Two New Jersey Assemblymen, Messrs. Reed Gusciora and Timothy J. Eustace, have proposed a bill to the state legislature which would have a significant impact on insurers’ extra-contractual exposure.

Bill A-4382 proposes to provide insureds with a private cause of action against insurers for unfair settlement claims practices in violation of New Jersey Statute 17:29B-4, irrespective of whether the insurer committed the violations with enough frequency as to indicate a general business practice. The law would apply only to claims arising out of a declared disaster, which is defined as “any natural, technological, or civil emergency that causes damage of sufficient severity and magnitude to result in a declaration of a state of emergency by the Governor [of New Jersey] or the President of the United States.”

If passed, the bill would take effect immediately and would apply to all claims filed on or after October 1, 2012, including all Superstorm Sandy claims. The applicable violations include, but are not limited to, actions such as:

(1) Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;

(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

(3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;

(4) Refusing to pay claims without conducting a reasonable investigation based upon all available information; and

(5) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.

Under the bill, if the claimant can establish such a violation, the claimant is entitled to:

(1) The full amount of damages set forth in the final judgment, regardless of the coverage limits of the policy;

(2) Prejudgment interest, reasonable attorney’s fees, and all reasonable litigation expenses from the date of the institution of the action filed pursuant to the provisions of the bill; and

(3) Punitive damages, when the insurer’s acts or omissions demonstrate, by clear and convincing evidence, actual malice or wanton and willful disregard of any person who foreseeably might be harmed by the insurer’s act or omissions.

The bill further clarifies that it is not intended to narrow or limit the already existing rights of insureds under established New Jersey case law to, assert a private cause of action for bad faith against an insurer. See Pickett v. Lloyd’s, 131 N.J. 457, 470, 621 A.2d 445 (1993). In Pickett the court established the test for determining “bad faith,” finding that “a plaintiff must show the absence of a reasonable basis for denying benefits of the policy.” Once a plaintiff demonstrates the absence of a reasonable basis, plaintiff must then prove the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim. The Pickett court clarified this test, explaining that an insurance company does not act in “bad faith” if the plaintiff’s insurance claim was “fairly debatable.” Under the “fairly debatable” standard, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad faith refusal to pay the claim.

We shall continue to monitor the bill’s status and will advise you of any updates.