Insurers Could Face More Bad Faith Suits if N.J. Legislation Passes

Legislation pending in New Jersey could make it easier to file bad faith lawsuits against insurers.

The New Jersey Insurance Fair Conduct Act is currently under consideration by the Assembly Financial Institutions and Insurance Committee after having been passed by the Senate.

If approved, SB 2144 would take effect immediately.

Jack Vales, a partner in the Short Hills, N.J. office of Dentons US, and colleague, Erika Lopes-McLeman, a senior managing associate in the same office, issued a bulletin on the legislation recently.

Under current law, if an insurer can show a debatable reason for a coverage decision, that will defeat any type of bad faith claim, said Vales, who added that there has been a movement to broaden the ability of policyholders to bring suits against insurers for extra contractual damages for some time.

“This proposed legislation would do exactly that,” said Vales. “It would give aggrieved claimants on their insurance policies the ability to sue not only for the policy benefits, but for attorney’s fees and treble damages. And the standard by which to achieve those remedies would be very low under this Act.”

The bill is bad for consumers, he said, “because it would increase the cost of doing business in the state for insurance companies, increase their claim costs, which could in turn result in increased premiums to consumers.”

It could also prompt insurers to cease doing business in the state, he added.

The vague language in the latest piece of legislation is concerning. The law would give policyholders the ability to file a civil action against its insurer for:

(1) an 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 P.L.1947, c.379 (C.17:29B-4).

b. In any action filed pursuant to this act, the claimant shall not be required to prove that the insurer’s actions were of such a frequency as to indicate a general business practice.

c. Upon establishing that a violation of the provisions of this act has occurred, the plaintiff shall be entitled to:

(1) actual damages caused by the violation of this act;
(2) prejudgment interest, reasonable attorney’s fees, and all reasonable litigation expenses; and
(3) treble damages.

Vales said a New Jersey court ruling already exists allowing claimants that have won bad faith claims to obtain reasonable attorney’s fees.

“That’s already permitted by law in a third-party context. That court rule doesn’t also provide for treble damages or for causes of action based upon a violation of the…Act like this would.”

Because current law allows an insurer that shows a debatable reason the opportunity to shut down a bad faith claim, Vale said the proposed legislation should be worded similarly.

“The statute should specify the conduct of the insurer, which would effectively protect them from any type of liability, i.e., if there’s a fairly debatable basis for the claims decision, said Vales.

Another problem with the proposed legislation is that it has two different triggers that can give rise to liability, Vales said.

“One is the unreasonable delay or denial of a claim for benefits on their insurance policy. The statute also provides that you would have a cause of action against the insurer for any violation of the Unfair Claims Settlement Practices Act,” said Vales. “And that is particularly concerning, because there’s no good faith protection built in to it. There could be an inadvertent error by the insurance company in the process of the claim that technically violates the Act. But it was not undertaken in bad faith. And, also, it didn’t injure the consumer. So, this is almost a strict liability type situation. Now you’re on the hook for treble damages and attorney’s fees. That’s crazy.”

Vales said that no private party can bring a lawsuit for violations of the Unfair Claims Settlement Practices Act.

“Those types of matters are brought…by the government. And they would only do so if they saw some type of pattern or practice of activity,” said Vales. “This Act waives any requirement that the claimant prove the insurer’s actions were such a frequency as to indicate a general business practice.”

“Our view is traditionally New Jersey’s done a pretty good job of balancing the interest between policyholders and insurers. This proposed act would really upend that balance and unfairly tilt the playing field again the interest of insurers,” said Vales.

As to whether the legislation will be passed prior to the two-year legislative period ending in January, Vales remained uncertain.

“It’s difficult to say. Certainly, the assembly is under Democratic control and the governor is a Democrat. The chances of the bill becoming law are certainly greater now than they were in 2013 when Governor Christie, a Republican, was the governor,” Vales said.

The Dentons partner doesn’t think the bill, as currently worded, fairly protects the interest of consumers and insurers.

“I think this bill, if it became law, would seek to solve a problem that doesn’t exist,” Vales said. “It also would serve as sort of bonanza to trial lawyers and incentivize them to convert any insurance claim issue into a bad faith suit under this Act, which would escalate the cost for insurers to do business in the state and ultimately punish consumers.”