Insurance Services – Coverage & Bad Faith Litigation

Key Points:

• New Jersey’s Insurance Fair Conduct Act now imposes stringent and dangerously vague duties and requirements on New Jersey insurers and special investigators.
• The passage of the Act brings New Jersey in line with several other states and jurisdictions in creating a statutory cause of action for bad faith in certain first-party claims.
• When SIU investigates claims, best practices will be crucial in establishing good faith and avoiding the punitive consequences of violation of the Insurance Fair Conduct Act.

Earlier this year, Governor Phil Murphy signed into law Senate Bill 1559, now known as the New Jersey Insurance Fair Conduct Act (Act), that created a new statutory cause of action for bad faith in first-party insurance claims in the state of New Jersey. Prior to passage of the Act, bad faith claims in New Jersey were governed by the seminal case of Pickett v. Lloyd’s, 621 A.2d 445 (N.J. 1993). There, the court found that, to establish bad faith, a claimant had to show the “absence of a reasonable basis for denying benefits of a policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” Under Pickett, a denial of coverage could not be considered bad faith so long as there was a reasonable basis to support the denial. This provided claimants with a remedy for an insurer’s reckless and unreasonable actions, but it also allowed insurers to deny claims where there were reasonable questions or law or fact.

The passage of the Act significantly reduces the burden to establish bad faith in New Jersey. While the bill was initially drafted to cover all first-party claims, the final enacted version is limited to UM and UIM claims. The Act creates a private civil cause of action against an automobile insurer for:

1. any unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy; or
2. any violation of the provisions of section 4 of N.J.S.A. 17:29B (the New Jersey Unfair Claims Settlement Practices Act or “UCSPA”).

Significantly, “Insurer” is defined under the Act as any individual, corporation, association, partnership, or other legal entity which issues, executes, renews or delivers an insurance policy in New Jersey, or which is responsible for determining claims made under the policy. Arguably, this could be interpreted to include individual claims handlers or investigators as insurers for the purposes of the Act.

Penalties for violation of the Act are severe. The Act provides that a successful plaintiff shall be entitled to: (1) actual damages caused by the violation of the Act, which shall include, but need not be limited to, actual trial verdicts that shall not exceed three times the applicable coverage amount; and (2) pre-and post-judgment interest, reasonable attorney’s fees, and reasonable litigation expenses. In short, treble damages plus fees and costs.

Frighteningly vague, the Act does not provide any guidance at all as to what might be considered an unreasonable delay or denial. Further, violations of the UCSPA were previously enforced only upon a showing that they were committed by an insurer with routine frequency. The Act has stripped that element, specifically stating that a claimant “shall not be required to prove that the insurer’s actions were of such a frequency as to indicate a general business practice.” In sum, one singular violation of the UCSPA could be used by a claimant to establish a violation of the Act by an insurer.

The UCSPA sets forth 15 specific examples of deceptive acts or practices that could constitute a violation of the Act if committed by an insurer. Relevant examples include: misrepresenting pertinent facts or policy provisions; failing to adopt and implement reasonable standards for the prompt investigation of claims; refusing to pay claims without conducting a reasonable investigation based upon all available information; failing to affirm or deny coverage of claims within a reasonable time; and not attempting in good faith to effectuate fair settlements of claims in which liability has become reasonably clear. Again, in the context of the Act, there is no requirement to show the above violations occur at such frequency to indicate a general business practice.

Similar statutes passed in other jurisdictions have been used to attempt to hold individual insurance employees personally liable for bad faith. In the matter of Keodalah v. Allstate Ins. Co., 449 P.3d 1040 (Wash. 2019), the Washington Supreme Court narrowly found that a similar bad faith bill did not create a cause of action against individual claims handlers. The Colorado Supreme Court also refused to hold individual insurance employees liable in Skillet v. Allstate Ins. Co., 505 P.3d 664 (Colo. 2022). These narrow decisions show that the plaintiff’s bar is willing and eager to push these vague statutes to their limits. The vagueness of the Act will likely invite comparable attempts by plaintiffs in New Jersey.

The New Jersey Insurance Fair Conduct Act is new, vague and harsh. The future landscape of the Act, its impact and implications are uncertain. What is certain is that claimants and the plaintiff’s bar will test the limits of the Act. The insurance industry, and SIU in particular, must be ready to adapt and meet the challenge.

*Matt is a shareholder in our Mount Laurel, New Jersey, office. He can be reached at 856.414.6035 or mjburdalski@mdwcg.com.

_{Defense Digest, Vol. 28, No. 3, October 2022 is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2022 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}