New Jersey’s Bad Faith Bill Remains Pending in Senate

March 12, 2012

On January 20, 2012, the New Jersey Senate introduced S766, which provides a cause of action for bad faith – an insurance carrier’s breach of the covenant of good faith and fair dealing – in the investigation, evaluation, processing, payment or settlement of insurance claims.  The bill is intended to codify certain common law rights and to ensure that this new cause of action is decided before a judge without a jury.  The bill remains pending in the Senate Commerce Committee.

New Jersey common law on bad faith is shaped almost entirely by two New Jersey Supreme Court rulings.  In Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474 (1974), the Supreme Court held that a carrier owes its insured an “inherent fiduciary obligation,” and it “can justly serve its interests and those of its insured only by treating the claim as if it alone might be liable for any verdict which may be recovered.”  Id. at 492-493.  Applying this logic, the Court ruled that when an insurer controls the defense and refuses to settle within policy limits, the carrier has breached the covenant of good faith and fair dealing and, therefore, is responsible for paying the full judgment even if that judgment is in excess of the policy limits.  Id. at 496.

Nearly twenty years later, the Supreme Court expanded the factual bases of bad faith set forth in Rova Farms in its opinion in Pickett v. Lloyd’s, 131 N.J. 457 (1993), holding that bad faith claims are not limited to third-party policies but extend to first-party policies as well.  It further found that an insurer is liable for bad faith where it denies or delays paying a claim when aware of an absence of a reasonable basis to deny or delay processing the claim or where the insurer shows a reckless indifference to facts or to proofs submitted by the insured.  Id. at 473, 481.  The Court established the level of proof necessary to maintain this cause of action, adopting the “fairly debatable” standard by which the plaintiff must show that the bad faith could be determined on summary judgment as a matter of law.  Id. at 473.

Against this backdrop, the legislature introduced S766.  The bill has two stated goals: (1) to codify existing case law recognizing a cause of action for bad faith in the processing and denial of first- and third-party claims by insurance carriers; and (2) to reverse the recent Supreme Court ruling in Wood v. New Jersey Manufacturers Ins. Co., Docket A 44 066643, June 14, 2011, (2011 N.J. Lexis 679), where the Court held that a bad faith claim for failure to settle a claim within limits gave rise to the right to a jury trial.

In its current iteration, with the obvious exception of the right to a jury, the proposed legislation preserves much of the common law.  The essence of Rova Farms is captured in the bill where it provides, in pertinent part, that the cause of action for the breach of the duty of good faith and fair dealing includes “the insurer’s failure to attempt in good faith to effectuate a prompt, fair and equitable settlement of a claim in which [the insured’s] liability becomes clear.”  The inclusion in this proposed legislation of first-party claims is clear in the definitions and the accompanying statement.  That the legislature also intended to incorporate aspects of Pickett is also evident.  The bill, in its current form, unambiguously includes acts of bad faith connected to processing of a claim (“investigation, evaluation, processing, payment”) as well as the settlement issue set forth in Rova Farms.  What is somewhat less clear is the applicable standard of proof.  The bill simply states that an insurer that “acts[s] unreasonably” in the processing of a claim settlement or without a “reasonable basis in denying the coverage” will have committed bad faith.  Whether that translates to the “fairly debatable” standard articulated by the Supreme Court in Pickett or to standards set forth in other New Jersey statutes and regulations will undoubtedly be the subject of future court rulings if the legislation is passed.  See N.J.S.A. 17:29(B)-4(9) et seq. and N.J.S.A. 17B:30-13.1 et seq. (and associated regulations at N.J.A.C. 11:2-17.1 et seq.) which prohibit insurers from engaging in unfair claims settlement practices.

The bill also provides for the recovery of attorneys’ fees.  What is not as clear is how this provision interacts, if at all, withN.J. Court Rule 4:42-9(6) which allows, at the discretion of the Court, for the recovery of attorneys’ fees for successful claimants in actions involving liability and indemnity policies.  The proposed legislation does provide, however, that a claimant that meets the established burdens of proof shall be entitled to “the full amount of damages as determined by the judge, regardless of the coverage limits of the policy.”  Whether that provision is sufficient to cover all attorneys’ fees, as well as other damages incurred by the policyholder, remains to be seen.  The proposed legislation also provides, consistent with the Pickett ruling, that punitive damages are available but only “by clear and convincing evidence” of “actual malice or wanton and willful disregard of any person who foreseeably might be harmed by the insurer’s acts or omissions.”

Even if this legislation does not pass, it still is instructive to the policyholder tendering a claim to its insurer.  The term “tendering a claim” is merely putting the insurer on notice of the circumstances that give rise to coverage and requesting that the insurer provide coverage.  However, given the applicable case law and the proposed legislation, it is in the policyholder’s interest to gather as much factual information as possible, including documentary evidence, of the circumstances giving rise to the claim and to forward that information to the carrier as soon as possible.  It is also important for the policyholder to keep all policy information, particularly when dealing with older occurrence-based policies, so factual issues over the extent of policy coverage will not give carriers a reason to delay.  Additionally, it is important for policyholders to comply with insurers’ inevitable requests for information to the extent possible.  Finally, policyholders should keep good records of all interactions with carriers following tendering of a claim so that, if necessary, proofs for a bad faith claim will be available to it.

Leave a Reply

%d bloggers like this: