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A bank withholding insurance proceeds from a homeowner after a fire loss is subject to potential liability for bad faith in New Jersey, it was held in Hills v. Bank of America, 2015 WL 1205007 (D.N.J. March 17, 2015). In that case, the District Judge denied a bank’s motion to dismiss a bad faith claim but granted the bank’s motion to dismiss a breach of contract claim.
In New Jersey, as in many places, exposure to liability for bad faith exists when one contracting party unfairly exercises its discretion in performing its contract even though there may be no actionable breach of contract. Hills v. Bank of America, 2015 WL 1205007, *4 (D.N.J. March 17, 2015). In other words, even though the defendant did not breach its contract, still the defendant may have exercised discretion in bad faith even though the defendant’s discretion was permitted by the contract.
In the Hills case, for example, Mr. and Mrs. Hills alleged that “’Ms. Hills began calling Defendant and, between October 2012 and February 2013, she spoke with seventeen different representatives for Defendant and faxed documents multiple times to complete their request for disbursement of insurance funds.’” Hills v. Bank of America, 2015 WL 1205007, *1 (D.N.J. March 17, 2015).
To no avail. The Hills wanted to rebuild their home after a fire loss. They had insurance. The insurance company paid the fire loss. The bank was a payee on the insurance company’s check along with Mr. and Mrs. Hills. The Hills allegedly endorsed the insurance company’s check and turned it over to the bank. The Defendant bank allegedly sat on it without disbursing the proceeds to rebuild the Hills’ home.
Although the Court in this case denied the Defendant bank’s motion to dismiss the bad faith claim and instead gave the plaintiffs “the benefit of the doubt and allow this claim to proceed to discovery,” still the Court cautioned: “At the same time, Plaintiff[s’ are] on notice that the evidence must clearly show actual bad faith on Defendant’s part. Otherwise, the Court invites Defendant to revisit this motion at the close of discovery.” Hills v. Bank of America, 2015 WL 1205007, *4 (D.N.J. March 17, 2015).
Parenthetically, the bank’s motion at the close of discovery is more likely to be a motion for summary judgment than a “revisitation” of the bank’s motion to dismiss. The broader question then will be whether, based on the material facts, there is sufficient evidence in the record to allow the Hills’ bad faith claim to go to the jury.
Please Read The Disclaimer. ©2015 by Dennis J. Wall, author of “Lender Force-Placed Insurance Practices” (American Bar Association 2015). All Rights Reserved. No Claim to Original U.S. Government Works.