N.J. High Court Finds That Res Judicata Barred Plaintiff’s UM Bad Faith Claim, Not the Entire Controversy Doctrine

The New Jersey Supreme Court recently differentiated between the “entire controversy doctrine” and the doctrine of res judicata in determining whether the insured’s bad faith claim arising out of an uninsured motorist situation was barred. The insured was injured in an automobile accident when the insured was cut off by an unidentified white minivan causing the insured to cross a grass median and lose control of the vehicle. The insured’s vehicle collided with another vehicle and then was subsequently hit by a tractor trailer. The insured suffered several fractures to his leg as a result of the accident, as well as sustaining a $12,000 loss of wages. The insured had purchased UM coverage from New Jersey Manufacturer’s Insurance Company (NJM) with a limit of $100,000. The insured pursued a UM claim because no one could identify the vehicle that caused the insured to veer into the other side of the highway. Not only did NJM reject the insured’s demand for policy limits, NJM did not make any offer to attempt to settle the insured’s UM claim. Thereafter, the matter proceeded to private arbitration under the policy. The first arbitration panel comprised of three UM arbitrators who found that insured was entitled to a gross arbitration award of $125,000 which was reduced to take into account the insured’s comparative negligence, leaving a net award of $87,500.

NJM rejected the $87,500 arbitration award and demanded a jury trial. The insured’s attorney acknowledged NJM’s rejection of the arbitration award by letter dated April 21, 2005, and asserted that NJM was acting in bad faith by rejecting the award. On April 28, 2005, the insured filed a four-count Complaint against NJM seeking UM benefits. The Complaint, however, contained no explicit allegations against NJM regarding bad faith or alleged breach of any policy duties. NJM answered the Complaint on June 21, 2005. The matter was then submitted to mandatory non-binding arbitration, pursuant to Rule 4:21A of the New Jersey Rules of Civil Procedure. That arbitration resulted in a 50/50 liability finding, and a net arbitration award of $162,500 to the insured on a gross award of $325,000. NJM again refused the award and opted for a jury trial.

On April 7, 2006, the insured submitted an offer of judgment to NJM in the amount of $95,000 reiterating the insured’s belief that NJM’s conduct was in bad faith.

A verdict following a jury trial was entered in favor of the insured, finding that the phantom vehicle was 100 percent at fault, and awarded the insured $210,000 for pain and suffering, and $12,175 in lost wages. The insured’s wife was awarded $33,000 for her loss of consortium claim. The insured moved to enter judgment for the full amount of the verdict, notwithstanding the $100,000 policy limit, together with pre-judgment interest on the verdict, and attorneys’ fees.

The trial court reduced and modified the jury verdict to conform to the insurance policy of $100,000. The Judge also awarded the insured attorneys’ fees and pre-judgment interest. In doing so, the trial judge indicated that NJM’s actions did not constitute bad faith, because NJM had fairly debatable reasons for denying the benefits of the policy.

The trial court then entered judgment molding the jury verdict to conform with (1) the $100,000 policy limit; (2) awarded $93,796.51 to plaintiff for attorneys’ fees and court costs, pursuant to the offer of judgment rule; (3) awarded $15,652 in prejudgment interest; and (4) denied the insured’s motion for reconsideration. Following this award, both the insured and NJM filed cross-appeals. The insured contended that the trial court erred by molding the verdict to NJM’s policy limits because NJM had acted in bad faith. The Appellate Division of the New Jersey Court concurred with the trial judge’s modification of the jury verdict, but reversed the award of attorneys’ fees and expenses.

The insured filed a new Complaint in New Jersey Superior Court alleging that NJM breached its duty of good faith and fair dealing as well as the New Jersey Consumer Fraud Act, and Unfair Claims Settlement Practices Act. NJM moved for summary judgment arguing that the insured’s Complaint was barred by the “entire controversy doctrine,” res judicata and/or collateral estoppel. The trial court granted NJM’s motion for summary judgment finding that the “entire controversy doctrine” barred the insured’s bad faith claim. The trial court also found that the doctrine of res judicata applied. The second lawsuit was taken up on appeal. The appellate division rejected the insured’s claim that his bad faith cause of action did not ripen until the jury returned its verdict. Instead, the Appellate Court found that the insured’s bad faith claim accrued prior to the verdict and that the insured had a fair opportunity to assert and litigate that action. Accordingly, the Appellate Panel held that there was nothing unfair or inequitable about requiring an insured to pursue a bad faith claim in a UM action where (1) the insured recognized and threatened a bad faith claim before filing the UM action; (2) the insurer made no settlement offer despite an arbitration panel’s evaluation of damages in excess of the policy; and, (3) the carrier represented that it intended to proceed to trial solely because it would not have to pay more. The New Jersey Supreme Court granted the insured’s Petition for Certification. See, Wadeer v. New Jersey Manufacturer’s Ins. Co., 213 N.J. 534, 65 A.3d 260 (2013).

In Wadeer v. New Jersey Manufacturer’s Insurance Co., 220 N.J. 592, 110 A.3d 19 (2015), the New Jersey Supreme Court held that the prior judgment on the insured’s UM claim was res judicata barring the insured’s bad faith claim and that the “entire controversy doctrine” did not apply.

First, the New Jersey Supreme Court rejected the insured’s assertion that the legal injuries complained of in his bad faith action did not arise until after the jury verdict, when the trial judge reduced the excess award to comport with the policy limit. The Court also rejected the insured’s assertion that there was no commonality of legal issues between the insured’s UM bodily injury claim and his bad faith action. The insured had maintained that the factual circumstances of a personal injury claim arising from a motor vehicle accident did not give rise to a bad faith action because the bad faith cause of action was a separate and distinct claim solely relating to the conduct and actions of NJM throughout the course of the legal proceedings in the UM lawsuit. The insured also argued that the “entire controversy doctrine” relied upon by NJM was an equitable concept predicated upon judicial fairness, and that the result in the trial court below rendered null any concept of fundamental fairness in equity by requiring that a bad faith claim be brought prior to the conclusion of the underlying action.

The New Jersey Supreme Court began its analysis by acknowledging that every insurance contract contained an implied covenant of good faith and fair dealing as an extension of the covenant, insurance companies owe a duty of good faith to their insured in processing first party claims. Under the fairly debatable standard adopted in New Jersey, a claimant who could not have established, as a matter of law, a right to summary judgment on the substantive claim, would not be entitled to assert a claim for the insurer’s bad faith refusal to pay the claim. Under the “entire controversy doctrine,” codified in Rule 4:30A, the non-joinder of claims required to be joined by the entire controversy doctrine resulted in the preclusion of the omitted claims to the extent required by the “entire controversy doctrine.” The Court noted that the “entire controversy doctrine” embodied the principle that the adjudication of a legal controversy should occur in one litigation in only one court and, therefore, all parties involved in a litigation should, at the very least, present in that proceeding all of their claims and defenses that were related to the underlying controversy. In determining whether a subsequent claim should be barred under the “entire controversy doctrine,” the central consideration was whether the claims against the different parties arose from related facts for the same transaction or series of transactions. It is the core set of facts that provides the length between distinct claims against the same parties and triggers the requirement that they be determined in one proceeding. There was no requirement, however, that there be a commonality of legal issues. The Court then went on to discuss standard principles of res judicata under New Jersey law.

Turning to the specific facts, the Supreme Court noted that in the insured’s pending lawsuit, the insured sought to re-litigate an issue that was placed before the trial court during the first litigation and was already fully litigated and determined by the trial court in the first litigation. The insured’s second action seeking damages against NJM for its alleged bad faith handling of his claim for UM benefits involved the same alleged wrongs, the same theories of recovery (NJM’s alleged breach of its duty of good faith and fair dealing, warranting both consequential and punitive damages), the same evidence (the fact that NJM refused to settle “forcing” Plaintiff to take his case to trial because its liability would not exceed the UM policy limit regardless of the verdict), and the same alleged material facts as in the first litigation. Therefore the Court found that the issues in the two suits were identical.

The New Jersey Supreme Court pointed to the fact that the insured had raised the exact issue of bad faith during oral argument for his Motion to Entry Judgment for the full amount of the jury verdict. The trial court addressed and disposed of that issue in the first action in its Order and accompanying Statement of Reasons in ruling on the insured’s Motion. In the Court’s Statement of Reasons, the Court noted that there was a question presented as to whether the issue of bad faith had been properly raised since it was not pled in the complaint. The Court noted that the insured was asking the Court sua sponte to make that determination based on the facts before it. The Court found that the only real basis the trial court found in the first action that the insurer acted in bad faith was that the insurer refused to make an offer of settlement prior to the trial. Ultimately the Jury concluded that the phantom vehicle was the sole cause of the accident. The arbitrators had found significant liability on the part of the insured. Therefore, the question of responsibility for the accident was, according to the trial court, fairly debatable, and the failure to make an offer of settlement did not lead to the conclusion that NJM acted in bad faith. Thus, the New Jersey Supreme Court found, based upon the trial court’s order and accompanying Statement of Reasons, that the issue of bad faith had been fairly litigated and determined by the trial court and, therefore, the insured’s bad faith cause of action was barred from re-litigation under the doctrine of res judicata.

Having disposed of the case on the basis of res judicata, the Court addressed the application of the “entire controversy doctrine” to the facts. The Court noted that barring the insured’s bad faith claim solely on the basis of the “entire controversy doctrine” was inappropriate in the UM context. The Court found that the nature of first party bad faith claims warranted an exemption from the rigidity of application of the “entire controversy doctrine.” The Court observed that acts of first-party bad faith in the UM context can, and often will, continue throughout the course of the underlying legal proceedings, and that the insurance company’s acts of bad faith may often not cease until a verdict is returned, which occurs only after the insured has been forced to fully litigate the matter through arbitration and trial. Instead of forcing an insured to amend the initial complaint to add and reflect each incident of bad faith, the New Jersey Supreme Court expressed its belief that bad faith claims should be viewed as separate and distinct actions which would promote judicial efficiency and economy. This would avoid the difficulties that would be encountered in the process by one party seeking information regarding bad faith acts which may be prohibited in the UM cause of action. The Court found that the goals of the “entire controversy doctrine” were not served by mandating that the insured simultaneously file a first-party bad faith claim with the underlying breach of contract/UM lawsuit. Therefore, the Court referred the issue to the Civil Practice Committee of the State of New Jersey for review.

The Wadeer case is an example of the adage “be careful of what you ask for because you may get it.” In Wadeer, the insured had not filed a bad faith lawsuit against the insurance company, instead the insured merely filed a claim seeking UM benefits under the policy. Therefore, no bad faith discovery took place in the lawsuit. As an afterthought, the insured’s attorney, during oral argument, referenced bad faith, creating an opportunity for the trial court to comment on the bad faith allegations without an adequate record supported by bad faith discovery and, perhaps, the use of expert witness testimony to establish a viable claim for bad faith. The attorney for the insured got what he asked for, the Court considered the bad faith issue on an inadequate record. That tactical mistake resulted in the New Jersey Supreme Court finding that the trial court’s ruling in the first lawsuit barred a separate and independent cause of action for bad faith under the doctrine of res judicata. The insured’s attorney in Wadeer should not have pursued the issue of bad faith in the first lawsuit, which the attorney should have recognized was under-discovered on that issue. Had the attorney left “sleeping dogs lie,” and then filed the second bad faith lawsuit, there may have been a different result for the insured client.