Insurers can now add New Jersey to the list of jurisdictions in which they may be subject to federal racketeering claims. In Weiss v. First Unum Life Insurance Company, No. 05-5428, 2007 U.S. App. LEXIS 7613 (3d Cir. Apr. 3, 2007), the Third Circuit recently rejected an insurer’s McCarran-Ferguson challenge to a plaintiff’s RICO claims, fi nding that the federal RICO statute augments rather than impairs New Jersey’s insurance regime.

Some will argue that Weiss v. First Unum is not a signifi cant development because it is based on a fi nding that RICO is consistent with New Jersey’s current remedial scheme. Thus, the argument goes, Weiss represents merely a redundancy rather than an enhancement of remedies for aggrieved insureds. While that much may be true, there should be little doubt that Weiss is, indeed, an unfortunate development for insurers. It represents a growing trend toward federalization of insurance matters. In addition, just as “bad faith” claims are routinely appended to contract claims in coverage disputes, Weiss raises the specter that RICO will be invoked with even greater frequency, resulting in more costly litigation.

A. The McCarran-Ferguson Act Establishes Federal- State Balance.

In 1945, Congress enacted the McCarran- Ferguson Act to clarify the role of the Congress in regulating the business of insurance.1 The Act made it clear that the regulation of insurance was the province of the states. See 15 U.S.C. § 1012(a) (“the business of insurance . . . shall be subject to the laws of the several States”). The Act further provided that, unless a federal law was explicitly directed at the business of insurance, “[n]o act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance.” § 1012(b). Thus, any federal law not specifi cally directed at the business of insurance that has the effect of invalidating, impairing, or superseding a state’s insurance regime is subject to challenge under the McCarran-Ferguson Act.

B. Weiss v. First Unum.

Factual Background. The plaintiff in Weiss v. First Unum was an investment banker who was insured under a group disability insurance policy. The plaintiff alleged that he became disabled following a heart attack. Although the insurer initially approved the plaintiff’s disability claim, the insurer later discontinued benefi ts. In his complaint, the plaintiff alleged that his claim was “targeted for termination because it exceeded $11,000 per month.” Weiss, 2007 U.S. App. LEXIS 7613, at * 5. The plaintiff alleged not only that his claim was denied in bad faith, but that the denial was “one instance in a pattern of fraudulent activity by First Unum aimed at depriving its insureds with large disability payouts of their contractual benefi ts.” Id. The plaintiff asserted several causes of action, including RICO claims pursuant to 18 U.S.C. § 1961 et seq. Trial Court’s Decision. The trial court dismissed the plaintiff’s fi rst amended complaint, holding that the McCarran-Ferguson Act precluded the plaintiff’s RICO claims. The trial court reasoned that permitting civil racketeering claims would frustrate New Jersey’s insurance regime. In particular, the trial court noted that New Jersey’s Insurance Trade Practices Act (“ITPA”) regulates the business of insurance in New Jersey, and that the ITPA does not allow a private right of action by insureds. Nor, the trial court noted, does it provide for punitive damages against offending insurers.

Third Circuit’s Decision. In analyzing whether McCarran- Ferguson acts as a bar to the plaintiff’s claims, the Third Circuit acknowledged that New Jersey’s ITPA does not provide a private right of action to aggrieved policy holders. However, the court viewed the absence of a private right of action as an obstacle, “but by no means an insurmountable one.” Weiss, 2007 U.S. App. LEXIS 7613, at * 28.

Citing to Pickett v. Lloyd’s, 621 A.2d 445 (N.J. 1993), the court noted that New Jersey policy holders enjoy a common law right of action against insurers to recoup wrongly withheld benefi ts. The court reasoned that this judicially-fashioned remedy, which in some circumstances might allow for the recovery of punitive damages, was as much a part of New Jersey’s insurance regime as the ITPA. The court also noted that the allegedly wrongful conduct at issue was likely actionable under New Jersey’s Consumer Fraud Act (“CFA”), which is intended in part to deter and punish deceptive insurance practices. The court noted that the CFA, like RICO, allows for treble damages.

The court also noted that insurers themselves have utilized the RICO statute as a tool against insurance fraud. In conclusion, the court stated: “[W]e are left with the fi rm conviction that RICO does not and will not impair New Jersey’s state insurance scheme.” Thus, the court concluded that the McCarran-Ferguson Act did not bar the plaintiff’s racketeering claims. C. Impact of Weiss Decision. While it may be true that RICO has been used successfully by insurers to combat insurance fraud, this is little consolation to the insurance industry. To the contrary, the Weiss decision is bad news for insurers for at least three reasons. Trend Toward Federalization of Insurance. Weiss is representative of the trend toward federalization of insurance matters. Courts addressing the question presented by Weiss v. Unum have found that McCarran-Ferguson does not bar RICO claims in seven states. This is in contrast to the three states in which courts have found that RICO claims against insurers do impair or supersede the existing insurance regime.2 Increase in RICO Claims. Just as insurers have seen a dramatic increase in claims for fi rst party bad faith, Weiss is likely to lead to a proliferation of RICO lawsuits, even for the most routine claim decisions. It is not uncommon for an aggrieved insured to believe mistakenly that the denial of his claim was part of a wider pattern of improper insurer conduct. These types of allegations are already common, and they may become even more so if they serve as an entrée to the federal courts and federal remedies. More Costly Litigation. Even if RICO merely complements existing remedies, Weiss v. Unum nevertheless heightens exposure for insurers. RICO claims present different and much more signifi cant litigation challenges than typical insurance coverage litigation. First, RICO claims routinely result in Rule 12 motions. This is hardly surprising given that RICO claims are premised on allegations of criminal conduct. Moreover, should a plaintiff’s RICO claims survive the initial motions practice, they tend to lead to broader and more costly discovery.