The New Jersey Insurance Fair Conduct Act: Thoughts on How Recent Cases Interpret and Define the Contours of the Act | Chartwell Law

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The $1.88 million jury verdict in a New Jersey underinsured motorist (“UIM”) claim, Kelley v. Massachusetts Bay Insurance Company, No. 19-cv-19037 (D. N.J. May 13, 2022) drew headlines in legal and insurance media recently. One article suggested that the insurer defendant might be facing treble damages and be ordered to pay Kelly’s attorney fees under the newly enacted New Jersey Insurance Fair Conduct Act, N.J.S.A. §17:29BB-1, et seq. Kelley had received the $50,000 policy limits from the tortfeasor, and the trial concerned Kelley’s UIM claim under her employer’s motor vehicle policy which had $1,000,000 in UIM benefits.  The highest offer allegedly made before trial was $350,000.00.

Kelley’s attorney was quoted as stating that Massachusetts Bay allegedly showed bad faith by more than merely failing to settle for a reasonable amount. Kelley’s attorney alleged that Massachusetts Bay engaged in dilatory and abusive claims handling by requesting irrelevant records, failing to keep the insureds apprised of the status of the claim at proper intervals, and harassing the insured with character attacks. “There was an issue as to how they conducted themselves during discovery, issuing a subpoena, last-minute attempts at identifying new witnesses, that was done within days of the trial,” Kelley’s attorney was quoted as saying. The insurer denies wrongdoing.

This sounds very chilling to insurers. But how might Kelley’s statutory bad faith case under the new Act pan out?  Kelley brought her claim under the Act in January 2020 by pleading the bill that did not become effective until it was enacted and signed by the Governor on January 18, 2022, a span of 2 years. The Complaint alleges boilerplate violations of the unfair claim settlement practices provisions of the Insurance Trade Practices Act, N.J.S.A. § 17:29B-4(9) as well as a common law bad faith claim. No private right of action previously existed under the Insurance Trade Practices for violations of the unfair claims settlement practices provisions until the Fair Conduct Act was enacted. The court stayed the bad faith claims pending the outcome of the UIM case. Therefore, discovery is not complete as to the facts of the alleged bad faith claim.

The parameters of Insurance Fair Conduct claims are just starting to be defined by the courts. However, there are some observations that can be made about Kelley based upon the handful of decisions and the language of the Fair Conduct Act itself.

The first issue is whether a UIM claim that arose prior to the Fair Conduct Act’s January 18, 2022, effective date is subject to the Act. Kelley’s accident occurred on August 2, 2016, and suit was filed on October 16, 2019. The two courts known to have considered the issue have held that the Act is not retroactive. See Cooper v. Zuziak, No. CAM-L-585-21 (N.J. Super, Law Div. Mar. 18, 2022) (Denying leave to add a Fair Conduct Act claim, reasoning “The Act was signed into law on January 18, 2022, and states, ‘This act shall take effect immediately.’ The Court agrees with defendants’ argument that this language suggests that the Act applies to claims that arise immediately after the effective date of the Act. Therefore, the Act does not apply to plaintiff’s claims and the proposed amendment would be futile. The New Jersey Supreme Court has held statutes and laws that are written to ‘take effect immediately’ means they apply to claims that arise after the effective date.”); Mosquera v. Vazquez, No. MRS-L-0860-21 (N.J. Super. Law Div. Mar. 10, 2022) (Denying leave to amend complaint, finding that “Here, the Court finds nothing to suggest or support that legislative intent is expressed for this law to apply retroactively. The Court also finds nothing to suggest that the parties’ expectations justify retroactive application. This statutory scheme did not even exist when the July 5, 2019, accident at issue took place. Lastly, there is nothing to support that the New Jersey Insurance Fair Conduct Act was intended to be ameliorative or curative. To the contrary, it appears to this Court that this law was implemented to provide greater relief for prospective applicants.”). Thus, credible arguments can be made that the Act does not apply to the Kelley case at all. Even if the Court holds the Act does apply to the Kelley case, at most, only the insurer’s conduct from January 18, 2022, through the verdict, May 13, 2022, could possibly be considered to have violated the Act.

That raises the second issue – can an insurer’s conduct during litigation be the predicate for a claim under the Act? The Act does NOT have specific language regulating an insurer’s conduct during litigation. Among the litigation conduct alleged to be bad faith is Massachusetts Bay’s requesting allegedly irrelevant records and naming witnesses and issuing subpoenas on the eve of trial. However, civil and evidentiary procedure are governed by state and federal Rules of Civil Procedure and Rules of Evidence, court scheduling orders and the inherent powers of judges to manage their cases. Can something permissible under the Court Rules and that is ordered or allowed by a judge be bad faith?

Other jurisdictions that have considered this issue have held that alleged discovery violations during litigation on the underlying claim are not actionable as insurance bad faith. See e.g., Berg v. Nationwide Ins. Co., 189 A.3d 1030 (Pa. Super. 2018) (discovery violations do not constitute bad faith litigation conduct); Dubois Country Club v. Depositors Ins. Co., No. 3:19-cv-190, 2021 U.S. Dist. LEXIS 209473, at *22-23 (W.D. Pa. Oct. 29, 2021) (Citing Berg in observing that Pennsylvania’s bad faith statute is: “designed to provide a remedy for bad faith conduct by an insurer in its capacity as an insurer … not as a legal adversary in a lawsuit filed against it by an insured” and O’Donnell ex rel. Mitro v. Allstate Ins. Co., 1999 PA Super 161, 734 A.2d 901, 907 (Pa. Super. 1999) for declining to find bad faith where an insured alleged that during discovery, the insurer requested unnecessary information and information that had already been submitted to it.)

The rationale for finding that discovery violations and litigation conduct are not bad faith is that remedies exist for such conduct under the Rules of Civil Procedure. There is authority for making the same argument in New Jersey in light of New Jersey’s Constitution which provides that, “The Supreme Court shall make rules governing the administration of all courts in the State and, subject to the law, the practice and procedure in all such courts.”  N.J. Const., Art. VI, Sec. II, §3.  The New Jersey Supreme Court has interpreted this constitutional provision as meaning that the Supreme Court has exclusive and plenary power to promulgate rules governing practice and procedure in New Jersey’s courts, as distinguished from matters involving substantive law.  George Siegler Co. v. Norton, 8 N.J. 374, 381, 86 A.2d 8, 12 (1952).

Thus, it can be argued that if discovery and litigation practices that are permissible under the New Jersey Rules of Civil Procedure were considered to be bad faith, the Fair Conduct Act would be in conflict, either directly or by necessary implication, with the New Jersey Rules of Court promulgated by the Supreme Court of New Jersey pursuant to its authority under the New Jersey Constitution. Constitutional authority generally prevails over statutory authority. In other words, argument can be made that something that is permitted under state or federal court rules cannot be bad faith under the Act as a matter of law because the New Jersey Supreme Court regulates such matters and the New Jersey Assembly can’t enact laws that override the Supreme Court’s Constitutional authority. In cases of a federal judge or jury making determinations under the New Jersey bad faith statute, the Federal Rules of Civil Procedure preempt New Jersey law on this issue and/or if the court is sitting in diversity, state rules concerning certain matters are to be implied in cases where federal jurisdiction is based on diversity or if the court is exercising supplemental jurisdiction.

Assuming that Kelley and other plaintiffs pass these hurdles, the Act creates a statutory cause of action that affords a “claimant” seeking UM/UIM coverage, who is either (1) “unreasonably denied a claim for coverage or payment of benefit” or (2) “who experiences an unreasonable delay for coverage or payment of benefits,” a civil cause of action against the responsible insurance company. The Act further authorizes a claimant to seek redress for related violations to the New Jersey Unfair Claims Settlement Practices Act, N.J.S.A §.17:29B-4.   Such violations include, a pattern or practice of a carrier failing to promptly communicate and investigate a claim, failing to issue a coverage determination within a reasonable time, refusing to pay claims without conducting a reasonable investigation based upon all available information, and compelling policyholders to institute litigation in pursuit of their claims.

Thus, the preliminary predicate to an insurer being liable under the Fair Conduct Act is that the insured must first prove that the insurer’s conduct was unreasonable. The Act does not define “unreasonable.” Whether courts will apply New Jersey’s common law bad faith standard for reasonableness as espoused in Pickett v. Lloyds, 131 N.J. 457 (1993) is undecided.

The Act contains no express right to a jury trial. Whether Fair Conduct Act litigants have a right to a jury trial is also undecided. Whoever decides Kelley’s Fair Conduct Act claim may determine that Massachusetts Bay’ adjuster had a reasonable basis for only offering $350,000 to settle the UIM claim. It may turn out that the finder of fact decides that the insurer had a reasonable basis to believe or not believe certain witnesses in the Kelley case and the jury chose to believe otherwise in rendering its verdict. Kelley could have also introduced new evidence at trial that the insurer did not have available to it when it made its offer, so that the $350,000 offer was reasonable based upon the claim as presented.

The Act’s damages only apply if an insurer is found to have acted unreasonably. While the treble damages threat sounds ominous, what the Act actually says is:

“Upon establishing that a violation of the provisions of this act has occurred, the plaintiff shall be entitled to:

(1) actual damages caused by the violation of this act which shall include, but need not be limited to, actual trial verdicts that shall not exceed three times the applicable coverage amount; and

(2) pre- and post-judgment interest, reasonable attorney’s fees, and reasonable litigation expenses.”

Thus, the proper measure of damages is “actual damages caused by the violation of [the Fair Conduct] act” and interest, attorneys fees and litigation expenses.

The pain and suffering, medical expenses and wage loss caused by the underlying motor vehicle accident arguably are not “actual damages caused by the violation of [the Fair Conduct] act.” Such injuries were caused by the accident and are compensated in an award or verdict or settlement of the underlying UIM claim for policy benefits. Below is the actual jury verdict sheet for the $1.88 million Kelley verdict:

‍Kelley’s attorney reportedly stated that Massachusetts Bay’s failure to settle Kelley’s UIM claim before trial for the $1 million in UIM policy limits was a violation of the Fair Conduct Act. One article quoted Kelley’s attorney as suggesting that Kelley could recover “treble damages and attorneys fees.” But a close reading of the Act’s language indicates that it could be argued that the plaintiff’s “actual damages caused by the violation of the act” do not include the $876,650.98 of the verdict that is in excess of the $1 million policy limit because the excess verdict is not a damage caused to the plaintiff – it is a damage caused to the insurer. In the third party claim context, an excess verdict is a damage caused to a plaintiff who is liable to pay that verdict. UM/UIM claims are first party claims. The reference to verdicts in the damages section of the Act may be a vestige of an earlier draft of the Act that would have applied the Act to all insurance claims. The plain language of the Act does not speak of trebling the total amount of verdicts. Rather the Act says: “the plaintiff shall be entitled to: (1) actual damages caused by the violation of this act which shall include, but need not be limited to, actual trial verdicts that shall not exceed three times the applicable coverage amount . . . “ It imposes a cap on damages, not an automatic right to a tripling of the verdict on a UM/UIM claim.

Plaintiffs will undoubtedly claim they are entitled to a trebling of verdicts until New Jersey courts interpret the term “caused” in the Act. Any trebling of verdicts is limited to three times the applicable coverage amount, not three times the verdict. In Kelley, the policy had a single limit of $1 million in UIM benefits available. Even if Kelley’s attorney is correct that Kelley is entitled to “treble damages” such an award could at most be $3 million, not $5.64 million (3 x $1.88 million).

In Kelley, the verdict did not exceed three times the $1 million in UIM policy limits. But what if Kelley had only had $100,000 in UIM limits? Then per her attorney’s theory, the trial verdict portion of Kelly’s damages allegedly caused by a violation of the Act would be limited to $300,000 (the $1.88 million verdict molded to 3 times the $100,000 policy limit). In other words, on the UIM portion of her claim, Kelley could recover the $100,000 in UIM policy limits but only $200,000 additional under the Act.

In theory, “actual damages caused by the violation of this act” also could include damages other than the excess portion of the verdict. But in reality what could those other damages be? Interest, attorneys fees and litigation costs? These items are already allowed by the Act. So what other things could possibly constitute actual damages caused by the violation of the Act? Interest, foreclosure or late fees charged by credit cards or lenders or medical providers to the insured due to missed or late payments caused by the insurer not paying properly documented wage loss claims or medical expenses? Damages for emotional distress or defamation during the pendency of the claim and litigation? Worsened physical health due to the inability to receive treatment that was not considered in the UIM claim? The Act does not set a lower standard for the recovery of such personal hardship damages as does the New Jersey Law Against Discrimination, meaning that expert testimony on behalf of the plaintiff likely would be required to prove them. The litigation privilege allows a party to vigorously defend itself – sharp questioning/defense tactics may not be defamatory as a matter of law. Again, these are questions that need to be addressed by New Jersey courts.

Whether all of the things that Kelley claims are bad faith under the Fair Conduct Act remain unanswered questions to be decided by New Jersey courts.

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