New Jersey’s “Fairly Debatable” Standard in Bad Faith Insurance Claims Is Alive and Well

By Gina M. Zippilli, Esq.

The “fairly debatable” standard protects insurers from claims of bad faith if decisions to disclaim coverage are “fairly debatable.”  This long-standing shield to insurers recently came under attack in Badiali v. New Jersey Manufacturers Ins. Group, but was ultimately reaffirmed by the New Jersey Supreme Court.

The facts in Badiali were simple.  Augustine Badiali was hit by an uninsured motorist.  He had UM policies with two insurance companies; New Jersey Manufacturers (“NJM”) and Harleysville Insurance Co. (“Harleysville”).  In 2009, Badiali obtained an arbitration award of $29,148.62, which was to be split equally between NJM and Harleysville.  NJM refused to pay its share of the award ($14,754) on grounds that its policy contained a clause prohibiting payouts on awards in excess of $15,000.  The trial court and the Appellate Division disagreed, upheld the award, and reasoned that the $15,000 threshold applied to NJM’s liability.

Badiali subsequently filed a bad faith action against NJM as a result of its failure to timely pay its share of the award  The issue was whether NJM’s rejection of the arbitration award in an uninsured motorist claim was “fairly debatable.” NJM argued that its interpretation of the arbitration clause, and thus its basis for not initially paying its share, was “fairly debatable.”  In support of this argument, NJM pointed to a prior unpublished decision to which it was a party, which dealt with facts similar to those presented by Badiali and in which the court held that NJM’s interpretation was “fairly debatable.”  Although unpublished decisions carry no precedential value in New Jersey, the State Supreme Court agreed with NJM and held that NJM had adequate reason to believe that its conduct was judicially accepted practice and consequently, “fairly debatable.”