On June 7, 2018, the New Jersey Senate passed the “New Jersey Insurance Fair Conduct Act” (S2144[1R]), which, if passed in the Assembly, would create a statutory cause of action for a first party insurance claimant against an insurer. This potential statutory cause of action can be based on an unreasonable delay in payment of a claim, an unreasonable denial of a claim, and any violation of the Unfair Insurance Claims Settlement Practices Act. This piece of legislation would allow an insured, if successful, to recover actual damages, pre-judgment interest, reasonable attorney’s fees,litigation expenses, and treble damages.
A cause of action for bad faith stemming from first party insurance claims was first recognized by the New Jersey Supreme Court, in the seminal case of Pickett v. Lloyd's (A Syndicate of Underwriting Members),131 N.J. 457 (1993). For the past 25 years, first party bad faith claims have been recognized under the common law of New Jersey.
"To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one. Implicit in that test is our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless indifference to facts or to proofs submitted by the insured."
Pickett v. Lloyd's (A Syndicate of Underwriting Members),131 N.J. 457, 473 (1993).
The Pickett standard is based on the premise that a denial of coverage, when there is a reasonable basis to believe no coverage exists, is not bad faith, even if the insurer is subsequently proven wrong.This allows an insurer to litigate a claim when the insurer feels there is a question of law or fact which is necessary to be decided prior to payment of the claim.
The Pickett court also addressed damages and determined that only consequential economic losses that are fairly within the contemplation of the insurance company are recoverable. Further, absent egregious circumstances, no right to recover for emotional distress or punitive damages exists for an insurer's allegedly wrongful refusal to pay a first-party claim.
Essentially, Pickett created a first party bad faith cause of action but made it very difficult for plaintiffs to prove both liability and damages.
The proposed legislation presents two major changes, both likely to benefit a plaintiff bringing a bad faith claim. First, beyond an unreasonable delay in payment of a claim or unreasonable denial of a claim, which is likely consistent with Pickett, a first party bad faith claim can also be based on a violation of the Unfair Insurance Claims Settlement Practices Act. Previously the ability to enforce the Unfair Insurance Claims Settlement Practices Act was solely in the hands of the New Jersey Department of Banking and Insurance;however, the proposed legislation would give rise to a private cause of action brought by individual insureds.
Second, and perhaps most importantly, the legislation greatly increases the amount of a potential recovery if a determination is made that an insurer has acted in bad faith. Where under Pickett, the insured is entitled to consequential damages that are fairly within the contemplation of the insurance company. The proposed legislation would allow those damages to be trebled, and allow the insured to recover costs, fees, and interest.
The bill was passed by the Senate (21-14) and received in the New Jersey State Assembly where it was referred to the Assembly Financial Institutions and Insurance Committee.
For more information, please contact:
Michael J. Alivernini
Michael J. Diamond
Christopher J. Sulock