Discovery on Bad Faith Claim Should Be Stayed Until the Underlying UIM Claim is Decided

In the prior case of Procopio v. Government Employees Insurance Company, 433 N.J. Super. 377 (App. Div. 2013), the Appellate Division ruled that, in a suit alleging both a claim for UIM benefits and a bad faith claim against the carrier, discovery of the bad faith claim should be stayed until the conclusion of the UIM claim. The issue in Wacker-Ciocco v. Government Employees Insurance Co., 2015 N.J. Super. LEXIS 38 (App. Div. Mar. 16, 2015) was whether the disclosure of some bad faith-related materials merits a denial of a motion to sever the bad faith claim and an order requiring discovery as to the bad faith claim.

In Wacker-Ciocco, the plaintiff Lori Wacker-Ciocco had an auto policy with GEICO that provided UIM benefits in the amount of $300,000/accident. She was seriously injured in a motor vehicle accident when she was rear ended by a vehicle operated by John Laratta and incurred medical expenses that exceeded $300,000. Laratta’s policy only had liability coverage of $100,000. Plaintiff sought and obtained GEICO’s permission to settle her claim with Laratta for $99,000. Thereafter, she made a demand to GEICO for $200,000 in UIM benefits and arbitration of her claim.

Plaintiff’s complaint included a claim for UIM benefits and a bad faith claim against GEICO. Plaintiff filed a motion to compel the depositions of the GEICO UIM claims adjustors and documents related to the bad faith claim. GEICO filed a motion to sever the bad faith claim and stay discovery on that issue. However, it also submitted certain claims records to plaintiff’s counsel.

Finding that GEICO had provided claims materials to the plaintiff, the trial judge denied GEICO’s motion to sever and stay the bad faith claim, compelled the depositions of GEICO’s UIM adjustors and ordered GEICO to answers discovery and provide a full electronic and paper claim file. The trial judge reasoned that “the cat was out of the bag.”

In Procopio, the Appellate Division had noted the potential prejudice to the carrier’s defense by the disclosure of privileged materials. If an insured in attempting to prove the validity of his or her claim could obtain the insurer’s investigative files, showing exactly how the company processed the claim, how thoroughly it was considered and why it took the action it did merely be alleging the insurer acted in bad faith, then there would be an open invitation to all plaintiffs to include such allegations with every breach of contract claim. Thus, in Procipio, the court concluded that the benefits of simultaneous discovery were substantially outweighed by the burden exacted on the carrier.

Here, the Appellate Division noted that, as a preliminary matter, the insured who alleges bad faith by the insurer must establish the merits of his or her claim for benefits. If there is a valid question of coverage, i.e., the claim is “fairly debatable,” the insurer bears no liability for bad faith. If the insured is unable to establish a right to the coverage claimed, the bad faith claim must be dismissed.

To establish bad faith, the insured must show the lack of a reasonable basis for denying the claim or unreasonably delaying its processing, and the insurer’s knowledge or reckless disregard that it was acting unreasonably. This claim cannot be sustained by evidence of negligence, mistake, or delay in payment without some showing of the insurer’s wrongful intent.

Plaintiff argued that Procopio was distinguishable because the motion to sever the bad faith claim was made after proof of her bad faith claim was produced in information provided by GEICO in discovery. GEICO, however, argued that Procopio does not turn on whether some bad faith related discovery had been provided.

The Appellate Division agreed with GEICO’s position and concluded that the trial court erred in denying GEICO’s motion to sever and stay discovery as to the bad faith claim. The disclosure of some bad faith-related discovery did not resolve the issue of potential prejudice to GEICO. Thus, the Appellate Division reversed the trial court’s order and found that GEICO was entitled to sever and stay discovery as to the bad faith claim.