cost estimates ranging from $3.9 million to $5.2 million. Federal acknowledged that these estimates exceeded its $1.5 million coverage limit, and accordingly notified NAS of its potential liability as the third-tier excess insurer. Federal suggested settlement discussions with NAS.
On October 8, 1997, a court-appointed umpire and the parties' appraisers issued their findings, fixing the actual cash value of the property immediately before the fire at $800,000, and the replacement cost at $3,337,200. General Star and Fireman's Fund, the primary and first-tier excess carriers, paid their respective policy limits of $250,000. On or about October 24, 1997, Federal paid $300,000, the balance of the actual value, plus $7,325 for the cost of boarding up the property.
The insureds made a formal settlement demand of $2.3 million. Deducting the actual cash value already paid by General Star, Fireman's Fund and Federal, Federal and NAS were called upon to pay the balance. NAS agreed to the settlement, provided Federal pay its policy limit of $1.5 million as the second-tier excess insurer, with the balance to be paid by NAS. Federal rejected the settlement offer.
In an order for judgment dated January 2, 1998, the insureds were given the right "under the insurance policies issued by Federal and NAS to replace the insured property by purchasing or rebuilding" a comparable structure, without geographic limitation. They were given until January 2, 1999, to purchase or commence rebuilding.*fn2 Cross-claims between Federal and NAS were preserved. In its cross-claim NAS alleged that Federal had acted in bad faith by refusing to settle for $2.3 million. NAS also alleged breach of contract, breach of fiduciary duty, and tortious interference with NAS's contractual rights. It sought both compensatory and punitive damages.
By summary judgment dated October 9, 1998, the trial court dismissed NAS's cross-claims, concluding that Federal had not acted in bad faith, and that NAS's remaining claims were legally deficient.
In December 1998, the insureds entered into a written contract to purchase a replacement residential apartment complex in Hallendale, Florida, for $4,750,000. In January 1999, they moved to compel Federal and NAS to pay the "replacement cost" under the policies to be applied toward the purchase price of the Florida property. The trial court ordered that the replacement cost be paid, but only in the event that closing takes place on or before February 27, 1999. The court directed that if the insureds failed to close by that date, Federal and NAS would be relieved of their duty to render payment ...