March 12, 2012<\/p>\n
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.\u00a0 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.\u00a0 The bill remains pending in the Senate Commerce Committee.<\/p>\n
New Jersey common law on bad faith is shaped almost entirely by two New Jersey Supreme Court rulings.\u00a0 In\u00a0Rova Farms Resort, Inc. v. Investors Ins. Co. of Am<\/em>., 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.”\u00a0 Id. at 492-493.\u00a0 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.\u00a0 Id. at 496.<\/p>\n Nearly twenty years later, the Supreme Court expanded the factual bases of bad faith set forth in\u00a0Rova Farms\u00a0<\/em>in its opinion in\u00a0Pickett v. Lloyd’s<\/em>, 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.\u00a0 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.\u00a0 Id. at 473, 481.\u00a0 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.\u00a0 Id. at 473.<\/p>\n Against this backdrop, the legislature introduced S766.\u00a0 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\u00a0Wood v. New Jersey Manufacturers Ins. Co<\/em>., 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.<\/p>\n In its current iteration, with the obvious exception of the right to a jury, the proposed legislation preserves much of the common law.\u00a0 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.”\u00a0 The inclusion in this proposed legislation of first-party claims is clear in the definitions and the accompanying statement.\u00a0 That the legislature also intended to incorporate aspects of\u00a0Pickett\u00a0<\/em>is also evident.\u00a0 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\u00a0Rova Farms<\/em>.\u00a0 What is somewhat less clear is the applicable standard of proof.\u00a0 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.\u00a0 Whether that translates to the “fairly debatable” standard articulated by the Supreme Court in\u00a0Pickett\u00a0<\/em>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.\u00a0 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.<\/p>\n The bill also provides for the recovery of attorneys’ fees.\u00a0 What is not as clear is how this provision interacts, if at all, withN.J. Court Rule\u00a0<\/em>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.\u00a0 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.”\u00a0 Whether that provision is sufficient to cover all attorneys’ fees, as well as other damages incurred by the policyholder, remains to be seen.\u00a0 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.”<\/p>\n Even if this legislation does not pass, it still is instructive to the policyholder tendering a claim to its insurer.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0 Additionally, it is important for policyholders to comply with insurers’ inevitable requests for information to the extent possible.\u00a0 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.<\/p>\n","protected":false},"excerpt":{"rendered":"