Ostensibly responding to Superstorm Sandy, the New Jersey legislature is considering a broad change to the law addressing bad faith and unfair conduct by insurers. If the bill becomes law, it will represent a significant and policyholder-friendly change in the law governing insurer conduct.

Changes Would Strengthen Bad Faith Rules for All Insurance Claims

The bill would amend New Jersey's Unfair Claims Settlement Practices Act to (1) grant for the first time a private right of action to policyholders for substantive violations of the statute, and (2) remove the requirement of proving that an insurer's particular unfair conduct in a given case constituted a general business practice of that insurer.

While theoretically aimed at curbing abuses connected to Superstorm Sandy claims, enactment would significantly strengthen the rules of bad faith for all insurance claims. Under current New Jersey case law, the legal standards a policyholder alleging bad faith must meet are burdensome and very difficult to satisfy. The seminal opinion, Pickett v. Lloyds, 131 N.J. 457 (1993), held in a first-party coverage action that a policyholder may recover bad faith damages where the insurer refuses to honor its obligations and the nature of its obligations is not "fairly debatable."

It's Been Tough to Win Bad Faith Claims

Subsequent opinions extended the "fairly debatable" standard to claims under third-party policies and imposed a further litmus test: if the policyholder does not prevail on the coverage question on summary judgment, then the coverage question will be regarded as "fairly debatable" and no claim for bad faith will lie. Conversely, however, if a policyholder prevails on summary judgment, insurers still may argue that the coverage question was "fairly debatable" given the state of the law or facts prior to summary judgment. See, e.g., Hudson Universal Ltd. v. Aetna Cas. & Surety Co., 987 F. Supp. 337 (D.N.J. 1997); Universal Rundle v. Commercial Union Ins., 319 N.J. Super. 223 (App. Div. 1999). Accordingly, New Jersey policyholders face substantial burdens to maintain bad faith claims.

How the Rules Would Change

The proposed bill would create a means of proving bad faith parallel to the "fairly debatable" standard. A policyholder would now need to prove only a specific violation of one or more of the prohibited practices enumerated in N.J. Stat. Ann. § 17:29B-4(9). That section prohibits, among other things, the following:

  • Misrepresentation of pertinent facts or policy provisions
  • Failing to acknowledge and act reasonably promptly in response to claims
  • Failing to adopt and implement reasonable standards to ensure prompt investigation of claims
  • Refusing to pay claims without conducting a reasonable investigation based on all available information
  • Failing to affirm or deny coverage within a reasonable time after a proof of loss is submitted
  • Not attempting in good faith to effectuate fair and equitable settlements where liability has become reasonably clear
  • Compelling policyholders to institute litigation to recover amounts due by offering substantially less than the amount ultimately recovered
  • Attempting to settle a claim for less than the amount reasonable persons would believe themselves entitled to based on the insurer's advertising materials accompanying an application
  • Making payments without identifying the coverage pursuant to which the payment is made

Conclusion

As policyholder lawyers are well aware, insurers routinely violate these provisions. Unfortunately, New Jersey's toothless bad faith decisional and statutory law makes punishing and deterring these practices extremely difficult and very rare. The proposed revisions to strengthen New Jersey's unfair claims law would be a welcome change and surely would bring discipline and deterrence to an industry that too often acts with the knowledge that its defalcations will go unpunished.