In Coverage Dispute Over PFAS Remediation, New Jersey District Court Dismisses Bad Faith Claim

The United States District Court for the District of New Jersey, applying New Jersey law, held that a bad faith claim against an insurer must be dismissed when it is rooted in the same conduct as the breach of contract claim, absent additional factual predicates. Shamrock Techs., Inc. v. Ill. Union Ins. Co., 2025 WL 3670535 (D.N.J. Dec. 17, 2025). The court also held that to establish bad faith for delay in issuing a coverage position requires pleading that the insurer knows its delay is unreasonable or acts with reckless disregard.

The dispute arose after a company specializing in the production of specialty micronized powders and compounds discovered per- and poly-fluoroalkyl substances ("PFAS") in the groundwater and soil at three of its manufacturing facilities in Kentucky. Following an environmental assessment, the company reported the findings to the Kentucky Department of Environmental Protection (the "KDEP") and sought coverage under its general liability and commercial umbrella liability policies, both of which included specified coverage for pollution conditions. The insurer subsequently denied coverage for remediation costs and defense expenses associated with an "Agreed Order" that required the company to remediate the contamination. The insured filed suit alleging breach of contract and bad faith, asserting that the insurer failed to defend the KDEP investigation or cover the remediation costs and delayed its coverage decision for fifteen months.

The insurer moved to dismiss only the bad faith count, arguing it was duplicative of the breach of contract claim. In evaluating the bad faith claim, the court applied New Jersey's "fairly debatable" standard, which requires that a plaintiff show that the insurer did not have a "fairly debatable" basis for denying the claim and knew of or recklessly disregarded that lack of basis. The court observed that under New Jersey law, a breach of the covenant of good faith and fair dealing cannot arise from the same conduct underlying the breach of contract action. It found that several of the policyholder's allegations, such as denying coverage despite clear policy language, were merely rephrased allegations that the insurer breached the contract. The court determined that the insured had not pled a "distinct factual predicate" to support the bad faith count.

In response to the policyholder's bad faith allegations based on unreasonable delay in issuing a coverage position, the court noted that such claims are separate from underlying breach of contract actions. However, the court found the insured's complaint deficient because it failed to allege that the insurer knew its processing delay was unreasonable or that the insurer acted with reckless disregard. For these reasons, the court dismissed the insured's cause of action for bad faith without prejudice, permitting the insured to replead.

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