Toughening New Jersey's bad faith law
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.