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The New Jersey legislature is weighing a bill that would allow policyholders to collect triple damages and attorneys' fees from insurance companies found liable for unfair business practices.  Clark & Fox Partner Michael Savett is quoted in a Law360 article about the bill.  See the full article below:


NJ Bill May Open Floodgates For Insurance Bad Faith Claims
By Jeff Sistrunk

Law360 (June 28, 2018, 12:55 PM EDT) -- The New Jersey Legislature is weighing a bill that would allow policyholders to collect triple damages and attorneys' fees from insurance companies found liable for unfair business practices such as unreasonable coverage delays or denials, and attorneys say the whopping potential penalties could spur an explosion in bad-faith claims if the measure becomes law.

On June 7, the state Senate voted 21-14 to approve S2144, dubbed the New Jersey Insurance Fair Conduct Act, sending it to the General Assembly for consideration. The measure is currently before the Assembly's Financial Institutions and Insurance Committee.

The bill would create a new statutory cause of action permitting policyholders to file civil suits against first-party insurers — such as property and auto carriers — for unreasonable delays or denials of benefit payments or any violations of a New Jersey statute forbidding a wide range of unfair or deceptive practices.

Perhaps the most alarming component of the bill for insurance companies is the enhanced penalties it would establish. An insurer that loses a suit brought under the Insurance Fair Conduct Act would be on the hook for the claimant’s actual damages, plus treble damages, prejudgment interest, attorneys' fees and court costs.

According to insurance lawyers interviewed by Law360, if the bill garners the Assembly's stamp of approval and is signed into law by New Jersey Gov. Phil Murphy, it could lead to a surge of bad-faith claims. If that comes to pass, some insurers may opt to increase premiums, limit their coverage offerings or exit the market altogether to compensate for the heightened legal exposure, attorneys say.

“Over time, New Jersey has done a good job of balancing the interests of insurers and policyholders in the fair resolution of claims," said Jack Vales, a partner in Dentons' litigation and dispute resolution group, who represents insurance companies. "This proposed legislation, however, threatens to upend this balance, and to sharply tilt the scales against the interests of responsible insurers. Ultimately, such change in the law would cause harm to consumers by raising prices and creating less choice in the insurance marketplace.”

However, attorneys who represent policyholders say the bill is long overdue. While first-party policyholders can currently file common-law bad faith claims against insurers, such claims are difficult to prove, and a prevailing policyholder can only recover the withheld policy benefits and certain consequential damages tied to the insurer's breach, attorneys say.

“New Jersey law recognizes bad-faith claims in theory, but in practice the judiciary has made it tremendously difficult to prevail on such claims," said Sherilyn Pastor, leader of McCarter & English LLP's insurance coverage group. “As it stands, you are more likely to see Sasquatch than a bad-faith verdict in New Jersey.”

While the concept for a statutory bad-faith bill has been kicking around in New Jersey for more than a decade, support for such a measure has gradually picked up steam since Superstorm Sandy hit in October 2012, according to attorneys. That historic storm, which inflicted billions of dollars in damage in the Garden State, yielded countless coverage disputes between property owners and insurers.

“There were tons of first-party claims resulting from the storm, and because insurers knew it would be extremely difficult for policyholders to show bad faith, some of them didn’t behave the way they should have in handling those claims,” said Lynda A. Bennett, chair of Lowenstein Sandler LLP’sinsurance recovery group, who represents policyholders.

In order to succeed on a common-law bad-faith claim in New Jersey, a policyholder must show not only that its insurance company unreasonably delayed or denied a claim, but that the insurer knew that it was acting unreasonably. Under the New Jersey Supreme Court’s seminal 1993 decision in Pickett v. Lloyd’s, an insurer may be able to defeat a bad-faith suit if it can demonstrate that the existence of coverage for a claim was “fairly debatable.”

The Insurance Fair Conduct Act would lower the bar for claims premised on an insurer’s unreasonable coverage delay or denial by eliminating the need for a policyholder to show that the carrier had knowledge of its unreasonable conduct.

In addition, the bill would create a private cause of action for policyholders to sue insurance companies for violations of Section 17:29B-4 of the New Jersey statutes, which forbids a laundry list of unfair or deceptive activities, including false advertising and unfair claim settlement practices. At present, only the state’s insurance regulator, the Department of Banking and Insurance, can wield claims under the statute.

Critically, to prevail on an action alleging suspect settlement practices — which are enumerated in the section of the statute commonly referred to as the Unfair Claims Settlement Practices Act — the regulator is required to show that an insurer’s conduct is representative of an ongoing business practice. The proposed legislation, however, expressly states that a private litigant does not have to prove that the insurer’s actions “were of such a frequency as to indicate a general business practice.”

According to lawyers who represent insurance companies, the looser standards established by the Insurance Fair Conduct Act would expose insurers to bad-faith suits even when they make isolated, honest mistakes in assessing and handling claims. The Unfair Claims Settlement Practices Act sets forth more than a dozen types of prohibited conduct, presenting a multitude of potential stumbling blocks for insurers, attorneys say.

“In enacting the Unfair Claims Settlement Practices Act, the Legislature clearly did not intend for a minor, isolated mistake — a foot fault, if you will — to expose an insurer to claims under the act,” said Dentons’ Vales. “The proposed legislation, however, would incentivize plaintiffs' lawyers to seek out and advance such claims in litigation.”

Clark & Fox partner Michael Savett, who also counsels insurers, said the wording of the bill “creates more questions than it answers” and would engender uncertainty among New Jersey courts.

“For example, what is ‘unreasonable'?” Savett said. “The proposed legislation does not define that term. Under Pickett v. Lloyd’s, the standard is much more uniform. If the standard is lowered, it would become amorphous and vary from judge to judge and case to case.”

Furthermore, policyholders could weaponize the threat of treble damages and fee awards to wrest early settlements out of carriers, even if their bad-faith claims are weak, some attorneys say.

“The bill is vague and would represent a bonanza for plaintiffs' lawyers, who could use the new law to threaten insurers with awards of attorneys' fees and treble damages in order to extract settlements of even the most marginal of claims,” Vales said.

While the value of insurance settlements may increase if the proposed legislation is implemented, those costs would likely be passed along to policyholders in the form of higher premiums, said Clark & Fox’s Savett.

From policyholders’ perspective, though, the proposed penalties will serve as a powerful deterrent for recalcitrant insurance carriers.

“Those types of penalties will encourage insurers to meet claims appropriately and provide recourse to insureds who otherwise may be reluctant to pursue litigation, even when they are wrongfully denied coverage or their insurer wrongfully delays paying what is owed,” said Pastor of McCarter & English.

According to Pastor, insurers often take the position that unreasonable delays of benefit payments cannot support a bad-faith claim under the current common-law regime. Therefore, the Insurance Fair Conduct Act’s explicit recognition that an unreasonable delay is equivalent to an outright denial is important, she said.

“With some property claims, insurers may create excuses to delay paying for years, and then when they finally cut a check claim they haven’t done anything wrong,” Pastor said.

Lowenstein Sandler’s Bennett said that, while not every insurance claim “will or should include a bad faith claim,” the reforms presented in the bill are necessary because New Jersey Supreme Court precedent has “all but nullified bad faith claims in the state.”

“This bill is important because it would put bad-faith claims back on the table in cases where insurers’ claims-handling conduct really needs to be examined,” Bennett said.

--Editing by Rebecca Flanagan and Emily Kokoll.