New Jersey Senate Advances Bad Faith Legislation

New Jersey is the latest to join the list of states that have enacted or are considering enacting legislation that would authorize policyholders to file civil suits against first-party insurers for unfair business practices, such as unreasonably delaying or denying benefit payments, engaging in false advertising, or otherwise committing a wide range of unfair or deceptive practices.

On June 7, the New Jersey Senate passed a bill entitled the New Jersey Insurance Fair Conduct Act. The Act would create a new statutory cause of action pursuant to which a first-party insurer would be liable for bad faith based on a single statutory violation, thereby entitling an aggrieved policyholder to collect triple damages and attorneys’ fees. The proposed legislation is now before the state’s General Assembly for further consideration.

Under current New Jersey common law, a policyholder can recover bad faith damages against a first-party insurer only if the policyholder is able to demonstrate that the insurer (i) did not have a reasonable basis for declining coverage, (ii) recklessly disregarded the existence of a reasonable basis for providing coverage, or (iii) unreasonably delayed processing a claim. Pickett v. Lloyd’s, 131 N.J. 457 (1993). Under those scenarios, a prevailing policyholder can recover up to the limits of its policy as well as consequential damages arising from the insurer’s breach of its common law duty. New Jersey law also affords a court discretion to award a prevailing policyholder the amount it incurred in prosecuting its coverage claim. Conversely, there is no authority granting treble damages.

To the extent a policyholder meets its burden of proof under the common law standard, the burden shifts to the insurer. Where the insurer is able to show that insurance coverage is “fairly debatable,” it will defeat the insured’s claim of bad faith. Pursuant to Pickett, “[u]nder the ‘fairly debatable’ standard, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.”

The proposed Act would greatly reduce a first-party policyholder’s burden of proof by eliminating the need to demonstrate either that the insurer knew that its conduct was unreasonable or that the insurer handled the policyholder’s claim in a way that was indicative of its general business practices. Instead, a policyholder simply would need to demonstrate that the insurer engaged in prohibited conduct, such as (i) misrepresenting and falsely advertising its policy contracts, (ii) promoting false information and advertising generally, (iii) committing defamation, (iv) discriminating against the policyholder, (v) employing unfair claim settlement practices and (vi) failing to maintain complaint handling procedures.

Notwithstanding its specificity as to the types of actions that would be illustrative of an insurer’s bad faith, the Act as it is presently written does not define what constitutes the “unreasonable” delay or denial of a claim for benefits, and it does not include good-faith protections for insurers that exist under the current law.

Traub Lieberman Straus & Shrewsberry will continue to closely monitor the Act as it makes its way through the legislative process and update this blog post, as appropriate, in order to keep our friends and clients apprised of key developments.