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Exemption Of Insurance Brokers From Liability Under the New Jersey Consumer Fraud Act

The New Jersey intermediate appeals court has recently held that insurance brokers are exempt from liability under New Jersey's very strict Consumer Fraud Act, N.J.S.A. 56:8-1, et seq. The basis of this exemption began with claims made against medical professionals.

In Macedo, et al v. Dello Russo, et al, 178 N.J. 340 (2004), the New Jersey Supreme Court dealt with an alleged claim of "consumer fraud" against a licensed professional. In that case, patients alleged they were treated by a person who was not a fully licensed physician. They claimed that the failure to reveal the limitations of the person's license was a form of misrepresentation. "Plaintiffs...allege...that through words and conduct, the defendants [falsely] represented to each plaintiff that they would be treated by properly licensed doctors, with no limitations on their licenses." In other words, the plaintiffs transformed the failure of the defendants to reveal something, an omission, into the commission of a misrepresentation.

The Supreme Court rejected the Consumer Fraud Act claims in Macedo. The Supreme Court held that "...our jurisprudence continues to identify learned professionals as beyond the reach of the [Consumer Fraud] Act so long as they are operating in their professional capacities." The Supreme Court noted that in Neveroski v. Blair, 141 N.J. Super. 365 (App. Div. 1976), a real estate broker allegedly concealed termite infestation from potential home buyers. The Appellate Division had held in Neveroski that, because the Consumer Fraud Act had been already amended and real estate brokers were not included, the Consumer Fraud Act did not include them. The Appellate Division in Neveroski held that such a broker is in a "far different category from the purveyors of products or services or other activities. He is in a semi-professional status subject to testing, licensing, regulations, and penalties.... [T]he nature of his activity is recognized as something beyond the ordinary commercial seller of good or services – an activity beyond the pale of the act under consideration."

However, when the Appellate Division court considered the issues in Macedo, the appeals court decided that Neveroski was "negated" by "subsequent statutory and decisional developments." When Macedo came to the Supreme Court for review, that Court disagreed with the Appellate Division. The Supreme Court noted that the Consumer Fraud Act was only amended to include the sale of real estate in the definition of "merchandise." The Supreme Court noted that the Legislature is "thoroughly conversant" with its "own legislation and the judicial construction placed thereon." Macedo at 346. The Supreme Court stated:

...the construction of a statute by the courts, supported by long acquiescence on the part of the Legislature or by continued use of the same language or failure to amend the statute, is evidence that such construction is in accord with the legislative intent. (citation omitted)

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We therefore must assume that the Legislature approves of the consistent judicial interpretation of the [Consumer Fraud Act] that has been extant for decades. Under that interpretation, advertisements by learned professionals in respect of rendering of professional services are insulated from the [Consumer Fraud Act] but subject to comprehensive regulation by the relevant regulatory bodies and common-law remedies that otherwise may apply. We consider ourselves bound by that Legislative acquiescence. If we are incorrect in our assumption, we would expect the Legislature to take action to amend the statute. (Macedo at 346)(emphasis added).

Macedo cited the Appellate Division ruling in Neveroski with regard to a real estate broker:

...[h]e is in a semi-professional status subject to testing, licensing regulations, and penalties through other legislative provisions. See, N.J.S.A. 45:15-1, et seq. Although not on the same plane as other professionals such as lawyers, physicians, dentists, accountants or engineers, the nature of his activity is recognized as something beyond the ordinary seller of goods or services – an activity beyond the pale of the [Consumer Fraud Act]. (Macedo, 178 N.J. at 241)(citing Neveroski at 379).

Based upon that analysis, the Supreme Court held that physicians, when acting in their professional capacity, are licensed and learned professionals and, as such, are exempt from the Consumer Fraud Act.

Thereafter, the issue became whether insurance brokers, likewise, would be exempt from the Consumer Fraud Act. That question has been answered in Plemmons v. Blue Chip Insurance Services, Inc., et al, 387 N.J. Super. 551 (App. Div. 2006). In Plemmons, insurance brokers were held to be outside the scope of the Consumer Fraud Act when they are acting in their professional capacity.

In Plemmons a person sought to purchase residential property and convert it to commercial uses. The insurance broker sold the customer a homeowner's policy. It was voided due to a delay in the closing date. The customer paid the premium. Before the new closing date, the broker learned of the prospective commercial usage and advised that a business rather than homeowner's policy would be needed. The customer never paid a premium for the business policy. Neither type of policy was issued, and the property was uninsured when it was damaged by a storm. The plaintiff alleged that the broker "failed to inform" him that there was no coverage.

The Appellate Division court held that the Consumer Fraud Act did not apply to an insurance broker who was acting in his professional capacity. The appeals court held:

Furthermore, we are satisfied that insurance brokers are "semi-professional[s]" who are excluded from liability under the [Consumer Fraud Act] for the services they render within the scope of their professional licenses. Under the Insurance Producer Licensing Act, N.J.S.A. 17:22A-26 to -48, a person "shall not sell, solicit or negotiate insurance in this State unless the person is licensed for that line of authority," N.J.S.A. 17:22A-29. A person obtains a license to "sell, solicit or negotiate insurance" by passing a written examination, N.J.S.A. 17:22A-31, and meeting the application requirements set forth in N.J.S.A. 17:22A-32. In addition, insurance brokers must comply with the Insurance Producer Standards of Conduct promulgated by the Department of Banking and Insurance. N.J.A.C. 11:17A-1.1 to 17D-2.8. These standards proscribe various "unfair trade practices," N.J.A.C. 11:17A-2.1 to -2.11, delineate an insurance producer's fiduciary duties to insureds, see N.J.A.C. 11:17A-4.1, -4.3, -4.5, -4.10, set forth requirements regarding commissions, N.J.A.C. 11:17B-2.1, fees, N.J.A.C. 11:17B-3.1 to -3.3, and management of funds, N.J.A.C. 11:17C-1.1 to -2.6, and provide penalties for violations, N.J.A.C. 11:17D-1.1 to -2.8. Therefore, insurance brokers are subject to testing, licensing and regulation comparable to real estate brokers, and thus are exempt from liability under the [Consumer Fraud Act] for the reasons expressed by this court in Neveroski and reaffirmed by the Supreme Court in Macedo. (Plemmons, Slip Op., pages 17-19)

Accordingly, the broad exemption for licensed, learned professionals that was discussed in Macedo has been specifically applied to insurance brokers by the appeals court in Plemmons.

It should be noted that the "legislative acquiescence" that was relied upon to form the exemption from liability may not continue. There are Bills pending in legislative committees to make the Consumer Fraud Act apply to licensed professionals. In Senate Bill 86 and Assembly Bill 780, the Consumer Fraud Act (N.J.S.A. 56:8-2) would be expressly amended to include "any person who holds a professional or occupational license or certificate or certificate of registration or certification or appointment." Such persons would be liable for any unconscionable commercial practice, deception, fraud, false promise, misrepresentation or the knowing concealment, suppression or omission of any material fact with intent that others rely thereon in connection with the sale of "merchandise" or real estate. The definition of "merchandise" would be redefined to include "insurance contracts, coverage and policies" in addition to goods and services.

Senate Bill 668 is a bit narrower. It provides that learned professionals may be subject to liability under N.J.S.A. 56:8-2 in connection with "the use or employment in any advertisement in the commercial print or electronic media." It would seem that Senate Bill 668 would not pertain to the kind of broad misrepresentation alleged in Macedo, in which an alleged omission was transformed into a misrepresentation, a misrepresentation that was made by the defendant generally "through words and conduct."

Should these Bills become law, insurance brokers may find themselves subject to New Jersey's very strict Consumer Fraud Act, which entitles plaintiffs to recover triple damages and counsel fees.

It should be noted that mere advertising or sloganeering may still not be actionable. In Rodio v. Smith, 123 N.J. 345, 352 (1991), the Supreme Court held that "[h]owever persuasive, 'You're in good hands with Allstate,' is nothing more than puffery." The Supreme Court has not defined "puffery."

Nonetheless, it may be expected that, if the current exemption from the Consumer Fraud Act is rescinded, the ability of plaintiffs to allege new and different forms of "unconscionable commercial practices" on the part of insurance brokers will only be limited by the cleverness of claimants. The lure of triple damages and recovery of counsel fees will provide incentives to litigation. And, ultimately, all of those costs will be passed through to the persons who utilize professional services.

* Nicholas is an associate in our Cherry Hill, New Jersey, office. He can be reached at (856) 414-6015 or nikierniesky@mdwcg.com.