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New Jersey District Court Places Burden of Production on Insured and Grants Summary Judgment to Insurer on Bad Faith Claim Where There Was No Coverage Under The Policy

On June 21, 2010, the United States District Court for the District of New Jersey granted summary judgment to Continental Casualty Co. (“Continental”) for claims for coverage by Diebold Inc. (“Diebold”) in Diebold Inc. v. Continental Casualty Co., Docket No. 07-1991, 2010 U.S. Dist. LEXIS 62000.

It held that: (1) the discovery exclusion in the policy was applicable and therefore excluded coverage; (2) the initial burden of production should rest on the insured; and (3) a bad faith claim could not survive where there was no underlying coverage.  This ruling provides measurable support under New Jersey law to insurers defending similar bad-faith claims by requiring the initial burden of production on the insured, and barring bad-faith liability on an insurer where there is no coverage.

In this declaratory judgment action, Diebold sought to recover from Continental amounts Diebold paid to numerous bank customers after a sub-contractor, Tri-State Armored Services (“TSA”), mishandled the bank customer’s funds.  Continental issued a commercial crime policy to Diebold covering disappearance or theft of money when in the custody of an armored vehicle company.  The policy excluded coverage for “any loss caused by a wrongdoer after discovery of an actual or potential loss caused by that wrongdoer.”  The Court determined that Diebold’s Risk Management Department was aware that a potential loss to TSA had occurred prior to the funds coming into TSA’s possession and therefore, the discovery exclusion barred coverage for the loss.

In determining whether the above exclusion applied, the Court distinguished the insured’s burden of production from the insurer’s burden of persuasion in insurance coverage actions.  The Court, relying on Griggs v. Bertram, 88 N.J. 347 (1982) held that in the context of a bad faith settlement negotiation, it may not be fair or practical for the carrier to assume the burden of producing evidence because the circumstances surrounding the settlement and the operative facts are in control of the insured.  In Diebold, while the burden of persuasion rested with Continental to prove that there was no coverage, the Court held that the initial burden of production resided with Diebold, as it would be far more likely to know or have access to the relevant facts.  Upon review of the evidence produced by Diebold, the Court held that Diebold failed to make a prima facie showing that the loss dates occurred before the operative discovery date. 

Finally, and of considerable relevance, the Court addressed an insured’s ability to pursue a bad-faith claim where it has been determined that no coverage exists.   The Court held because there was no coverage for the underlying loss under the policy, Diebold’s bad-faith claim must likewise fail.  The Court determined the rationale of Pickett v. Lloyd’s, 137 N.J. 457 (1993) inapplicable when there is no coverage under the policy.  Instead, the Court relied upon the reasoning of the Third Circuit in On Air Entertainment v. National Indemnity Co., 210 F.3d 146, 153 (3d Cir. 2000) which held that the “finding of coverage under the insurance policy is a predicate to a bad-faith claim.”