Toughening New Jersey's bad faith law

Posted by Gene Killian on January 28, 2013

If an insurance company wrongfully denies a third-party liability claim, then, under the New Jersey Court Rules (R. 4:42-9(a)(6), to be exact), if the policyholder has to sue to enforce coverage for the claim, the policyholder is entitled to recover its attorneys’ fees.  Due to a weird quirk in the Court Rules, however, a policyholder currently is not entitled to recoup attorneys’ fees on a wrongfully denied first-party claim.  Since a bad faith ruling is very difficult to obtain in New Jersey on a first-party claim (many judges deem any investigation to be a good investigation), there’s little disincentive for a carrier to drag out a first-party claim indefinitely (perhaps in the hope that an unnoticed internal one or two-year limitations period in the policy will pass).  (For those not familiar with insurance terminology, “first party” coverage applies to damage to your own property; “third party” coverage applies to claims brought against you for damage to someone else’s person or property.)

There’s now a proposed bill in the New Jersey Senate, S-2460, that would allow policyholders (both corporate and individual) a private right of action under New Jersey’s Unfair Claims Settlement Practices Act (“UCSPA”), N.J.S.A. 17:29B-4(9).  Under this bill, if the policyholder can establish a violation of UCSPA, such as refusing to pay a claim without a reasonable investigation based upon all available information, the policyholder would be entitled to relief including punitive damages and “reasonable attorney’s fees.”  The sponsors of the bill are Sen. Nicholas P. Scutari (D-Middlesex, Somerset and Union) and Sen. Jennifer Beck (R-Monmouth).  The relief would apply in both the first- and third-party context.  The insurance industry’s response to Sandy seems to be the driving factor behind the proposed law.

This is a new version of a bill that Sen. Scutari had proposed some time ago, and that died on the vine.  I assume that this one will meet a similar fate, since the insurance industry has a powerful lobby and I have it on good authority from a legislative aide that the industry has already made its displeasure with the bill known.  Truth be told, the only provision in the bill that I really care about is the ability of policyholders to recover their fees on first-party claims.  I think that an insurance contract establishes a quasi-fiduciary relationship, and there should be consequences when a carrier denies coverage wrongfully, or stalls on payment, in any context (first or third).  For a policyholder, especially a small business or individual, to have to finance a potentially expensive court battle with a recalcitrant insurance company is unfair and, in many cases, difficult if not impossible. Hopefully, eventually, this wrongheaded quirk in the Court Rules will be rectified, either by S-2460 or otherwise.

By the way, a number of states already already do allow for a private right of action under UCSPA.  Here’s a handy state-by-state survey.   

Recovering attorneys' fees

Posted by Gene Killian on August 16, 2010

Absent a specific law or contractual provision, American courts generally follow the "American Rule," meaning that each side pays its own legal fees.  Seems unfair that when a company buys a liability insurance policy, it still may have to hire lawyers to sue the carrier and secure the paid-for defense of an underlying action.  New Jersey addresses this problem in R. 4:42-9 (a) (6), which provides for the recovery of legal fees "[i]n an action upon a liability or indemnity policy of insurance, in favor of a successful claimant."

Question:  Why doesn't the rule also allow for recovery of legal fees in actions upon first-party policies, such as property insurance policies?  Answer:  It's sort of like the origins of the Feast of the Seven Fishes.  No one really seems to know.   

In any event, the New Jersey Supreme Court has now held that the rule applies even when coverage litigation takes place out of state. The Court adopted the Appellate Division's opinion in Myron Corp. v. Atlantic Mutual Insurance Co., 407 N.J. Super. 302 (2009). The decision allows Myron Corporation, a business-to-business personalized gift company based in Maywood, New Jersey, to recover around $160,000 in legal fees incurred battling its liability carrier, Atlantic Mutual, in federal court in Illinois.  Underlying the coverage dispute was a putative class action filed in 2003 by Stonecrafters Inc., an Illinois business that claimed Myron had blasted it with junk faxes in violation of the federal Telephone Consumer Protection Act of 1991 and Illinois consumer protection law.   Myron notified Atlantic Mutual of the claim, seeking protection under the policy's "advertising injury" provisions. The carrier agreed to defend under a reservation of rights.

Atlantic Mutual then sued in Illinois for a declaration of no coverage.  Myron countersued in New Jersey to enforce coverage.  Game on.  Ultimately the Illinois court stayed the coverage case there on the ground that New Jersey had more significant contacts to the matter, Myron being based in New Jersey.  The parties settled, but Atlantic Mutual refused to reimburse Myron for the legal fees incurred in the Illinois coverage case. 

Under the Supreme Court's decision, the Illinois fees were incurred as part of larger "battles in a war that Myron ultimately won" and thus "an integral part of the entire controversy over coverage."