New Consumer Protection Act Targets New Jersey Insurance Companies

February 2013Insurance Alert

A bill that has been proposed in New Jersey, the "Consumer Protection Act of 2012," would create a private cause of action for insureds or their assignees if an insurer is found to have engaged in unfair claims settlement practices. If passed, the bill will become effective immediately and will apply to all claims filed on or after October 1, 2012. The current version of the bill, A-3710, was introduced to the Assembly on January 28, 2013, and has been referred to the Assembly Financial Institutions and Insurance Committee for review.

The statement attached to the bill recites that it is intended to incorporate "into statutory law certain aspects of New Jersey's current case law, which recognize private causes of action in first-party and third-party claims regarding the bad faith actions of insurance companies which result in harm to their insureds."1 Despite a stated intent to codify current case law, the language of the bill will likely expand the scope of a claimant's cause of action, and the potential universe of compensable damages, beyond what is understood to be available under current law.

First, the bill's definition of what constitutes unfair claims settlement practices is broader than what has been recognized under existing law. The reason is that the drafters of the bill did not create a new definition of unfair claims settlement practices, and instead incorporated the definition employed in N.J.S.A. 17:29B-4(9).2 N.J.S.A. 17:29B-4(9) was enacted to endow the Commissioner of Banking and Insurance with the authority to fine insurers that engage in unfair settlement practices, and did not contemplate a private cause of action.

Indeed, the definition of unfair claims settlement practices in N.J.S.A. 17:29B-4(9) could include, among other things, failing to act reasonably promptly upon receipt of a claim, failing to adopt reasonable standards for the prompt investigation of claims, refusing to pay claims without conducting a reasonable investigation, failing to act in good faith to settle a claim, failing to affirm or deny coverage within a reasonable time, attempting to settle a claim for less than the amount to which a person would have reasonably believed he was entitled by reference to advertising material accompanying an application, making claim payments to insureds not accompanied by a statement setting forth the coverage under which the payments is being made, and failing to promptly provide a reasonable explanation for the denial of a claim or for the offer of a compromised settlement. Therefore, whether intended or not, by importing the definition of unfair claims settlement practices in N.J.S.A. 17:29B-4(9), the drafters likely created a broader cause of action than could be found under existing case law.

In addition, the Consumer Protection Act of 2012 purports to create a broader universe of damages available to successful claimants. The bill provides that claimants may recover all damages as set forth in a final judgment, regardless of the coverage limits of the policy, and prejudgment interest, attorney's fees and litigation expenses from the date the action is commenced. Although such damages are arguably available under existing law, the broader definition of unfair claims settlement practices will likely result in increased litigation expenses associated with adjudicating a larger volume of alleged violations.

Moreover, inasmuch as the bill contemplates punitive damages where "the insurer's acts or omissions demonstrate, by clear and convincing evidence, actual malice or wanton and willful disregard of any person who foreseeably might be harmed by the insurer's acts or omissions," the inclusion of such language will likely invite punitive damage claims that will also increase litigation costs and expose insurers to an increased threat of enhanced damage awards. This language appears to broaden the admonition against wrongful or bad faith denials articulated by New Jersey's Supreme Court in Pickett v. Lloyd's, 131 N.J. 457, 455 (1993):

We agree with those courts that have held that absent egregious circumstances, no right to recover for … punitive damages exists for an insurer's allegedly wrongful refusal to pay a first-party claim…. We also concur with the courts holding, in the highly regulated area of personal injury protection, see N.J.S.A. 39:6A-5, that wrongful failure to pay benefits, wrongful withholding of benefits or other violation of the statute does not thereby give rise to a claim for punitive damages.

Accordingly, it is reasonable to expect that if and when the Consumer Protection Act of 2012 is enacted, the insurance industry is likely to experience a surge of responsive litigation designed to probe the boundaries of this new cause of action and the damages that it offers.

For more information on this issue or other insurance matters, please contact:

NY Arthur Jakoby at (212) 592-1438 or [email protected]

Copyright © 2013 Herrick, Feinstein LLP. Insurance Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.

1The cases cited are: Pickett v. Lloyd's, 131 N.J. 457 (1993), Samuel v. Doe, 158 N.J. 134 (1999), and Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474 (1974)

2One difference is that a claimant under the Consumer Protection Act would not be required to demonstrate that the insurer violated a provision so frequently as to indicate a general business practice.