The New Jersey Insurance Fair Conduct Act
On January 18, 2022, New Jersey Governor Phil Murphy signed into law the New Jersey Insurance Fair Conduct Act (IFCA). Effective immediately, the IFCA creates a private cause of action for first-party claimants in part for “an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy.”
Newark, N.J. (January 25, 2022) - On January 18, 2022, New Jersey Governor Phil Murphy signed into law the New Jersey Insurance Fair Conduct Act (IFCA). Effective immediately, the IFCA creates a private cause of action for first-party claimants in part for “an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy.” This new law is limited to uninsured and underinsured motorist (UM/UIM) coverage benefits under automobile insurance policies. As the new law became effective immediately upon its signing, it applies to all active and pending UM/UIM cases.
Under the statute, a “first-party claimant” or “claimant” is defined as an individual injured in a motor vehicle accident and entitled to the uninsured or underinsured motorist coverage of an insurance policy asserting an entitlement to benefits owed directly to or on behalf of an insured under that insurance policy.
Under the IFCA, a claimant can file a civil suit against their automobile insurer for:
- an unreasonable delay of a claim for payment of benefits under an insurance policy or
- an unreasonable denial of a claim for payment of benefits under an insurance policy; or
- any violation of the provisions of section 4 of P.L.1947, c.379 (C.17:29B-4), also known as the New Jersey Unfair Claims Settlement Practices Act (“UCSPA”), N.J.S.A. § 17:29B-4.
As a result, the IFCA now provides for a new private cause of action for “unreasonable delay” or for “unreasonable denial” of an insured’s UM/UIM claim. The IFCA sets forth a statutory bad faith claim against an insurer. Prior to the enactment of this statute, New Jersey only recognized bad faith for UM/UIM claims under common law. It is unclear if, with the passage of this statute, any common law bad faith claims are expressly supplanted. However, given the broad reach of this statute, including the allowable damages, this statute provides greater relief to a potential successful claimant than under common law, meaning it will likely become a favorite of the plaintiffs’ bar going forward.
The IFCA in its current form does not define the term “unreasonable.” It fails to specify what conduct will meet this legal threshold. As a result, we foresee significant litigation as the courts seek to define this term in the statute. Nonetheless, we can also foresee that the courts would look to the common law bad faith standard under Pickett v. Lloyds, 131 N.J. 457 (1993) for guidance.
In Pickett, the New Jersey Supreme Court held that “an insurance company owes a duty of good faith to its insured" in the processing of an insurance claim.” Although the Pickett court recognized a duty of good faith and fair dealing on the part of the insurer, the court limited recovery of damages for this cause of action only if the underlying was not “fairly debatable.” The Pickett court explained the term “fairly debatable” means that when a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim, they would therefore not be entitled to assert a claim for an insurer's bad faith refusal to pay the claim.
Moreover, as to any alleged delay in the processing of a UM/UIM claim, the Pickett court addressed this by stating that when the issue involved is not a denial or refusal to pay a claim, but instead inattention to payment of a valid, uncontested claim, an insurer only acts in bad faith when: (1) the insurer’s conduct is unreasonable, and (2) the insurer knows that the conduct is unreasonable or recklessly disregards the fact that the conduct is unreasonable.
Further, the courts may also look to a prior version of the IFCA, which contained a definition for “unreasonable denial” that was set forth as (1) no debatable reasons existing for denial of the benefits, and (2) the insurer knowingly or recklessly disregarding the fact that no debatable reasons existed for denying the claim. Although this definition did not make it into the final version of the IFCA, it is notable that it almost is identical to the standard set forth in Pickett. Accordingly, this may convince the courts further to adopt some version of the Pickett standard when interpreting the definition of “unreasonable” delay or denial of a UM/UIM claim.
In addition to providing for a cause of action for “unreasonable” delay or denial of a UM/UIM claim, the IFCA also essentially now provides for a private cause of action for any violation of the New Jersey Unfair Claims Settlement Practices Act (UCSPA), N.J.S.A. 17:29B-4. Prior to the enactment of the IFCA, a private right of action was not recognized by the New Jersey Courts.
The UCSPA governs “unfair methods of competition and unfair and deceptive acts or practices in the business of insurance.” The UCSPA defines certain activities as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance including, among other things, misrepresentations and false advertising of policy contracts, false information and advertising generally, defamation, unfair discrimination, unfair claim settlement practices, and failure to maintain complaint handling procedures. Thus, with this cause of action in the IFCA, the potential violations of the IFCA can potentially extend far beyond just claims handling.
Two initial areas of concern within the UCSPA (as such applies under the IFCA) are found at paragraphs 1 and 9. Paragraph 1 prohibits misrepresentations and false advertising of policy contracts. This is the same basis for which an insured can sue an insurer under the New Jersey Consumer Fraud Act (CFA). However, in looking at the text of 17:29B-4 (UCSPA) and the basis for liability under the CFA, the UCSPA is broader. As a result, the potential exists for increased liability against insurers under the IFCA. In effect, the IFCA may allow a claimant to circumvent the CFA and recover attorneys’ fees and three times the UM/UIM policy limits for misrepresentations in the sale of automobile policies.
As to paragraph 9 of the UCSPA, there is a myriad of potential violations but the most troublesome for insurers is contained in subparagraph (h), which imposes liability on an insurer essentially for trying to settle a case for less than the insured thinks it is worth. This could encompass just about every settlement attempt made by an insurer. As a result, the IFCA, by incorporating the definition of unfair claims pursuant to the UCSPA in N.J.S.A. 17:29B-4(9), creates a broader civil cause of action against an insurer than ever existed under common law.
Claimants who establish a violation of the provisions of the IFCA are entitled to recover actual damages caused by a violation of the statute, which includes, but is not limited to, actual trial verdicts that are not to exceed three times the applicable coverage amount, as well as reasonable attorneys’ fees, reasonable litigation costs, and pre- and post-judgment interest.
Previously, under common law for UM/UIM bad faith claims in New Jersey, plaintiffs needed to prove consequential damages, which may have included attorneys’ fees. Pickett concluded that recoverable damages should be limited to consequential economic losses that were fairly within the contemplation of the insurer. Subsequent case law has held that, if bad faith was proven, any foreseeable consequential damages may be sought, which would typically include costs of litigation, including expenses for experts, attorneys’ fees, and prejudgment interest. However, these damages were not measured by the amount of damages determined by the jury for the insured’s injuries. In fact, the prior measure of damages under common law for UM/UIM bad faith claims in New Jersey did not take into account the verdict of an underlying claim at all. Given this potential measure of damages, the trial of the underlying UM/UIM claim will become of utmost importance as it will serve as a baseline for any potential bad faith damages after the conclusion of the underlying claim.
Aside from the substantive aspects of the IFCA, some procedural concerns also arise:
Statute of Limitations
The IFCA does not set forth a statute of limitations period for its statutory bad faith claim. Common law bad faith claims under New Jersey law have a six-year limitations period, which is the same as the limitations period for UM/UIM claims. The IFCA does not state whether it applies to pre-suit or post-suit claims handling. In its present form, the IFCA appears to extend the statute of limitations period for all alleged bad faith actions, as an argument can be made that any violation of the IFCA is not ripe until the conclusion of the underlying UM/UIM claim.
Jury or Bench Trials
The new law also does not state whether the private cause of action is to be tried before a judge or a jury. Prior case law has upheld a plaintiff’s right to a jury trial in a bad faith claim and we do not anticipate that the courts would deny a jury trial in a cause of action under the IFCA.
Severance of the IFCA claims from the underlying UM/UIM claims
Common law UM/UIM bad faith claims were routinely pled in the same complaint as the underlying UM/UIM claims. In those instances, the defense would routinely move to sever and stay the bad faith claims until the resolution of the underlying claims. This case management method was expressly recognized by case law to protect any prejudice to the defendant carrier in engaging in claims handling discovery while the underlying UM/UIM claim was still active and being litigated.
With the IFCA, if bad faith and the underlying claim are still pled together, severing the bad faith claims should still be a preferred method, procedurally. This is because the bad faith action created by IFCA is a wholly distinct cause of action with its own proofs and unrelated to the proofs needed for the underlying claim, similar to a common law bad faith action. Moreover, given that one of the measures of damages under IFCA takes into account the actual trial verdict of the underlying claim, the underlying claim should be concluded before the bad faith action is even ripe.
IFCA claims filed after the conclusion of the underlying UM/UIM claims
The IFCA could also potentially open the floodgates for claims that have already been settled and for UM/UIM claims that have been taken to trial with excess verdicts even when bad faith claims are not pled in the beginning of the action. The New Jersey Court Rules have already been amended to eliminate the Entire Controversy bar for bad faith claims after the conclusion of the underlying UM/UIM claim, meaning that plaintiffs can bring a bad faith claim related to an underlying UM/UIM claim even that underlying was already settled or otherwise resolved. As a result, we can potentially see a multitude of new bad faith claims for UM/UIM claims that have already been concluded, especially if those UM/UIM matters resulted in an excess trial verdict above the applicable UM/UIM policy limits.
In sum, the passage of the IFCA will significantly change the landscape as it applies to UM/UIM bad faith law in New Jersey. We anticipate a higher volume of bad faith claims being filed, as well as significantly more bad faith claims requiring litigation through discovery and potential trial. Moreover, given the undefined terms under the IFCA, a significant amount of litigation will arise simply to have the courts define the applicable terms for a cause of action under the statute. The interpretation and application of this statute will be constantly evolving and we will stay at the forefront of this issue to protect the interests of our insurer clients.
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Kurt H. Dzugay, Partner
Colin P. Hackett, Managing Partner - Newark, NJ
Afsha Noran, Partner