By John E. Tyrrell and Kelly Woy
Earlier this summer, the United States District Court for the District of New Jersey issued an insurance coverage opinion which, quite appropriately, involved a dome covering over a baseball field. Healthquest of Cent. Jersey, LLC v. Antares AUL Syndicate 1274 et al., 2020 U.S. Dist. LEXIS 136036 (D.N.J., July, 31, 2020). The Court decided, consistent with New Jersey precedent, that Plaintiffs’ claims of bad faith for denial of coverage could not survive a motion for summary judgment, due to the existing dispute of material fact as to the cause of the incident dome collapse.
Factual Background
Plaintiffs Healthquest of Central Jersey, LLC (“Healthquest”) and Diamond Nation LLC (“Diamond Nation”) are entities that operate a health and fitness club and a sports tournament and training facility, respectively, in Flemington, New Jersey. Diamond Nation owns real property in Flemington containing an outdoor turf baseball field, and is the sole owner of the air-supported dome structure that covers the baseball field during the winter months. In January 2016, the Original Dome over the baseball field failed; Diamond Nation had a Replacement Dome constructed, which was designed by the same engineer as the Original Dome, using the same specifications. The Replacement Dome was “designed to withstand a snow load of 30 pounds per square foot” and wind speeds of up to 120 miles per hour.
Defendants issued an insurance policy to both Plaintiffs as named insureds, effective November 3, 2016 through April 15, 2017, which provided coverage for external risks of direct physical loss to the Replacement Dome unless the loss is caused by an excluded peril. The excluded peril provision included “coverage for loss caused by collapse, unless the collapse is caused only by one or more of certain specified perils, including [the] weight of ice and snow,” as well as “coverage for losses that result from an act, error, or omission, whether negligent or not, relating to, inter alia, the design construction[,] and specification of [the Replacement Dome].”
The Storm and Resulting Dispute
On or about March 14, 2017, the Replacement Dome collapsed as the result of a winter storm, which included accumulation of approximately 19 inches of snow at ground level (approximately 11 pounds per square foot), with a maximum sustained wind speed of 24 mph and gusts reaching 40 mph. Plaintiffs filed a claim with Defendants relating to the failure. An engineer inspected the site and Replacement Dome on behalf of Defendants, and issued a report in which he opined that “the [Replacement] Dome’s fabric membrane tore and the [Replacement] Dome failed under weather conditions that the [Replacement] Dome had been designed to withstand.” Accordingly, Defendants issued a denial and renewed denial of Plaintiffs’ claim, “based on the application of the Policy’s exclusions for Collapse and Defects, Errors, and Omissions.” Plaintiffs initiated suit, claiming breach of contract, breach of the covenant of good faith and fair dealing for both failure to process the claim in good faith and denying coverage in bad faith, and declaratory judgment that Defendants are obligated to provide coverage to Healthquest relating to the collapse.
Defendants filed a Motion for Summary Judgment. First, Defendants contended that they were entitled to judgment as a matter of law on Plaintiffs’ breach of contract and declaratory judgment claims because the failure of the Replacement Dome was not covered by the Policy, as it was caused by a combination of the weight of the ice and snow and a design defect (i.e., a covered peril and an excluded peril). Similarly, they argued that they were entitled to summary judgement on Plaintiffs’ bad faith claims because the claims necessarily arose from the policy, which does not provide coverage for the loss, or in the alternative, that their decision to deny coverage was “at least, fairly debatable,” as their two denials were supported by the engineers reports.
Reasoning and Outcome
In analyzing whether the Motion for Summary Judgment should be granted as to Plaintiffs’ breach of contract and declaratory judgment claims, the main issue at hand was the cause of the collapse of the Replacement Dome: that is, whether (1) the weather conditions were within the Replacement Dome’s specifications and therefore the collapse was caused by a design defect (i.e., if the Replacement Dome had adhered to the manufacturer’s specifications, the tear would not have occurred), or (2) the collapse was caused by the localized build-up of snow and partially melted snow on the Replacement Dome, combined with the excessive wind speeds, which exceeded the design snow load for the building and initiated the tear in the fabric membrane. The Court found that that the parties reasonably disputed the cause of the Replacement Dome’s failure, and therefore there was at least one genuine dispute of material fact between the parties which precluded summary judgment. Therefore, the Motion for Summary Judgment was denied.[1]
Regarding Defendants’ Motion for Summary Judgment on Plaintiffs’ bad faith claims, to establish a claim for bad faith in the insurance context, Plaintiffs needed to show that (1) the insurer lacked a “fairly debatable” reason for its failure to pay a claim, and (2) that it knew or recklessly disregarded the lack of reasonable basis for denying the claim. Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445, 454 (N.J. 1993). “A claimant who cannot establish a right to summary judgment on the substantive claim that the policy was breached, however, cannot prevail on a claim for an insurer’s alleged bad faith refusal to pay the claim.” Andrews v. Merchs. Mut. Ins. Co., 718 F. App’x 135, 140 (3d Cir. 2018).
Plaintiffs urged the Court to depart from the aforementioned precedent, claiming that this case was distinguishable because when the first denial was issued, it was “flat out wrong.” However, the Court declined to do so, pointing out that the Plaintiffs did not file a cross-motion for summary judgment where the case law clearly requires it. The Court further explained that while the first report from the engineer on which Defendants based their first denial did not explicitly state that the loss was caused by a design defect or specification deficiency, it does note that the Replacement Dome collapsed under weather conditions that it was designed to withstand, and that the design did not allow the steel cables to prevent the propagation of a tear, which caused the ultimate collapse. Therefore, because Plaintiffs could not establish a right to summary judgment as to their underlying breach of contract claim, Defendants’ Motion for Summary Judgment as to Plaintiffs’ bad faith claims was granted.[2]
This case demonstrates the importance of making sure you — and your field — are covered.
John E. Tyrrell is a founding Member of Ricci Tyrrell Johnson & Grey. He has decades of experience in representation of operators and managers of stadiums, arenas, entertainment venues and sports and recreational facilities.
Kelly Woy is an Associate at Ricci Tyrrell Johnson & Grey who works within the Sports, Event and Recreational Liability practice group.
[1] See Assurance Co. of Am. v. Jay-Mar, Inc., 38 F. Supp. 2d 349, 355 (D.N.J. 1999) (denying insurer’s motion for summary judgment where “[t]he discrepancy between [] expert reports” as to whether a loss was caused by a covered or excluded peril “creates a genuine issue of material fact which must be decided by the factfinder in this case”).
[2] See also Hudson Universal, Ltd. v. Aetna Ins. Co., 987 F. Supp. 337, 341 (D.N.J. 1997) (that “an insurer’s disclaimer of coverage cannot be held to be in bad faith unless the insured is granted summary judgment on the issue of coverage”); Tarsio v. Provident Ins. Co., 108 F. Supp. 2d 397, 401 (D.N.J. 2000) (“If factual issues exist as to the underlying claim (i.e., questions of fact as to whether plaintiff is entitled to insurance benefits-plaintiff’s first cause of action), the Court must dismiss plaintiff’s second cause of action-the ‘bad faith’ claim.”).
