Insurers Beware: Potential Impact of NJ's Proposed Insurance Fair Conduct Act

Troutman Pepper

New Jersey legislators are working to enact a law that will provide policyholders with potentially punishing recourse if their insurance carriers mishandle their claims for benefits. The proposed legislation would allow policyholders to sue insurance companies and their employees for various types of “unreasonable” conduct, including the denial of benefits or undue delay in processing claims.

New Jersey’s Senate passed S-2144, the New Jersey Insurance Fair Conduct Act (IFCA), by a 21-14 margin on June 7. In addition to allowing lawsuits for “unreasonable” conduct in processing or paying claims, the IFCA would also create a new private cause of action against insurance companies for violations of the New Jersey Unfair Claims Settlement Practices Act (UCSPA), N.J.S.A. § 17:29B-4, which bars insurers from engaging in various practices, including misrepresenting facts about coverage or refusing to pay claims without conducting a reasonable investigation. Currently, the UCSPA grants sole enforcement power to the New Jersey Department of Banking and Insurance.

If the IFCA is ultimately enacted, New Jersey would join other states that have created statutory bad-faith regimes for policyholders to pursue claims against insurers. Pennsylvania, for example, is known for having a particularly harsh bad-faith statute, allowing policyholders in certain cases to recover multimillion-dollar punitive damages awards.

Punitive damages are not included in the current version of New Jersey’s legislation, but the IFCA would still significantly up the ante for insurance carriers in the state. New Jersey currently offers limited remedies to policyholders who feel they have been mistreated by their insurers. Under the present regime, policyholders can sue under New Jersey common law for the bad-faith delay or denial of first-party claims for insurance benefits. Successful claimants may recover consequential damages arising from the insurer’s breach of the insurance policy and the policy benefits for the claim, but there is no additional recovery available to the insured nor any punitive risk to the insurer. Under the IFCA, policyholders who can prove that their carrier acted unreasonably in handling their insurance claims would be entitled to several categories of relief, including actual damages, prejudgment interest, attorney’s fees and treble damages. The addition of attorney’s fees and treble damages raises the stakes of litigation substantially.

The current version of the IFCA also gives policyholders leverage by including a broad definition of insurers subject to potential suit. The proposed statute defines “insurer” to include “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 this policy.” That means statutory liability for unreasonable conduct could attach not only to insurance companies themselves, but also to employees.

Not all elements of the IFCA are well-defined. For example, the IFCA, as currently drafted, does not specify what constitutes unreasonable conduct. Thus, the standard that policyholders would have to meet to recover the increased remedies under the IFCA is unclear. There can be no doubt that if the IFCA becomes law, there will be a rash of litigation filed by policyholders that will look to fill in these gaps and further define the parameters of the IFCA.

The IFCA bill currently sits with the New Jersey Assembly’s Financial Institutions and Insurance Committee, which received the proposed legislation for review on June 11. Assuming both legislative bodies approve the bill, it would go to Gov. Phil Murphy for his approval or veto. If enacted, the IFCA will have significant real-world effects, providing insureds with a new avenue of recourse against their carriers and exposing insurance companies and their employees to high-stakes litigation. Since the proposed bill significantly changes the current law, insurance companies should closely monitor its progress and ensure they have claims-handling procedures in place to minimize their risk under the proposed statute.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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