AMERICAN SOUTHERN HOME INSURANCE COMPANY v. UNITY BANK, 3:16-cv-03046

American Southern issued a forced-placed commercial property policy to Unity covering vandalism but excluding theft-related losses; loss occurred Jan. 1, 2016 at 856 Landis Ave., Elmer, NJ.
Unity reported vandalism; American Southern’s third-party adjuster (Mello) inspected and concluded damage resulted from theft (dismantled refrigeration, auction stickers, removed copper piping and heaters).
American Southern denied coverage and filed a declaratory judgment action seeking a ruling that the loss was theft (not covered).
Unity answered and asserted three counterclaims: (I) breach of contract, (II) declaratory judgment (vandalism = covered), and (III) bad faith breach of the duty of good faith and fair dealing; Unity also sought attorneys’ fees.
American Southern moved to dismiss Counterclaim III (bad faith) under Rule 12(b)(6) and to strike Unity’s request for attorneys’ fees; the court granted both motions (bad faith claim dismissed without prejudice; fees struck).

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Unity adequately pled bad faith (breach of duty of good faith and fair dealing)	American Southern: Unity fails to allege lack of reasonable basis for denial or insurer knowledge/reckless disregard	Unity: Denial was wrongful because insurer failed to conduct a proper, independent investigation	Dismissed without prejudice — Unity’s allegations only contest adequacy of investigation and amount to disagreement or negligence, not bad faith (need absence of reasonable basis plus knowledge/reckless disregard)
Whether attorneys’ fees are available under N.J. Ct. R. 4:42-9(a)(6)	American Southern: Fees unavailable because Unity seeks first-party coverage, not fees authorized by rule	Unity: Fees allowable because it must defend against insurer’s declaratory action and asserted bad faith counterclaim	Fees struck — Rule 4:42-9(a)(6) applies narrowly to suits to indemnify/defend third-party liability (and a few limited inter-insurer contexts); it does not authorize fees for insureds’ direct first-party coverage suits

Pickett v. Lloyd’s, 131 N.J. 457 (1993) (elements and fairly debatable standard for bad faith in insurance context)
Wadeer v. N.J. Mfrs. Ins. Co., 220 N.J. 591 (2015) (insurance contracts include implied duty of good faith and fair dealing)
Badiali v. N.J. Mfrs. Ins. Grp., 220 N.J. 544 (2015) (distinguishing negligence from bad faith in insurer investigations)
Eagle Fire Prot. Corp. v. First Indem. of Am. Ins. Co., 145 N.J. 345 (1996) (Rule 4:42-9(a)(6) limited to insurer’s refusal to indemnify/defend third-party liability)
Occhifinto v. Olivo Const. Co., LLC, 221 N.J. 443 (2015) (discussion of American Rule and narrow exceptions for fee-shifting under Rule 4:42-9(a))
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standard requiring allegations to raise claim above speculative level)