Viewpoint: N.J. Gov Approves New Law Modifying Bad Faith Standard for UIM Claims

Uninsured motorists (UM) and underinsured motorists (UIM) claims in New Jersey already present a myriad of factual and legal issues that must be addressed in every claim. That ranges from whether a vehicle is uninsured or underinsured, the applicable UM/UIM limits, and permissible exclusions. And now, insurers and those handling New Jersey UM/UIM claims may soon have another sizeable obstacle to consider.

On Jan. 18, Gov. Phil Murphy signed into law the New Jersey Insurance Fair Conduct Act, which permits individuals injured in motor vehicle accidents to pursue “bad faith” lawsuits against insurers and anyone “responsible for determining claims made under the policy” for unreasonably denying or delaying coverage or payment of UM or UIM benefits.

Under New Jersey’s common law, parties pursuing a bad faith claim against an insurer relating to payment of UM/UIM benefits must prove that the insurer lacked a “fairly debatable” basis for denying or delaying payment of the claim, which generally requires proof that the carrier lacked a factual or legal basis for its position. However, under the new legislation, an injured party seeking UM/UIM coverage could sue the insurer or the company responsible for determining claims under the insurer’s policies, for “an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy,” or for violating statutes prohibiting unfair or deceptive practices.

Despite providing this expansive relief to insureds, the legislation provides no guidance on what constitutes an “unreasonable” delay or denial. Presumably, it will be for the state’s courts to evaluate whether the denial or delay was unreasonable, and for the courts to determine whether to apply a standard other than the fairly debatable standard when assessing an insurer’s bad faith liability.

The legislation would also allow a private cause of action against an insurer or party responsible for determining claims under the policy based on alleged violations of New Jersey’s Insurance Trade Practices Act, which prohibits unfair competition or unfair or deceptive acts and practices in the business of insurance. This, too, would be a departure from New Jersey common law, which holds that the statute does not authorize a private cause of action against an insurer for violations of the act.

The legislation would allow a successful plaintiff to recover his or her actual damages, subject to a cap of the insureds’ potential damages at three times the applicable “coverage amount,” along with pre- and post-judgment interest and reasonable attorney fees and reasonable litigation expenses. Additionally—and presumably in recognition of the increased costs to insurers presented by the legislation—the law would prohibit insurers from passing on rate increases to policyholders as a result of complying with the new legislation. The legislation would take effect immediately.

Given the broad relief afforded by the legislation and its limited guidance on what constitutes an unreasonable delay or denial, and the right of the successful plaintiffs to recover their attorneys’ fees and expenses, if passed into law the legislation will no doubt result in increased litigation over UM/UIM claims, requiring the state’s courts to attempt to apply the law in a manner consistent with existing New Jersey common law.