In every contract, there exists a duty of good faith and fair dealing. Badiali v. N.J. Mfrs. Inc. Grp., 220 N.J. 544, 553 (2015); Price v. N.J. Mfrs. Ins. Co., 182 N.J. 519, 526 (2005). This means that neither party to the contract “shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract…” Association Group Life, Inc. v. Catholic War Veterans, 61 N.J. 150, 153 (1972). As an example, in the insurance context, agents are responsible for exercising “good faith and reasonable skill in advising insureds.” Weinisch v. Sawyer, 123 N.J. 333, 340 (1991).
Since 1993, New Jersey has recognized a private litigant’s authority to bring claims against their insurance company for bad-faith delays or denials of their insurance benefits. The seminal case of Pickett v. Lloyd’s, 131 N.J. 457, 473 (1993) set forth what is called the “fairly debatable standard” in the context of bad-faith claims by policyholders against their insurer. This narrow standard has imposed a heavy burden upon the insured to show that no debatable reasons existed to deny a claim or delay in processing a claim. In Pickett, the Court found that the claimant met this standard because the insurer did not merely mishandle the claim—the insurer unreasonably and intentionally delayed payment on an uncontested claim.
The Pickett case and its progeny have made clear that simple negligence on the part of the insurer is not enough to establish a bad-faith claim. Bad-faith claims are typically upheld only if the insured can demonstrate a pattern of misconduct or indifference on the part of the insurer, or if the insured can succeed on a summary judgment motion on the underlying coverage issue. If the bad-faith claim is successful, the insured is entitled to recover extra-contractual damages above and beyond the policy benefits.
On June 7, 2018, New Jersey’s Senate passed Bill S-2144, which establishes a private cause of action for first-party claimants regarding misconduct by their insurer in handling their claims. It also establishes a private cause of action for violations of the Unfair Claims Settlement Practices Act, which previously could only be brought by the Commissioner of Banking and Insurance. The proposed Bill, the “New Jersey Insurance Fair Conduct Act,” seeks to give teeth to first-party bad-faith claims by replacing the “fairly debatable” standard with one that is seemingly less stringent. The Bill authorizes a first-party claimant to bring a cause of action for:
(1) an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy; or
(2) any violation of the provisions of section 4 of P.L.1947, c.379 (C.17:29B-4).
In addition, a claimant would not be required to prove that there was recurring misconduct on the part of the insurer that would indicate “a general business practice,” which means a single litigant may recover under this Act. Importantly, the proposed Bill would allow recovery of treble damages, reasonable attorney’s fees and litigation expenses, in addition to extra-contractual damages.
The language of the proposed Bill is ambiguous as it defines “insurer” as “any individual, corporation, association, partnership or other legal entity which issues, executes, renews or delivers an insurance policy in this State, or which is responsible for determining claims made under the policy.” (emphasis added). Based on this language, it appears that those who are subject to this act may not just be the insurance companies. While not clearly defined, “delivering” an insurance policy may fall within an insurance producer’s scope of work, and thus a producer may also be exposed to bad-faith litigation if this Bill passes.
Further, the proposed Bill does not clearly define what an “unreasonable delay or unreasonable denial” entails. The Bill also appears to remove the requirement of any form of intentional or reckless conduct by the carrier, thus, only a showing of negligence will be required in order to pursue claims for bad faith.
As of now, the Bill has been received in the Assembly and referred to the Assembly Financial Institutions and Insurance Committee. We will continue to monitor this Bill’s progress and provide you with any further developments.