NJ’s Bad Faith Legislation Stemming From Superstorm Sandy Needs Emergency Relief

By Jeffrey M. Winn and Ryan C. Chapoteau, Sedgwick New York

In the wake of Superstorm Sandy, the New Jersey Legislature is considering the passage of A3710, which will enable policyholders to sue insurers for bad faith based on a single alleged violation of the New Jersey Insurance Trade Practices Act, NJSA § 17:29B-1, et seq.

The proposed legislation is unnecessary and will just promote more litigation, delay the resolution of first-party claims, disturb New Jersey’s current landscape of thoughtful and termperate common law remedies, and result in higher premiums for all policyholders. Although the proposed legislation may be a boon for lawyers, it likely will be a losing proposition for virtually everyone else.

Prior to Superstorm Sandy, the New Jersey Legislature and the courts had carefully crafted a comprehensive framework of rules, causes of action, and damages measures which have adequately protected the public against the bad faith claims settlement practices of insurers.  For example, in Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 323 A.2d 495 (1974), the New Jersey Supreme Court prescribed a cause of action that protects policyholders from excess verdicts.  In Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (1993), the Supreme Court conducted a thorough national survey of insurance bad faith decisions before adopting the centrist “fairly debatable” test for New Jersey first-party bad faith claims, thereby rejecting the extreme standards that prevail in some jurisdictions.

While New Jersey already permits policyholders to recover extra-contractual damages against insurers, both the Legislature and courts have adroitly balanced the competing interests.  The Supreme Court in Pickett posited that, when the policyholder has demonstrated that the insurer has engaged in bad faith, the policyholder may recover consequential damages (including attorneys’ fees) and punitive damages.  On liability insurance disputes, prevailing policyholders are generally permitted to recover their costs and fees if they can satisfy the elements of New Jersey Civil Practice Rule 4:42-9(a)(6).  Thus, the remedies are in place and the public is adequately protected.

Policyholder attorneys dislike the Pickett standard because it requires a showing of “gross negligence” by the insurer.  This middle-of-the-road standard eschews the extreme liberal standard of simple negligence advocated by policyholder attorneys, and the extreme conservative standard of “intentional wrongdoing” favored by some insurance industry advocates.  In adopting the Pickett standard, the Supreme Court sent the strong message that bad faith claims should not be a routine add-on to the typical insurance coverage dispute, but should be reserved for sufficiently reckless conduct by the insurer.  The Supreme Court was clear that, to make out an actionable bad faith claim, “simple negligence” is not enough.

The proposed legislation will eviscerate the time-honored Pickett standard.  If enacted, the legislation will unsettle the New Jersey insurance market by equating bad faith with simple negligence, thus making bad faith claims commonplace in most first-party cases.  In the interest of maintaining a stable insurance market in New Jersey, the proposed legislation should not be adopted.

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