KAREN WOOD and FREDERICK WOOD, as assignees of ALFONZIA CARUSO v. NEW JERSEY MANUFACTURERS INSURANCE COMPANY

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-1768-08T21768-08T2

KAREN WOOD and FREDERICK

WOOD, as assignees of

ALFONZIA CARUSO,

Plaintiffs-Respondents,

v.

NEW JERSEY MANUFACTURERS

INSURANCE COMPANY,

Defendant-Appellant.

_________________________________

 

Argued March 3, 2010 - Decided

Before Judges Stern, Graves, and Sabatino.

On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-0926-08.

Michael J. Marone argued the cause for appellant (McElroy, Deutsch, Mulvaney & Carpenter, LLP, attorneys; Mr. Marone, of counsel; Richard J. Williams, Jr., and Mr. Marone, on the brief).

Charles M. Crocco argued the cause for respondents (Nelson, Fromer & Crocco, attorneys; Mr. Crocco, of counsel and on the brief).

Evan L. Goldman argued the cause for amicus curiae New Jersey Association for Justice (Law Offices of Schiffman, Abraham, Kaufman & Ritter, P.C., attorneys; Mr. Goldman, on the brief).

Hugh P. Francis argued the cause for amici curiae Insurance Council of New Jersey and Property Casualty Insurers Association of America (Francis & Berry, attorneys; Mr. Francis and Joanna Huc, on the brief).

PER CURIAM

Defendant, New Jersey Manufacturers Insurance Company ("NJM"), appeals the Law Division's summary judgment order conclusively determining that NJM had breached its duties by declining to settle a tort action against its insureds within the coverage limits of NJM's liability insurance policy. Because we are persuaded that, under the principles of Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 483-84 (1974) and related case law, there are genuine and triable issues of material fact as to whether NJM acted in bad faith by rejecting the opportunity to settle the underlying case within the policy limits, we vacate the summary judgment order. We consequently remand the bad faith issues for a trial or plenary hearing.

I.

The present appeal grows out of a prior lawsuit for personal injuries brought by Karen Wood and her husband Frederick Wood against NJM's insureds, Alfonzia Caruso and John Crittelli, and also against the Alfred Vail Mutual Association ("AVMA" or "the association"). At the time of the March 1, 2001 incident that allegedly caused her injuries, Wood was a letter carrier employed by the United States Postal Service.

Wood was injured after being attacked by a dog named "Max" while delivering mail on the grounds of AVMA's complex in Shrewsbury. The dog was owned by Crittelli and was kept on the premises by Caruso, Crittelli's grandmother. The March 1, 2001 incident was the sixth occasion in which Max had charged at Wood while she was attempting to deliver mail.

According to Wood's account of the March 1, 2001 incident, she saw Max, who was not on a leash, run toward her across a common area. As Wood backed up against a fence and tried to locate a gate to escape, the dog jumped at her, pushing Wood off of her feet. Wood held onto the fence and was "dangling there" while the dog struck her. Wood broke free and proceeded to fend off the dog on at least two more attempted strikes before she was able to escape to her truck. Wood then called the State Police to the scene. After the police responded, Wood returned to and finished her mail route.

On the day after the dog attack, Wood saw a physician and complained of lower back pain. Thereafter, she also complained of pain in her neck. After consultation with various physicians, Wood underwent cervical spinal surgery in March 2003 and, subsequently, lumbar spinal surgery in June 2004.

As a consequence of the March 1, 2001 incident, Wood pursued a workers' compensation claim against the Postal Service. She and her husband also brought a personal injury action in the Law Division against Crittelli, Caruso and AVMA.

The workers' compensation claim resulted in the payment of substantial medical benefits and disability income to Wood. As of the time that her personal injury action went to trial in the fall of 2007, the compensation lien had accrued to $280,281.17, consisting of $79,612.31 in medical reimbursements and $200,668.86 in disability income payments. It was recognized at the time of trial that the lien amount could increase beyond these accrued levels as the result of Wood's continued medical treatment.

At the time of the subject incident, NJM had a liability insurance policy in force, which it had issued to Caruso, the unit owner. It is undisputed that the NJM policy had a coverage limit of $500,000. Crittelli was also apparently covered under that policy as an additional insured, at least with respect to harms caused by his dog, which he had kept at Caruso's residence with her permission. NJM consequently provided both Caruso and Crittelli with a defense in Wood's personal injury action. The same defense attorney assigned by NJM jointly represented both Caruso and Crittelli in the litigation.

Prior to and during the personal injury trial, NJM and counsel for Wood sharply disputed the nature and extent of Wood's alleged injuries, and whether, and to what degree, those injuries had been caused by the March 1, 2001 dog attack.

Wood's principal medical expert who testified on her behalf at trial, Steven Berkowitz, M.D., an orthopedic surgeon, opined that, as a result of the March 1, 2001 incident, Wood had sustained herniations at disc levels C5-6, C6-7, L1-2, and L4-5. Dr. Berkowitz also found that Wood had sustained a right-sided "sacroiliac sprain/strain dysfunction."

Another orthopedic surgeon who examined Wood at the request of her employer in connection with her workers' compensation claim, Robert Dennis, M.D., initially opined that Wood's cervical injury was causally related to the March 2001 dog attack. However, Dr. Dennis subsequently revised his opinion, and at his de bene esse deposition in April 2007, concluded that the cervical injury was not related to the March 2001 incident.

The defense's medical expert at trial, Michael Gordon, M.D., an orthopedic surgeon who had examined Wood in April 2004 and again in February 2005, agreed that Wood had a herniated cervical disc. However, Dr. Gordon concluded that the cervical herniation was not related to the March 1, 2001 dog attack. With respect to Wood's lumbar region, Dr. Gordon initially characterized her condition as a lumbar "strain." On further reflection, Dr. Gordon ultimately was persuaded that Wood, in light of her persisting symptoms, had sustained a lumbar "disc protrusion," and that the condition was caused by the March 2001 dog attack.

Wood further presented expert proof from an economist, Robert P. Wolf. Wolf estimated Wood's past and prospective economic loss at $561,590, taking into account her pre-injury and post-injury earnings and her earnings capacity. The defense did not retain a competing economic expert.

At a non-binding arbitration session held at the Monmouth County Courthouse on August 25, 2005, the court-appointed arbitrator evaluated Wood's gross economic and non-economic damages at $600,000. The arbitrator allocated ninety percent of the fault to Caruso, and ten percent to AVMA. This allocation yielded a net recommended award against Caruso of $540,000, a sum exceeding NJM's $500,000 policy limit. The defense rejected the arbitrator's determination and made a timely request for a jury trial de novo.

Prior to the jury trial, Wood's case was evaluated by the defense attorney assigned by NJM to represent its insureds, by NJM's claims adjuster, and ultimately by NJM's internal "Major Claims Committee." The claims adjuster advised the Committee that "[t]he value of [Wood's] case would be in the neighborhood of [NJM's] policy, especially if the jury were to believe that [Wood's] neck injury and resultant surgery were from the incident of March 1, 2001." The assigned defense attorney similarly recommended that NJM release settlement authority to him in the full amount of the $500,000 policy. The record also contains a November 7, 2005 letter to NJM from defense counsel for the insured, reporting that Wood, according to her attorney, was at that time planning to undergo additional back surgery. As defense counsel saw it, the prospective surgery "will certainly place the non-compromisable workers' compensation lien well into the $400,000.00 [range] and the value of the case will exceed your insured's policy."

NJM's Major Claims Committee (the "Committee") was more optimistic, however, about the prospects of successfully defending Wood's case and of containing the net liability of its insureds to a sum under the $500,000 policy limits. Specifically, the Committee decided that NJM would only authorize $300,000 in settlement of Wood's claims.

In making its evaluation, the Committee apparently found several factors were significant. Among other things, the Committee perceived that Wood had been untruthful in her interrogatory answers and at her deposition, in contending that she had experienced no neck injuries prior to the March 2001 dog attack. In fact, there was contrary medical documentation showing that Wood had been previously treated for neck injuries and that the pre-existing neck condition was chronic. The Committee also regarded as significant the fact that Dr. Dennis, Wood's expert from the compensation case, had reversed his opinion about the causal linkage between the March 2001 incident and Wood's cervical condition.

The Committee also had a more optimistic view of its insureds' liability exposure. The Committee noted that despite repeated complaints to AVMA about the dog, the association apparently took no action to address the situation. The Committee therefore predicted that AVMA would be allocated "a significant portion of liability" by the jury, thereby reducing the comparative exposure of NJM's insureds.

After the Committee authorized an amount up to $300,000 to settle the case in January 2006, defense counsel tendered an offer of that entire amount to Wood's attorney. Through her counsel, Wood rejected the $300,000 offer.

Thereafter, Wood's attorney communicated several times to the insured's defense counsel that Wood was willing to settle the case at or below NJM's $500,000 policy limit. As part of such settlement communications, Wood's attorney faxed on October 9, 2006 what is customarily known as a "Rova Farms" letter, characterizing the $300,000 defense offer as one made in bad faith. The letter further warned that, if Wood obtained a judgment exceeding the $500,000 policy limits, she would look to NJM to be responsible for that excess amount. Wood's attorney followed up with another Rova Farms letter dated October 25, 2007, noting that the workers' compensation lien had risen by that point to $280,000. Wood's counsel reiterated that his client would look to recover from NJM in the event of an excess verdict.

In that same vein, personal counsel to Caruso sent NJM's adjuster a certified letter on March 15, 2006, invoking the insured's rights under Rova Farms. That letter from personal counsel demanded that the carrier negotiate in good faith with Wood's counsel and that NJM "use [its] best efforts to settle [Wood's] claim within [the $500,000] policy limits."

Despite these various entreaties, NJM held fast to its view that a settlement offer above $300,000 was unjustified. It did not approve any increase in that authorized amount. Meanwhile, before the jury began deliberations, Wood's attorney orally advised defense counsel that his client's settlement demand had dropped to $450,000, an amount $50,000 less than NJM's policy limits. That eleventh-hour reduction in Wood's demand still did not precipitate any enhanced counter-offer by NJM.

During the course of the trial, the trial judge made several rulings adverse to the position of NJM's insureds. In particular, the trial judge precluded the defense from presenting Dr. Dennis's de bene esse deposition testimony, pursuant to Genovese v. N.J. Transit Rail Operations, 234 N.J. Super. 375, 381 (App. Div.), certif. denied, 118 N.J. 195 (1989), which prohibits the substantive use of an expert's deposition by an adversary over an objection by the expert's proponent. Wood's counsel, who had taken the deposition in anticipation of using it at trial, objected to its substantive use by NJM. The trial judge did, however, allow defense counsel to call Dr. Dennis as a live witness, as permitted by Fitzgerald v. Stanley Roberts, Inc., 186 N.J. 286, 301-03 (2006). However, for reasons that are not entirely clear, the defense did not pursue that avenue. NJM believes that, had Dr. Dennis's deposition testimony been provided to the jury, it would have substantially weakened Wood's damages claims and would have corroborated the defense theory that Wood had been untruthful about her prior injuries, or at least that she had downplayed them.

Trial counsel for NJM's insureds did not cross-examine Wood directly about the discrepancies between her pre-March 2001 medical records and her repeated assertions that she had no prior injuries. Those inconsistencies were hinted at during Wood's cross-examination by trial counsel for the co-defendant, AVMA, although the specific inconsistencies were not detailed through that cross-examination.

After considering the trial proofs, the jury found both Caruso and AVMA negligent in failing to take measures that could have prevented the March 1, 2001 dog attack. Applying comparative fault principles, the jury allocated fifty-one percent fault to Caruso and forty-nine percent fault to AVMA. The jury awarded Wood compensatory damages in an aggregate amount of $2,422,000, representing $1,400,000 for Wood's pain and suffering, $782,000 for her economic losses, and $240,000 for her husband's per quod claims.

The trial judge subsequently molded the verdict to factor in the respective comparative fault percentages, and also to add in appropriate prejudgment interest. As the result of those calculations, final judgment was entered against Caruso, inclusive of interest, for $1,408,320.33, and a final judgment against AVMA for $1,353,092.07.

Following the jury's verdict, NJM's insureds moved for a new trial or, in the alternative, remittitur of the damages award. The trial judge denied that application in a bench ruling, after hearing the oral arguments of counsel. The judge found that the trial proofs, and, in particular, Wood's testimony, justified the jury's award for her pain and suffering and, moreover, that the economic damages were not excessive in light of the evidence.

AVMA appealed the judgment against it. We affirmed that judgment as to AVMA in an unpublished opinion last year. See Wood v. Crittelli, No. A-2788-07T2 (App. Div. Aug. 17, 2009). NJM's insureds did not appeal.

Following the outcome of the personal injury case, NJM paid the full amount its $500,000 policy to Wood and her husband, in partial satisfaction of the judgment against NJM's insureds. Thereafter, the Woods and the insureds negotiated an assignment of the insureds' potential bad faith claims against NJM, allowing the Woods to bring those bad faith claims directly.

In February 2008, the Woods, as assignees, filed a verified complaint against NJM in the Law Division, contending that NJM had acted in bad faith in refusing to settle the underlying personal injury action within the $500,000 policy limits. Consequently, plaintiffs sought to obligate NJM to pay the entire excess judgment. NJM denied any such bad faith on its part. This Rova Farms action was administratively assigned to the same Law Division judge who had presided over the underlying personal injury trial.

Prior to the completion of discovery in the Rova Farms action, plaintiffs moved for summary judgment and a declaration that NJM had, in fact, breached its duties and was thereby liable for the entire verdict amount, including the excess sum above the policy limit. Before the trial court heard that motion, NJM requested that the trial judge recuse herself from deciding the summary judgment motion.

The gist of NJM's request, which was thereafter formalized in a recusal motion, was that the trial judge had developed a bias against NJM because she had previously expressed views both during the underlying trial and in the post-judgment motions after the trial about the credibility of the witnesses, the persuasiveness of the proofs, the soundness of the parties' settlement positions, and the admissibility of certain evidence, including Dr. Dennis's deposition. NJM asserted that the trial judge had recommended, during the pendency of the personal injury action, that the insurer consider meeting the Woods' settlement demand, which the judge had felt at the time was reasonable.

Plaintiffs opposed the recusal application, arguing that the trial judge's disqualification was unnecessary and, moreover, that her familiarity with the related underlying case was beneficial, not harmful, in presiding over the bad faith issues. Plaintiffs also did not share NJM's recollection that the trial judge had participated in the pre-verdict settlement discussions or that she had made any settlement recommendations to the parties.

Meanwhile, NJM contended that the motion for summary judgment was premature because plaintiffs' interrogatory answers were incomplete, and plaintiffs had not supplied certain requested documents. Consequently, NJM cross-moved to dismiss plaintiffs' complaint under Rule 4:23-5(a)(1) for failure to provide discovery.

In addition to these motions, NJM filed an application to extend discovery. The application was based upon NJM's claim that it needed the extension to obtain the outstanding discovery from plaintiffs, and also to produce a defense expert report on the bad faith issues.

On the day before plaintiffs' summary judgment motion was returnable before the trial court, NJM served an expert report upon plaintiffs. The defense expert opined that the pre-verdict evaluation of plaintiffs' personal injury case by NJM and, in particular, by its Major Claims Committee, was reasonable, and that NJM had acted in good faith in declining before the jury's verdict to settle the case within its policy limits.

Following oral argument, the trial judge denied NJM's recusal motion and its application to extend the discovery period. Turning to the substance of the matter, the trial judge ruled that NJM had demonstrably acted in bad faith and breached its obligations to its insureds in failing to increase its settlement position above the $300,000 offer and accept the Woods' request to settle the case within the $500,000 policy limit.

In the course of her oral opinion analyzing the summary judgment issues, the trial judge made the following observations:

In this instant case, the [c]ourt has considered the affidavits and exhibits submitted by NJM. Not once in any of those documents could the [c]ourt find any reference to NJM's duty to protect its insured. All the certifications which the [c]ourt reviewed -- reviews in the most favorable light to NJM is that the insurer took the position that plaintiff's claim was questionable, that her experts were unreliable, and never deviated from that position, despite indications from numerous sources which included the attorney handling the case for NJM, the [claims] adjust[e]r, the arbitrator, and [another judge who had conferenced the case before trial]. There is no indication that NJM took any initiative to settle the case after the first and only offer.

A proper analysis of this claim which kept in mind the interest of the insured would require something more specific than a generic statement that this claim was submitted to a committee who approved it.

NJM proceeded to trial without an expert witness as to economic loss. When offered the opportunity to call Dr. Dennis live, they rejected it. There was no evidence adduced at trial that plaintiff's injuries were preexisting or that she had lied about them.

Given these considerations, the trial court concluded that there are no genuine issues of material fact with respect to NJM's bad faith. As the judge summed up her reasoning:

In sum, this matter seems to have been cavalierly handled by NJM who made a take-it-or-leave-it offer based on assumptions they never attempted to prove at trial.

The record reflects that there were numerous attempts to settle the case within the policy limits which were rejected. In the final analysis, NJM gambled on a trial contrary to the interests of its insured.

Accordingly, the trial court entered an order on November 21, 2008, granting summary judgment to plaintiffs and directing NJM to pay plaintiffs the excess amount of the verdict.

NJM now appeals. It reiterates its argument that the trial judge was obligated to recuse herself in the bad faith action because of her prior involvement in the underlying trial. NJM further argues that the entry of summary judgment against it was procedurally improper because discovery was not yet complete. As to the merits, NJM asserts that summary judgment should not have been granted because there were numerous genuine issues of material fact as to the reasonableness of its pre-verdict settlement posture, and that the trial judge misapplied the legal standards for bad faith liability under Rova Farms and associated case law. NJM urges that the summary judgment order be vacated, and that the case be remanded to a different Law Division judge. Plaintiffs oppose all of these arguments, and urge that we affirm the trial judge's rulings in all respects, including her decision not to recuse herself.

Several organizations have appeared in the appeal as amici curiae, respectively siding with different parties to the appeal. The Insurance Council of New Jersey and the Property Casualty Insurers Association of America (collectively "the insurer amici") argue that the trial court's orders should be vacated, not only for the reasons cited by NJM, but also because (1) the assignment of the insureds' bad faith claims to plaintiffs is allegedly deficient, and (2) because the trial judge specifically erred in accepting the opinions of the Woods' economic expert.

Meanwhile, amicus curiae, New Jersey Association For Justice ("NJAFJ"), which supports plaintiffs' position, argues that NJM should be liable for the entire excess verdict because it manifestly did not evaluate the Woods' personal injury case fairly, and also because it failed to properly notify its insureds about the prospects of an excess verdict. As to the recusal issue, NJAFJ adopts plaintiffs' contention that it was unnecessary for the trial judge to disqualify herself from the bad faith action and, in fact, that the trial judge "was clearly in the best position to evaluate the facts of the case and to fully understand what took place during the trial."

II.

A.

We begin our analysis with a recitation of the familiar legal principles governing bad faith claims in New Jersey arising out of an insurer's failure to settle a negligence action against its inusred within the policy limits. Those legal principles, commonly referred to as the "Rova Farms" doctrine, substantially originated in Radio Taxi Serv., Inc. v. Lincoln Mut. Ins. Co., 31 N.J. 299 (1960), a case that predated the Supreme Court's 1974 opinion in Rova Farms, supra, 65 N.J. at 474. We present a detailed discussion of Radio Taxi and Rova Farms because those seminal cases contain important guidance for the instant appeal.

The litigation in Radio Taxi arose out of a collision between an automobile and a taxicab, which injured the automobile driver. Radio Taxi, supra, 31 N.J. at 300-01. The automobile driver sued Radio Taxi Service, Inc. ("Radio Taxi") for negligently causing the harm caused by the collision. Ibid. At the time, Radio Taxi was covered under a liability insurance policy issued by Lincoln Mutual Insurance Company ("Lincoln Mutual"). Id. at 300. Prior to trial, Lincoln Mutual rejected the car driver's offer to settle the negligence case within the insurance policy limits. The case went to trial and produced a judgment against Radio Taxi that was nearly three times the policy limit. Id. at 301.

Radio Taxi then filed an action in the Law Division against Lincoln Mutual, contending that the insurer had acted in bad faith by refusing to settle the negligence action within the policy limits when that opportunity arose. Radio Taxi further alleged that the insurer had failed to exercise due care in investigating the accident. Ibid. After Radio Taxi presented its case-in-chief on the bad faith claims, Lincoln Mutual moved for a judgment of dismissal. The trial court granted that motion. Radio Taxi appealed, and the Supreme Court accepted direct certification of the appeal. Ibid.

In analyzing the insurer's duty to its insured in Radio Taxi, the Supreme Court acknowledged that the basic purpose of a policy of liability insurance is "to protect the insured from liability within the limits of the coverage." Id. at 304. The Court further acknowledged that an insurer should not "frustrate that purpose by a selfish decision as to settlement which exposes the insured to and results in a judgment beyond the specific monetary protection which his premium has purchased." Ibid. On the other hand, the Court also recognized an insurer's own interests in preserving its resources. Ibid. The Court further recognized the insurer's contractual right, under the liability policy, to control the defense of the tort litigation and the settlement of claims. Id. at 305.

Balancing these competing interests, the Court in Radio Taxi fashioned and adopted a legal standard that requires good faith by an insurer in foregoing an opportunity to settle a tort action against its insureds for a sum within the applicable policy limits. As the Court explained:

[The insurer's] decision not to settle must be an honest one. It must result from a weighing of probabilities in a fair manner. To be a good faith decision, it must be an honest and intelligent one in the light of the company's expertise in the field. Where reasonable and probable cause appears for rejecting a settlement offer and for defending the damage action the good faith of the insurer will be vindicated.

[Id. at 305 (emphasis added).]

In making such a determination, the Court emphasized that "[c]onsiderations of experience, expertise and judgment are particularly important and significant." Ibid.

The Court in Radio Taxi declined to adopt a principle of strict liability that would make an insurer automatically responsible for an excess verdict if it had rejected a pre-verdict opportunity to settle a case within the policy limits. Instead, the insurer's obligation to bear the excess amount is to be based upon a fact-specific assessment of the reasonableness and good faith of the insurer's conduct in dealing with offers of settlement. In that context, the Court recognized that evaluating the value of a litigated claim for settlement purposes is often an imprecise and difficult task:

The law does not expect an insurer to be gifted with powers of divination or of accurate prophecy. The requirement is due care in investigation and good faith in dealing with offers of settlement. The ultimate question is not whether a verdict in excess of the policy limits should have been anticipated but whether the insurer lacked good faith in deciding not to meet the settlement demand.

[Id. at 312 (internal citation omitted).]

The Court elaborated:

Mere failure to settle within the policy limit when there was an opportunity to do so before or during trial is not evidence of bad faith. The fact that the policy limit was exceeded by the verdict, in the light of hindsight may indicate a mistake of judgment. But such a mistake when resulting from a decision made with good faith regard for its own and the insured's interests does not confer a cause of action on the insured for the excess.

[Ibid. (internal citation omitted).]

Applying that standard to the record before it, a majority of the justices in Radio Taxi agreed with the trial court that Lincoln Mutual had not demonstrably acted unreasonably, or in bad faith, by declining to settle the action against its insured within the coverage limits. The majority specifically noted that "no facts were presented which would warrant a finding" that either (1) "the defendant was unduly venturesome at the expense of the insured," or (2) "that the danger of an adverse verdict in the accident case was so great as to create an inference of bad faith in rejecting the settlement offer," or (3) "that the decision not to meet the [injured driver's] settlement demand sprang from optimism unrelated to the realities of the case." Id. at 313.

Consequently, the Court majority affirmed the trial court's dismissal of Radio Taxi's bad faith claims. Ibid. The two dissenting justices did not contest the general standards of good faith and reasonableness espoused in the majority's opinion, but disagreed that Radio Taxi's proofs of the insurer's breach of those standards were inadequate to withstand the insurer's motion to dismiss. Id. at 313-20.

Fourteen years later, the Supreme Court amplified these controlling legal principles in Rova Farms, supra, 65 N.J. at 496. In that case, Rova Farms Resort, Inc. ("Rova Farms"), the operator of a lake resort, was sued after one of its patrons was injured in a diving accident on the premises and became confined to a wheelchair. Id. at 478-79. On the first day of the trial of that underlying action, Rova Farms' liability carrier, Investors Insurance Company of America ("Investors"), tendered a settlement offer to the injured patron in a sum well below the policy limit. Id. at 481. After that offer was rejected, the case went to trial and the jury returned a verdict in favor of the patron, awarding compensatory damages that exceeded four times the policy limit. Ibid.

Investors paid out its policy limit, and Rova Farms then sued Investors in the Law Division, alleging that the insurer had acted improperly "in not settling or attempting in good faith to settle the case" against the insured. Id. at 482. After conducting what is described in the Supreme Court's opinion as a "full hearing on the merits," the trial court found that Investors had indeed acted in bad faith and entered judgment against it for the excess amount. Id. at 483.

In reviewing the circumstances in Rova Farms, the Supreme Court substantially reiterated the general principles of bad-faith liability it had set forth earlier in Radio Taxi. Id. at 491-96. The Court cast the insurer's obligation as one of fiduciary duty, sounding both in tort in contract law, id. at 496, recognizing that the insurer had "contractually restricted the independent negotiating power of its insured" to deal directly with the injured claimant. Id. at 495.

In giving contours to the insurer's fiduciary responsibility, the Court in Rova Farms again recognized the interests of the insured, who "has the right to expect that the amount of protection he has purchased will be offered in compromise where necessary to effect an end to the litigation." Id. at 500. The Court balanced that against the ability of the insurer to "pursue its own interests and decline to settle a case, for whatever reason (so long as not in bad faith or similarly wrongful)." Ibid.

The Court also noted the practical difficulties that an insured faces in yielding control of the defense and the settlement of the underlying lawsuit to the insurer, and the danger that an insurer may unilaterally "gamble with the insured's money." Id. at 502. Nevertheless, the Court declined in Rova Farms to revise the applicable legal standards it had previously announced in Radio Taxi, and eschewed a per se rule making a carrier bear the financial consequences of an excess verdict in all cases where there was an opportunity to settle within the policy limits. Id. at 502. The Court found it particularly unnecessary to consider that possibility in Rova Farms because the proofs, which had notably been developed in a plenary fashion at the non-jury trial, had adequately supported the trial judge's finding that the insurer had acted unreasonably and had thereby breached its duties to the insured. Id. at 496-97.

Expounding upon the applicable principles of good faith in Rova Farms, the Supreme Court recognized the insurance company's presumed expertise in investigating and evaluating claims asserted against its insureds. Id. at 489-90. Nevertheless, as the Court stated, "'[a] decision not to settle must be a thoroughly honest, intelligent and objective one. It must be a realistic one when tested by the necessarily assumed expertise of the company.'" Id. at 489-90 (quoting Bowers v. Camden Fire Ins. Ass'n, 51 N.J. 62, 71 (1968)). The Court further explained that:

[t]his expertise must be applied, in a given case, to a consideration of all the factors bearing upon the advisability of a settlement for the protection of the insured. While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured and the witnesses at trial.

[Id. at 490.]

The insurer's obligation is not a passive one, but, as the Court noted in Rova Farms, the insurer "has a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy coverage." Id. at 496. Even so, the Court specified that an insurer will not be held liable under these bad faith principles unless its exercise of judgment is found to be "actually dishonest, unreasonably optimistic or otherwise in bad faith, or infected with negligence such as to impede the reaching, or having the capacity to reach, a 'good faith' decision." Id. at 497.

Ensuing bad faith cases in our State's reported case law have reaffirmed and applied these multi-faceted concepts of good faith and reasonableness. Although we are urged by amicus NJAFJ to revisit these well-established principles and to instead endorse a strict liability approach to a carrier's responsibility to settle cases within policy limits, we decline to do so.

It is not our function as an intermediate appellate court to rewrite the Supreme Court's holdings. See State v. Hill, 139 N.J. Super. 548, 551 (App. Div. 1976). Instead, we are bound by the rule of law expressed in the Supreme court's precedents in Radio Taxi, Rova Farms, and their progeny. We apply the law as it has existed and has been applied for the past four decades, and reserve to the Supreme Court any potential alteration of those principles.

B.

We now review the trial court's application of these established substantive principles. In performing that review, we bear in mind the distinct procedural posture in which NJM's appeal arises, i.e., a decision by the trial court to grant summary judgment in favor of plaintiffs and to declare conclusively that NJM breached its fiduciary duties by failing to settle the Woods' personal injury case within the $500,000 policy limits.

The quantum of evidence needed to justify the entry of summary judgment under Rule 4:46-2 is well known. The court must "consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995); see also R. 4:46-2(c). Summary judgment should not be granted unless "the evidence is 'so one-sided that one party must prevail as a matter of law[.]'" Brill, supra, 142 N.J. at 540 (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S. Ct. 2505, 2512, 91 L. Ed. 2d 202, 214 (1986)).

Motions for summary judgment are frequently inappropriate for resolving issues that turn upon a party's state of mind or intent, including claims of bad faith. Pressler, Current N.J. Court Rules, comment 2.3.4 to R. 4:46-2 (2010); see also N.J. Title Ins. Co. v. Caputo, 163 N.J. 143 (2000). Additionally, "'[w]here discovery on material issues is not complete[,]'" the trial court should only grant summary judgment if the non-moving party cannot specify what discovery is still required. Alpert, Goldberg, Butler, Norton & Weiss, P.C v. Quinn, 410 N.J. Super. 510, 538 (App. Div. 2009) (quoting Pressler, supra, comment 2.3.3 to R. 4:46-2). Where a claim is based upon alleged bad faith, discovery that relates to a potential circumstantial inference of such bad faith is generally warranted before the summary judgment motion can be heard. See Wilson v. Amerada Hess Corp., 168 N.J. 236, 252-54 (2001).

An appellate court reviews a grant of summary judgment de novo, applying the same standards governing the trial court under Rule 4:46. Liberty Surplus Ins. Corp., Inc. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007); see also Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). Moreover, in performing our appellate review, we accord no special deference to the trial court's rulings on the law itself. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).

Having independently reviewed the record, we are persuaded that the trial court here acted too swiftly in granting summary judgment to plaintiffs on the question of NJM's alleged bad faith. Although we appreciate many of the criticisms leveled by plaintiffs against NJM about its inflexible settlement position prior to the jury's verdict, we do not share the trial court's confidence at least on this paper record that the proofs compel a conclusion that NJM was "actually dishonest, unreasonably optimistic or otherwise [acting] in bad faith, or infected with negligence such as to impede the reaching, or having the capacity to reach, a 'good faith' decision." Rova Farms, supra, 65 N.J. at 497.

To be sure, the jury's ultimate multi-million-dollar damages award in this case, factoring in the fifty-one percent proportionate share of that award allocated to NJM's insureds, substantially exceeded NJM's $500,000 policy limit. It is undeniable, and well documented, that the Woods offered to settle their claims within the policy limit before the case was placed in the jurors' hands. However, we are also mindful, as the Supreme Court has instructed, that a "[m]ere failure to settle within the policy limit when there was an opportunity to do so before or during trial" is not a per se demonstration of bad faith. Radio Taxi, 31 N.J. at 312. Hindsight, after all, is always perfect. Instead, the bad faith examination must employ the multi-faceted analysis described by the Supreme Court in Rova Farms, including the consideration of such factors as the range of anticipated verdicts, the strengths and weaknesses of the expected proofs, the patterns of prior verdicts in similar cases, and the relative credibility and personal appeal of the parties and witnesses. Rova Farms, supra, 65 N.J. at 490.

The motion judge's bad-faith analysis faulted NJM for failing to take any further initiative to settle the case after making its $300,000 offer. Although, in hindsight, that proved to be an unsuccessful negotiating strategy, we cannot say in the absence of a trial or a plenary hearing that the carrier's reluctance to increase its offer above $300,000 was necessarily unreasonable or done in bad faith.

Viewing the record, as we must, in a light most favorable to NJM up to the time before the jury's verdict, it appears that there were countervailing factors that led NJM to be more hopeful about its chances of containing the exposure at or below $300,000. Without reciting them all here, there were, among other things, the prospect that the jury might discount Wood's credibility because of her failure to acknowledge her prior back injuries; her apparent lack of reported symptoms for a substantial interval following the days immediately after the accident; the disputed issues of medical causation; and the fact that the co-defendant AVMA could have been found to bear equal or greater responsibility for the safety of the common areas where Wood delivered the mail.

NJM's stringent approach to settlement was also fortified, to some degree, by the neutral arbitrator's assessment of Woods' gross damages at $600,000. Although the arbitrator more heavily allocated liability to NJM's insureds than to AVMA, NJM predicted a much closer split of fault, which, in fact, was borne out by the jury's ultimate nearly-even allocation. Indeed, if one hypothetically were to apply an even (i.e., fifty/fifty) allocation to the arbitrator's $600,000 gross damages figure, the resulting share of liability for NJM's insured would be $300,000, the precise sum that NJM had authorized for settlement.

We do agree with the motion judge that the allegedly-elaborate procedures followed in NJM's internal claims review, and the sophistication of its Major Claims Committee, cannot be dispositive of the issue of its alleged good faith. An insurer cannot fend off bad faith allegations by simply pointing to the quality of its internal protocols for claims review. Sophisticated insurance company executives can sometimes be dead wrong about the likely outcome of a litigated matter, and may conspicuously overlook significant factors that should warrant higher settlement authority.

In this case, NJM's reliance upon its Major Claims Committee is substantially undercut by the fact that both its assigned adjuster and defense attorney were forecasting a dismal outcome at trial and a verdict in excess of the policy limit. The significance of that dissonance to the question of NJM's bad faith is best explored in a plenary fashion. We do not believe that NJM or the Committee were required to rubber-stamp the settlement recommendations of the adjuster and the defense attorney. NJM should have been permitted to put on its witnesses at a plenary hearing to explain in greater detail why the Committee rejected the advice of the defense attorney and the adjuster, thereby enabling a trier of fact to evaluate the credibility and persuasiveness of such explanations.

The grant of summary judgment is further compromised, to some extent, by the fact that discovery was allegedly not yet complete at the time of the motion judge's disposition. We do not second-guess or overturn in this opinion the judge's handling of the discovery issues, and do not find that the court abused its discretion over such matters. See Abtrax Pharms., Inc. v. Elkins-Sinn, Inc., 139 N.J. 499, 517-18 (1995). Even so, we are mindful of the possibility that NJM's counterproofs on the bad faith issues and its expert's report might have been stronger had the trial court allowed the sought-after additional discovery before granting plaintiffs final judgment. The denial of that requested discovery, although justifiable from a case management perspective, diminishes our comfort level with the trial court's summary disposition of this particular lawsuit on its merits.

For these numerous reasons, we conclude that summary judgment was prematurely granted to plaintiffs on the bad faith issues. There are genuine fact-sensitive determinations that need to be made about the reasonableness of NJM's handling of settlement negotiations in the underlying tort action. That assessment of reasonableness will hinge, to some degree, upon the credibility and persuasiveness of fact witnesses. It may also depend upon the testimony of expert witnesses opining about what went wrong here on the settlement front and why it went wrong. Prudence dictates that these pivotal questions of reasonableness and bad faith be decided in this case after a full-blown evidentiary presentation before the factfinder. By no means are we saying that summary judgment in favor of an insured is never appropriate in a bad faith case, but simply that there is enough proof on both sides of the ledger here to warrant a plenary disposition.

That leads us to consider who the appropriate factfinder will be. The parties' briefs on appeal do not explicitly address whether, in the event the summary judgment order is vacated, the bad faith issues are to be appropriately decided by a judge or by a jury. The Supreme Court's case law suggests conflicting answers about the identity of the factfinder. In Radio Taxi, the Court considered whether the record was sufficient to raise "a jury question" on bad faith. Radio Taxi, supra, 31 N.J. at 311. The Court further detailed why it was inappropriate "to allow a jury to review" bad faith issues in every excess verdict case. Id. at 313. The Court did not, however, explain why it presumed that bad faith claims presenting triable proofs would be heard by a jury rather than by a judge.

Conversely, in Rova Farms, the bad faith issues were litigated in a non-jury hearing. Rova Farms, supra, 65 N.J. at 483. The Court's opinion does not tell us whether the right to a jury had been waived by the parties, or whether the trial court itself had determined that no right to a jury trial was implicated.

None of the ensuing reported cases in New Jersey have clarified whether bad faith claims in this context should be heard by a judge or by a jury. The question essentially turns on whether such a bad faith claim is essentially one of law or equity; if it is the latter, then there is no right of a jury trial. See N.J. Const. art. I, 9; In re LiVolsi, 85 N.J. 576, 587-88 (1981); 500 Columbia Tpk. Assocs. v. Haselmann, 275 N.J. Super. 166, 171 (App. Div. 1994) (finding a question of a breach of fiduciary duty to be "primarily equitable in nature").

At oral argument before us, the parties and amici counsel did not agree on whether plaintiffs' bad faith claims, if not resolvable on summary judgment grounds, should be heard by a judge or by a jury. We do note that plaintiffs included a jury demand in the case information statement filed with their complaint. At oral argument on the appeal, plaintiffs' counsel indicated a willingness to waive a jury trial, assuming that the right to a jury even applies. However, that potential withdrawal of the jury demand by plaintiffs is not dispositive without the acquiescence of NJM. See R. 4:35-1(d). Given the absence of full briefing on the issue, and the respective tactical judgments that both parties presumably would want to undertake after their receipt and review of this opinion, we leave it to the trial court on remand to resolve any dispute over whether the factfinder in the remand proceeding should be a jury or the court.

In sum, we vacate summary judgment and remand the matter for a trial or a plenary hearing in the Law Division. In anticipation of that proceeding, the parties may engage in reasonable supplemental discovery, in the discretion of the trial court. As part of that discovery and to provide the factfinder with a fuller exposition of the critical issues in light of this opinion, the trial court shall treat NJM's expert report as timely, and shall also provide plaintiffs a reasonable opportunity to furnish an expert report of their own if they so choose. We direct that the trial court convene a case a management conference within twenty days of this opinion to schedule such additional discovery, and also to plan the ultimate trial or plenary hearing and determine whether a judge or a jury will be the factfinder.

We further direct that, on remand, the case be assigned to a different judge than the one who previously heard the matter. We provide that direction not because we believe that the prior judge would be incapable of fairly and conscientiously considering the merits anew, or that she is disqualified from hearing the case as a matter of law. See Part II.C, infra. Rather, we call for the reassignment of the case to spare the prior judge the potential difficulty and discomfort of revisiting the bad faith issues in light of the definitive opinions that she had already expressed on those subjects in her summary judgment ruling that we have now vacated for legal reasons. See N.J. Div. of Youth & Family Servs. v. A.W., 103 N.J. 591, 617 (1986); State v. Henderson, 397 N.J. Super. 398, 416-17 (App. Div.), certif. granted on other grounds, 195 N.J. 521 (2008).

C.

Our decision vacating summary judgment and remanding the matter for a trial or plenary hearing, to be presided over by a different judge, moots the separate ground asserted by NJM for reversal, alleging that the motion judge was obligated to recuse herself. We comment on that recusal issue only briefly, for the purposes of providing a measure of guidance and also to assure that our disposition of this appeal is not misread or misunderstood.

NJM and the insurer amici argue that that the motion judge was necessarily disqualified from presiding over the bad faith litigation because of her involvement in the prior underlying tort action. The insurer amici specifically urge that we endorse a per se rule barring such subsequent involvement by the original trial judge. We reject this contention and decline to endorse such an inflexible rule.

NJM and the amici express concern that a judge who had presided over the underlying tort action will often have developed views, or have made adverse rulings during the course of that case, that will prevent that same judge from being objective in assessing the good faith or reasonableness of the insurer in failing to settle the original case within the applicable policy limits. We perceive no such inherent bias, nor the need for automatic disqualification. Indeed, the original judge's familiarity with the underlying matter may provide beneficial background in dealing with the ensuing bad faith issues. Efficiency is also gained by not having to familiarize another judge with the history of the case.

It is not at all unusual in our system of justice for a judge who presided over a matter to thereafter be called upon to evaluate, after the fact, the reasonableness of the positions or conduct of a participant in the litigation. For example, judges hearing matrimonial cases are commonly asked to decide post-trial motions for counsel fees, in which the judge is obligated to consider, among other things, the "reasonableness and good faith of the positions advanced by the parties both during and prior to trial[.]" See R. 5:3-5(c)(3). In criminal cases, the same judge who tried the case is customarily asked to rule on post-verdict motions for a new trial based upon allegations of prosecutorial misconduct that occurred during the trial. See R. 3:20-1. Similarly, the same criminal trial judge presumptively will entertain applications for post-conviction relief, which often are based on claims that defendant's trial attorney was ineffective and did not act with reasonable care. Moreover, in civil and other litigation, trial judges are frequently asked to decide, in retrospect, if a party or a lawyer should be sanctioned for having engaged in bad faith or frivolous conduct in a matter presided over by that same trial judge. See N.J.S.A. 2A:15-59.1; R. 1:4-8.

These various illustrations demonstrate that there is nothing inherently wrong with allowing a trial judge who presided over a matter and who made rulings in that case to thereafter decide issues that implicate the reasonableness of parties, lawyers, or others who had participated in some way in the earlier proceeding. See also N.J.S.A. 2A:15-49 (providing that a judge is not disqualified from sitting on a trial or deciding an argument because he has "given his opinion on any question in controversy in the pending action in the course of previous proceedings therein").

We also reject the contention that the trial judge was disqualified from presiding over the bad faith case if she had made settlement recommendations during the pendency of the original matter. Such settlement recommendations by the trial judge are often an important and routine part of efforts to resolve pending cases amicably. See Brown v. Pica, 360 N.J. Super. 565, 567-69 (Law. Div. 2001), appeal dismissed, 360 N.J. Super. 490 (App. Div. 2003). Although it is disputed whether the trial judge in the underlying matter had even communicated any settlement recommendations to counsel, even assuming that she had done so would not require her disqualification from handling ensuing matters relating to that same case.

Having rejected the arguments for automatic disqualification, we are left with the traditional standard for judicial disqualification, requiring a demonstration of an objectively reasonable basis to conclude that the proceedings were unfair. See DeNike v. Cupo, 196 N.J. 502, 517 (2008); R. 1:12-1(d) and 1:12-1(f). Recusal is not necessary because there has been "a mere suggestion" of disqualification. Hundred E. Credit Corp. v. Eric Schuster Corp., 212 N.J. Super. 350, 358 (App. Div.), certif. denied, 107 N.J. 60 (1986).

Applying those customary principles, we are satisfied that the motion judge did not err or abuse her discretion in denying NJM's recusal motion. Bonnet v. Stewart, 155 N.J. Super. 326, 330 (App. Div.), certif. denied, 77 N.J. 468 (1978). The fact that the judge had expressed her opinions about the merits of various issues within the underlying case during the course of the prior proceedings did not, by any means, disqualify her from hearing the bad faith claims. We emphasize that our present decision to remand this case to a different judge is not based on any compulsion for recusal, but rather one prompted by administrative considerations to avoid putting the judge in the awkward position of having to revisit the merits of the case as a potential factfinder after having been reversed by this court.

The judge's denial of the recusal motion is consequently affirmed.

D.

We need not resolve or address the remaining arguments presented on appeal, including the contentions raised by the insurer amici (but not by NJM) challenging the validity of the assignment of the insured's Rova Farms claim to plaintiffs. Those unresolved matters may be raised by one or more of the parties, if they so choose, during the course of the remand proceedings.

Affirmed in part, vacated in part, and remanded for a trial or plenary hearing consistent with this opinion. We do not retain jurisdiction.

 

For sake of simplicity, we shall refer to Karen Wood singularly as "Wood," unless otherwise indicated.

Although it is not mentioned in Wolf's trial testimony, plaintiffs contend that Wolf posited a higher economic loss figure if Wood were unable to return to at least sedentary work.

It is not contended in the present case that the failure to appeal was due to any bad faith, or that it constituted a deviation from NJM's fiduciary duties or the applicable standards of care.

We shall hereafter refer to the Woods, in their capacity as assignees, as "plaintiffs," recognizing that in the underlying action the Woods were "plaintiffs" in their own right and not acting as assignees.

NJM's motion to dismiss the complaint under Rule 4:23-5(a)(1) was mooted by the summary judgment ruling.

The majority also upheld the trial court's finding that the insured had failed to demonstrate that Lincoln Mutual had not adequately investigated the case by failing to interview a minor who had crossed through the intersection shortly before the accident, because it was speculative whether the minor had knowledge that would have materially affected the jury's assessment of the taxicab operator's fault. Id. at 302-03.

See, e.g., Courvoisier v. Harley Davidson of Trenton, Inc., 162 N.J. 153, 164 (1999) (recognizing the insurer's affirmative defense to show the infeasibility of a settlement within the policy limits, or a settlement outside of those limits to which the insured would have contributed); Am. Home Assurance Co., Inc. v. Hermann's Warehouse Corp., 117 N.J. 1, 7 (1989) (noting that an insurer must "exercise good faith in its dealings with the insured, particularly when the insured's money or other interests . . . may be at stake"); Fireman's Fund Ins. Co. v. Sec. Ins. Co. of Hartford, 72 N.J. 63, 68-69 (1976) (finding that the insurer owes a fiduciary duty to its insured in making settlement offers, but declining to adopt a per se rule automatically requiring insurers who do not settle within the policy limits to be automatically liable for ensuing excess verdicts); N.J. Mfrs. Ins. Co. v. Nat'l Cas. Co., 413 N.J. Super. 94, 101-02 (App. Div. 2010) (applying the seminal standards of Rova Farms and ordering a remand for appropriate discovery relating to the bad faith issues); Taddei v. State Farm Indem. Co., 401 N.J. Super. 449, 459 (App. Div. 2008) (noting that, in a third party coverage context, the insurer has a fiduciary duty to act in good faith when settling the claim); N.J. Mfrs. Ins. Co. v. Nat'l Cas. Co., 393 N.J. Super. 340, 353 (App. Div.) (reaffirming an insurer's duty to engage in good faith discussions with the claimant to reach a settlement), certif. denied, 192 N.J. 481 (2007); Princeton Ins. Co. v. Qureshi, 380 N.J. Super. 495, 502-03 (App. Div. 2005) (detailing an insurer's obligations under Rova Farms), certif. denied, 186 N.J. 243 (2006); Frankel v. St. Paul Fire & Marine Ins. Co., 334 N.J. Super. 353, 358 (App. Div. 2000) (stating that an insurer will be liable for the amount in excess of the policy limit if it fails to exercise good faith); Venetsanos v. Zucker, Facher & Zucker, 271 N.J. Super. 459, 475-76 (App. Div.) (noting that, under the standard set forth in Rova Farms, an insurer is under the obligation to initiate and attempt a settlement within the policy limits), certif. denied, 137 N.J. 166 (1994).

We recognize that empirical or reliable data on this factor may be hard to obtain, and do not read Rova Farms to require consideration of this particular factor in all cases.

By comparison, we note that, in Rova Farms, the insurer was found to have acted in bad faith only after a plenary hearing before the trial judge. Rova Farms, supra, 65 N.J. at 483. In Radio Taxi, the insurer was exonerated, but only after plaintiff was first given a chance to present its witnesses in court. Radio Taxi, supra, 31 N.J. at 301. In neither of those seminal cases was summary judgment granted in favor of the insured.

Again, we do not fault the trial court for its previous discovery rulings, but perceive that supplemental discovery by both parties, in the current posture of this case, would be fair and appropriate in light of the substantive guidance set forth in this opinion.

We note that the trial judge was not designated as a fact witness to testify in the bad faith litigation. Our discussion of the recusal issue is therefore confined to circumstances in which the judge is not being called as fact witness.

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A-1768-08T2

July 28, 2010