New Statute May Spell Trouble for New Jersey Insurers

On January 19, 2022, New Jersey Governor Phil Murphy signed S.B. 1559, known as the “New Jersey Insurance Fair Conduct Act,” which allows motorists to sue their insurance companies over “unreasonably” late or denied coverage benefits and unfair settlement practices.  The bill, passing through both houses of New Jersey’s legislature without substantial amendment, would allow prospective plaintiffs to pursue bad faith litigation against their uninsured/underinsured motorist carriers and employees for “unreasonably” denying coverage for claims or delivering benefits “unreasonably” late after a claim.

Prior to the imposition of S.B. 1559, New Jersey Courts used a “fairly debatable” standard for first party bad faith claims as established in Pickett v. Lloyd’s. 131 N.J. 457, 621 A.2d 445 (1993). Under that standard, the insurer must have no valid reason to deny benefits or delay processing of the claim, and must have known or recklessly disregarded the fact that no reasonable basis existed for denying the claim. Williams v. State Farm Indem. Co., No. A-4460-06T1, 2009 WL 112753, at *2 (N.J. Super. Ct. App. Div. Jan. 20, 2009). S.B. 1559 removes the second requirement, no longer forcing a plaintiff to establish an insurer knew or recklessly disregarded the unreasonable nature of their denial or delay.

The bill also allows potential plaintiffs to sue their insurance carriers under the New Jersey Unfair Claims Settlement Practices Act (“UCSPA”). Previously, only the Commissioner of Banking and Insurance could bring such suits, and only after multiple violations.

Further, where plaintiffs were previously only allowed to recover damages up to the original coverage amount, S.B. 1559 Section 3(c) now allows for the recovery of three times the coverage amount purchased by potential plaintiffs, pre- and post-judgment interest, attorney’s fees, and litigation expenses. A further caveat to the bill portends to forbid insurers from passing additional expenses incurred by carriers as a result of these claims on to insureds through rate increases. Prior to the passage of S.B. 1559, plaintiffs who filed common-law bad faith claims could only recover the withheld policy benefits and certain consequential damages. New Jersey Senate President Nicholas Scutari, a former personal injury attorney and sponsor of the bill, stated, “[Q]uite simply it just requires [insurers] to deal in good faith.”

Several proponents of the bill believe it allows plaintiffs, and plaintiffs’ attorneys, to bring lawsuits against insurers based on trivial or minor delays and denials without regard for the reasoning behind those same denials or delays. It is likely that the passage of the bill will result in a surge of bad faith and UCSPA claims based on little or no evidence of delay or unreasonable denial. As the bill contains no definition of “unreasonable,” New Jersey Courts will be responsible for setting the standard. The text of the bill can be found here.

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