Insurers Finally Get Right to Jury Trial in New Jersey

Forty years ago the New Jersey Supreme Court in Rova Farms Resort, Inc. v. Investors Ins. Co. of America, 65 N.J. 474, 323 A.2d 495 (1974), recognized a cause of action against an insurance company in situations where the insurer had an opportunity to settle claims against the insured within policy limits, the insurer refused to settle the claim in bad faith, and a verdict above the policy limits was returned. This became known as a so-called “Rova Farms” claim. In this type of situation, when the excess judgment is realized, a plaintiff will negotiate a settlement with the insured whereby the insured will be given a covenant not to execute and the plaintiff receives an assignment entitling the plaintiff to stand in the shoes of the insured in proceeding against the insurer for the deficiency as well as bad faith.

Recently, in Wood v. New Jersey Manufacturers Ins. Co., 2011 WL 2314954 (N.J. June 14, 2011), the New Jersey Supreme Court held that a Rova Farms claim represented a traditional contract claim entitling the insurer to the right to trial by jury to determine whether the insurer was obligated to pay damages above the policy limits.

In Wood, plaintiff assignee characterized a Rova Farms claim as arising from a fiduciary obligation which was imposed on an insurer to negotiate a settlement within the policy limits on its insured’s behalf. Because the foundational obligation was fiduciary in nature, and because a fiduciary duty is primarily equitable in nature, plaintiff assignee argued that the insurer had no right to a trial by jury because of the equitable nature of the claim. The general rule is that claims for equity are decided by the court while claims at law are decided by juries or the court depending upon the request of the parties.

The insurer in Wood cited to the Court the common-law history of the jury trial right in New Jersey asserting that the relationship between an insurer and its insured is one based in contract and an insured’s Rova Farms bad faith claim under an insurance policy is nothing more than a species of contract claim arising under the implied covenant of good faith and fair dealing imputed into the policy. Therefore, the insurer argued that the dispute between the insurer and the insured concerning their respective rights and obligations under the insurance policy constituted common-law, breach of contract claims for which legal remedies provided the primary form of relief and to which the right to a jury trial attached.

The Supreme Court of New Jersey agreed with the insurer. The Court found that whether a jury trial right attaches to a plaintiff’s cause of action cannot be driven by the label a party affixes to its pleading because it is the obligation of the judiciary to transcend such superficialities and reach the substance of what is alleged and sought in the lawsuit. The Court observed that no matter how the plaintiff assignee in the Wood case couched her claim against the insurer, it was undisputed that a Rova Farms bad faith claim was nothing more than a garden variety action at law which required that the plaintiff assignee prove that the insurer breached its insurance contract by its failure in bad faith to settle plaintiff’s original personal injury suit against the insured. Although there was language in the lawsuit referring to the relationship between the insurer and its insured as being something akin to a fiduciary relationship, the Court found that it remained unmistakable, at its core, that a Rova Farms bad faith claim was a simple breach of contract claim. A breach of contract claim is a claim in law and the right to a jury trial attached to the disposition of the claim.

In almost every state in the country courts have permitted jury trials in lawsuits likened to the cause of action recognized in New Jersey 40 years ago as a so-called Rova Farms claim. In the Wood decision, the New Jersey Supreme Court has joined the almost unanimous judicial recognition that the right to trial by jury has been and remains a bedrock in the dispute resolution mechanisms for insurer/insured relations and claims for bad faith.