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Thursday, February 28, 2013

'Bad faith' bill is bad policy for New Jersey

S-2460, the covertly dubbed “Consumer Protection Act of 2012,” is a new lease on trial lawyers’ attempt to create a new cause of action for ‘bad faith’ (S-766/A-3434).

That bill, S-2460, is now scheduled for a hearing on Monday, March 4th, in the Senate Commerce Committee. 

Proponents argue that this bill will help policyholders who have been affected by Superstorm Sandy by codifying existing case law, protecting their right to sue insurance companies who fail to pay claims to which they are entitled.  In reality, it adds uncertainty and greater consumer costs to New Jersey's homeowners' insurance market:
  • Very few victims of Sandy will be helped.  Those who lacked flood coverage, had inadequate coverage limits, or could not afford their deductible could not file suit under this bill.
  • Policyholders would be able to recover damages in excess of the terms of their insurance contract.  In addition, they would be able to file for attorneys' fees, court costs, and prejudgment interest dating to the time the suit was filed.   
  • All New Jersey insurance customers, including businesses which purchase commercial insurance, will pay higher insurance premiums as a result.

And as we noted last month, many of us opt for lower premiums in exchange for higher deductibles.  Others quickly sign on the dotted line and hope we never meet the devil lurking in the details.  But when the worst happens, as many New Jerseyans experienced late last year, customers expect their insurer to cover their losses as defined in their coverage. 

New Jersey Manufacturers Insurance Co. (NJM) CEO Bernie Flynn told a legislative committee last month that they expect payouts to reach $300 million.  State Farm has made a point of expediting their 30,000 Sandy-related claims.  On some occasions, however, an insurer may fail to live up to their end of the agreement and deny payment to a customer.  New Jersey consumers are able to file suit against their insurer in these instances.  But recently reintroduced legislation threatens to add more bureaucracy and litigation into an already stressed civil justice system. 

S-2460, the covertly dubbed “Consumer Protection Act of 2012,” is a new lease on trial lawyers’ attempt to create a new cause of action for ‘bad faith’ (S-766/A-3434).  It wouldn’t simply codify existing case law with respect to ‘bad faith;’ rather, a court would only need to find that an insurer acted ‘unreasonably’ in order to win a bad faith case, adding subjectivity and the potential for awards beyond one’s coverage. 

Acting Department of Banking and Insurance commissioner Kenneth Kobylowski noted that New Jersey’s strong homeowners’ insurance market had rates near the national average despite having property values among the highest in the country. 

"To have average premiums in the middle of the marketplace is just a testament to how stable, how competitive and how well-run our homeowners' market is," he told NJ BIZ

But if the cost of doing business increases for New Jersey’s insurance industry, we can all expect our premiums to rise. 

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