On July 18, 2008, a fire ignited in the Khatri home, a multi-family dwelling, resulting in damage to the house as well as surrounding properties and serious bodily injury to an upstairs tenant and a firefighter responding to the fire. Khatri had a $300,000 homeowners policy with NJM. In Doitch v. Khatri, 2015 N.J. Super. Unpub. LEXIS 2134 (App. Div. Sept. 3, 2015), Khatri filed a third party action against NJM for failing to cover a claim after NJM had exhausted its policy limits in paying these claims.
Following the fire, Khatri faced multiple claims and lawsuits. Between property damage and bodily injury claims filed, claimants sought a total of more than $7.5 million in damages against him.
After NJM paid one small claim, $290,501 remained on the policy. A month before trial, the 3 remaining claimants agreed to take the policy limits for the remainder of the policy limits. NJM notified Khatri of the proposed settlement and also advised him that it was aware of one other property subrogation damage claim from State Farm in the amount of $36,000. This claim was for damage claimed by a tenant, Sharon Masgay-Doitch, for her contents. That claim was denied years before and NJM had heard nothing since from State Farm.
NJM recommended the settlement to its insured (Khatri) because a recovery would likely exceed the insured’s policy limits. However, it made the insured aware that this potential State Farm claim would not be satisfied with this settlement. Khatri did not object and these 3 claims were settled, exhausting the policy limits.
Based upon the language of NJM’s policy, its duty to settle or defend ended when it paid for damages from an occurrence that equaled its limit of liability. Further, its total liability for all damages from any one occurrence will not be more than the limit of its liability.
Three months after the settlement, NJM received notice that Masgay-Doitch filed suit against Khatri and then State Farm filed suit against Khatri about 10 months thereafter. Khatri filed this third party suit, demanding that NJM indemnify and defend him as to these claims. Khatri argued that NJM’s failure to defend was a breach of his insurance policy.
The trial court granted NJM summary judgment and dismissed the suit. The Appellate Division affirmed.
Khatri argued that NJM had a duty to initiate and engage in settlement negotiations with Masgay-Doitch before settling for its policy limits. However, absent bad faith, an insurer may settle with one or more claimants, even if the settlements may exhaust the policy limits. Here, the Appellate Division found no evidence of bad faith.
To the contrary, NJM negotiated a very favorable settlement within the $300,000 policy limits in a suit that exceeded $7.5 million. The court found unpersuasive the plaintiff’s argument that NJM should have proactively searched for other claims to include in the settlement, in light of the magnitude of the pending claims in the lawsuit. Further, the court pointed out that the insured knew that the global settlement would exhaust the policy limit and would not include the Masgay-Doitch claim – yet the insured nevertheless agreed with the proposed course of action.
Thus, the Appellate Division found nothing to suggest that NJM acted in bad faith or breached its duty owed to its insured. Hence, it determined that summary judgment was properly granted to NJM.
