The Brief Case: DRI Committee News

Insurance Law: Covered Events

Leadership Note from ILC Vice-Chair Jonathan Schwartz

By Jonathan Schwartz
Edited by Robert F. Friedman

Greetings fellow DRI members! I hope you are enjoying your summer.

The Insurance Law Committee proudly and eagerly encourages you to sign up for the 2022 Insurance Coverage Practice Symposium in New York City, December 7-9, 2022. We are lining up exceptional speakers on cutting-edge topics, but perhaps as important, we are bringing back the magic that is DRI in NYC during the holiday season. It’s the Tree at Rockefeller Center, the Rockettes at Radio City Music Hall, and Midtown Manhattan at its finest. We are excited to host you and offer the best insurance CLE around. What’s more, we are planning social and charitable events that will make for a truly memorable experience.

If the COVID-19 pandemic taught us one thing, it’s that online CLE fills the gap, but it’s no substitute for being around friends, clients, and potential new connections. In-person CLE is where it’s at, and nobody does it better than DRI. So, please join us in New York City for the Insurance Law Committee’s annual flagship conference – an event too special to miss.

Between now and December, if you have ideas for a webinar, podcast, or seminar presentation (we’ve already started planning for the 2023 Insurance Coverage and Claims Institute), please do reach out to me and share. We’d love to hear what’s on your mind and firmly on your radar.

Jonathan Schwartz, ILC Vice-Chair

Bad Faith SLG Leadership Note

By Matthew Lavisky
Edited by Robert F. Friedman

Does your practice include the defense or avoidance of bad faith claims? If so, and you are not a member of the Bad Faith SLG, you are missing out! The Bad Faith SLG meets regularly (generally every other month) by Zoom. The meetings usually include a featured speaker on a particular topic. For instance, earlier this year, we enjoyed a great presentation about expert witnesses in bad faith cases. In June, the presentation will focus on jury selection. In August, we expect to discuss statutory interpretation. The meetings are well-attended, interactive, and lively.

In addition to the educational benefits, these meetings provide members with opportunities to get to know others from the comfort of their offices. So, when members attend a larger conference (like ICCI or ICPS) there are many familiar faces. Getting involved in the Bad Faith SLG is a great way to interact with colleagues and make new friends in advance of these conferences.

The Bad Faith SLG also provides opportunities to be published in DRI’s fine publications.

Want to join? Please email me at mlavisky@butler.legal. We look forward to seeing you at the next meeting.

Matthew J. Lavisky is a partner in the Tampa office of Butler Weihmuller Katz Craig LLP.

Recent Developments in the Tort of Intrusion Upon Seclusion in Canada

By David R. Mackenzie

Edited by Robert F. Friedman

This year marks the ten-year anniversary of the release of the Ontario Court of Appeal’s decision in Jones v. Tsige (2012 ONCA 32). That decision, which, for the first time, recognized the existence of the tort of Intrusion upon Seclusion in the Province of Ontario, was a watershed in the development of privacy torts and privacy litigation in Canada. Developments continue and the contours of privacy torts are coming into clearer view. At the same time as privacy torts have been experiencing their Canadian Renaissance, data breach class action litigation has also been coming to the fore. Review of recent case law shows that the law is far from finished in its evolution. While there are questions that remain unanswered, it is becoming increasingly clear that common law privacy torts are going to be interpreted restrictively and may not be the primary driver of data breach class action litigation in this country, as once may have been believed.

The recent Stewart v. Demme (2022 ONSC 1790) decision of the Ontario Superior Court of Justice (Divisional Court) continues this development. At issue in Stewart was certification of a putative class action arising out of the conduct of a nurse who had been employed by a hospital between 2007 and 2016. During the course of her employment, she stole 24,000 Percocet pills by improperly accessing the individual records of thousands of patients. In so doing, she had the ability to view the patient’s name, identification number, the hospital unit they had visited, and if applicable, any allergy information. Sometimes medication taken during the last 32 hours would also be on the screen she had accessed.

However, viewing patient information was not her purpose. By accessing patient files, the nurse could open a drawer containing Percocet. That was her sole goal in accessing the patient files. The Certification Court found:

…it stands to reason that she was interested in obtaining opioids, not information or knowledge of a patient's file. There is no evidence, nor is there reason to suspect, that Ms. Demme pursued any patient records beyond what was needed to open the medication dispensing drawer. She was, by her own admission, a drug addict; she improperly accessed these records to feed her craving for narcotics, and not to satisfy any other need for patients' health information.

The case against the hospital was certified in the first instance on the basis that while “access to each patient's data may have been ‘fleeting’ does not mean that the nature and quality of that information is unimportant.” Functionally, any improper intrusion on Personal Health Information should be considered “highly offensive,” thereby satisfying a key element of the test for Intrusion on Seclusion set out in the Jones case (the three-part test being: (1) the defendant's conduct must be intentional; (2) the defendant must have invaded, without lawful justification, the plaintiff's private affairs; and (3) a reasonable person would regard the invasion as highly offensive causing distress, humiliation or anguish).

On appeal, the Divisional Court disagreed that the putative class could succeed in establishing the tort in the circumstances. According to the Court, the Intrusion on Seclusion tort is narrowly applied by design:

… designed to offer a remedy in situations where the privacy intrusion is very serious, not any privacy intrusion. Hence the need for the intrusion to be significant and deliberate and the need for an objectively reasonable person to view the intrusion as highly offensive, "causing distress, humiliation or anguish." The fact that this is a "no actual damages tort" means that it should only be available in particularly serious instances.

The Court acknowledged that Personal Health Information was worthy of protection, but also found that the nature of the intrusion was also a critical element of the test. There is no standard in Ontario that says that any intrusion upon Personal Health Information will be, by its nature, “highly offensive.” Here, the intrusion was fleeting, the information was not particularly sensitive by health information standards, and the intruder was not actually seeking to obtain any of that information. There was “no discernable effect on the patients.” Thus, the Certification on the intrusion upon seclusion issue was not certified.

This continues a pattern established in a series of decisions delineating, functionally, what the tort is not. Del Giudice v. Thomson a 2021 (ONSC 5379) arose out of the Capital One data breach. There, Capital One was storing data with Amazon Web Services. An employee of Amazon Web Services accessed data pertaining to more than 100 million people (including as many as 6 million Canadians). The hacker, Capital One, and Amazon Web Services were all named as defendants in a putative class action. The Ontario Superior Court refused to certify the claim pertaining to intrusion on seclusion as against the two corporate defendants on the basis that they themselves were not alleged to have intruded on the seclusion of putative class members, nor did they act in a highly offensive manner as required by the tort: As the Court stated, a failure to prevent an intrusion, even a reckless failure to prevent, is not an intrusion:

First, it was Ms. Thompson who was the intruder. Capital One and Amazon Web are alleged to have increased the risk of a data breach or to have failed to prevent the data breach. A failure to prevent an intrusion, even a reckless failure to prevent, is not an intrusion.

Further, the conduct of the two corporate entities was not “highly offensive.” At most, they made mistakes in efforts to safeguard information that was not particularly sensitive.

The same Court extended this rationale in Winder v. Marriott International Inc,. which was another data hacking class action certification case. The Court acknowledged that a new and interesting argument was being advanced. In short, counsel argued that Marriott had collected and preserved personal data from people who had not consented to such collection and preservation. That information was hacked, and personal information was extracted from Marriott’s systems. The collection of data was alleged to have been “reckless,” in that it was collected under allegedly false pretenses. This, it was asserted, made Marriott the equivalent of an “intruder” in the sense that it had intruded on the putative class members privacy with the result that the hacker was subsequently able to intrude upon the seclusion of individuals. Marriott’s conduct was, then, argued to be both intrusive and highly offensive. The Court, while sympathetic, rejected the argument for a number of reasons.

First, at most, Marriott might have been a “constructive intruder,” and the tort did not extend to include constructive intruders. Second, there was no need to expand the tort to include constructive intrusion. When the Court of Appeal acknowledged the existence of the tort in Jones, it expressly stated that the tort was intended to fill a gap in the law, not create a comprehensive new avenue to obtain remedies that already existed under other causes of action. Negligence, breach of confidence, breach of fiduciary duty, breach of contract and breach of statute could address the circumstances at issue in Winder. Further, the Court explained that extending the tort to encompass losses better captured under these other causes of action might “open the floodgates” of litigation:

…there is no gap in the law of privacy that needs to be filled by extending the nature of intruders. The tort of intrusion on seclusion is not needed to extend liability to defendants who obtain information by false pretenses or by breaching contractual promises or by failing to comply with statutorily imposed privacy safeguards. The law associated with negligence, breach of confidence, breach of fiduciary duty, breach of contract, and breach of statute address or could address the pleaded circumstances of the immediate case.
The case was, factually and legally, not sufficiently distinguishable from other decisions of the courts (including Del Giudice), such that the Court could depart from established precedent.

In summary, these cases demonstrate that the tort of intrusion upon seclusion will have an increasingly narrow footprint in the development of class action privacy litigation going forward. The tort resists broad application and is increasingly acknowledged to be fact dependent. There are not categories of information that will, in and of themselves, justify application of the tort. While there are classes of information that may be more likely to attract the protection of the tort, the scope, nature and extent of the intrusion will be material to the determination as to whether the tort will apply. Further, it is increasingly clear that an entity that did not, itself, perpetrate the intrusion cannot be the subject of the tort, even if that entity acted with a lack of care in the protection of information.

It is increasingly apparent that intrusion upon seclusion has become a dead-end for class counsel seeking to advance broad class action claims in Ontario, except in narrow and rare circumstances. It is likely that we may see other avenues of attack advanced against organizations that lose control of sensitive Personal Identifiable Information or Personal Health Information (expansion of existing torts of negligence and breach of confidence come to mind, as do certain statutory avenues, including British Columbia’s Privacy Act, which may be more amenable to the kinds of claims being advanced). As one door may be closing, other doors may now be tested.

David R. Mackenzie is a partner in Blaney McMurtry’s Insurance Coverage Counsel Group, located in Toronto. His practice focuses on coverage issues arising from Cyber, CGL, Property, Professional Liability and Specialty coverage forms. He sits on the Board of Canadian Defense Lawyers and is a member of DRI and the FDCC.

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Insurance Law: Covered Events (Cont.)

Texas Courts are now Considering Extrinsic Evidence with Respect to the Duty to Defend

Immediate Impact Appears to be More of the Same: Artful Pleading Still Seems to Work

By Robert D. Allen
Edited by Robert F. Friedman

On February 11, 2022, the Texas Supreme Court issued its long-awaited decision analyzing an insurer’s duty to defend under Texas law in Monroe Guaranty Ins. Co. v. BITCO General Ins. Corp, 640 S.W.3d 195 (Tex. 2022). In Monroe Guaranty, the Court announced: “Today, we expressly approve the practice of considering extrinsic evidence in duty to defend cases.” Id. at 201. In so doing, the Court then articulated a new rule for deciding when extrinsic evidence can be considered, which is when:

1. the petition alleges “a claim that could trigger the duty to defend,”
2. a “gap” in the petition makes it unable for the court to determine whether coverage exists by applying the eight-corners rule,
3. the facts the extrinsic evidence relates solely to the coverage issue and do not overlap with the liability merits,
4. those facts do not contradict facts alleged in the petition, and
5. the extrinsic evidence “conclusively establishes the coverage fact to be proved.”

Id. at 202.

In Monroe Guaranty, undisputed extrinsic evidence established that an event causing property damage took place prior to the inception of Monroe Guaranty’s policy. Id. at 197-98. Nonetheless, the Monroe Guaranty Court held that the proffered extrinsic evidence of the stipulation of the date that an event occurred could not be considered because it overlapped with the merits. In this regard, the Monroe Guaranty Court opined:

A dispute as to when property damage occurs also implicates whether property damage occurred on that date, forcing the insured to confess damages at a particular date to invoke coverage, when its position may very well be that no damage was sustained at all.

Id. Accordingly, the Monroe Guaranty Court refused to consider the extrinsic evidence that could have exculpated the insurer from providing a defense and held that the insurer owed its insured a duty to defend. Id. at 204.

In the 3½ month aftermath of the issuance of the Monroe Guaranty opinion, the issue of whether to consider extrinsic evidence in determining the duty to defend has been analyzed by four courts. The immediate takeaway is that, on the one hand, for three of the cases, the new rule does not change anything—e.g., artful pleading to manufacture a duty to defend appears to be alive and thriving—however, on the other hand, the use of extrinsic evidence appears to be well-suited to deal with situations such as a claim against an insured predating the inception of a claims-made policy.

For example, simultaneously with the issuance of its Monroe Guaranty opinion, the Texas Supreme Court handed down its decision in Pharr-San Juan-Alamo Independent School Dist. v. Texas Political Subdivisions Property/Casualty Joint Self-Ins. Fund, 642 S.W.3d 466 (Tex. 2022), which refused to consider extrinsic evidence and applied the eight-corner rule to conclude that the allegations that an accident involving the negligent use of a golf cart did not allege a claim for coverage under the auto policy. Id. at 477. On this point, the Pharr-San Juan Court held that none of the Monroe Guaranty factors permitted such extrinsic evidence consideration because no gap existed in the pleadings. Id. at 477-78.

Shortly after Monroe Guaranty was decided, Dallas federal district judge Jayne Boyle was presented with the situation as to whether to consider extrinsic evidence in determining the duty to defend in Knife River Corp.—South v. Zurich American Ins. Co., 2022 WL 686625 (N.D. Tex. 2022). Knife River involved a declaratory judgment action over whether an insurer provided coverage to a putative additional insured, Knife River. Id. at *2. As it related to the duty to defend, the insurer wanted to introduce extrinsic evidence of a subcontract to demonstrate that Knife River did not qualify as an additional insured under the operative policy. Id. at *9.

On these facts, District Judge Boyle analyzed Monroe Guaranty and she refused to consider the subcontract as extrinsic evidence to determine the duty to defend because the subcontract involved allocating responsibility for the placement of a sign, which the court ruled overlapped with the merits of whether Knife River was liable. Id. at *8. Resorting to a strict 8-corner analysis, the court denied the insurer’s motion to dismiss on the basis that it did not owe a duty to defend. Id. at *10.

In the first artful pleading case considered post-Monroe Guaranty, another Dallas federal district judge, Sam A. Lindsay, did not even cite to Monroe Guaranty in finding a duty to defend in Certain Underwriters at Lloyd’s London v. Keystone Development, LLC, 2022 WL 865891 (N.D. Tex. 2022). Keystone Development involved a situation where the operative policy insuring a condominium developer contained an exclusion that precluded coverage for projects consisting of over 25 units, however, there were 39 units in the particular development. Id. at *2. After receiving the insurer’s motion for summary judgment that no duty to defend existed based on this exclusion, the plaintiff in the underlying construction defect case artfully amended its pleadings to allege that the development consisted of two projects, one with 24 units and the other with 15 units. Id. at **2, 4.

District Judge Lindsay refused to apply the pre-Monroe Guaranty rule allowing utilization of extrinsic evidence in determining the duty to defend for collusive efforts to manufacture a duty to defend that was announced in the 2020 Texas Supreme Court opinion in Loya Ins. Co. v. Avalos, 610 S.W.3d 878 (2020). Although he alluded to “different exceptions to the eight-corners rule,” Keystone Development, 2022 WL 865891 at *2, District Judge Lindsay did not analyze the new test in determining a duty to defend as announced in Monroe Guaranty. Rather, he rejected the applicability of the Loya rule allowing the use of extrinsic evidence to defeat a collusive effort to manufacture a duty to defend because there was no evidence to implicate the insured in the “Plaintiff’s alleged fraud.” Keystone Development, 2022 WL 865891 at *2.

Left with a strict eight-corner analysis, the court held that the live pleadings circumvented the exclusion for projects over 24 units and thus, the insurer owed a duty to defend. Id. at **2, 6. Additionally, the court ruled that the proffered extrinsic evidence “problematically overlap[ped] with the merits of the facts alleged in the live petition.” Id. at *6. In this regard, District Judge Lindsay held:

The extrinsic evidence pointedly questions the number of units and the number of floors or height of each unit and impermissibly engages in the truth or falsity of the facts alleged in the second amended petition. Id.

The only case decided post-Monroe Guaranty that so far has actually considered extrinsic evidence in holding that the duty to defend did not exist, Drawbridge Energy US Ventures, LLC v. Federal Ins. Co., 2022 WL 991989 (S.D. Tex. 2022), involved a claims-made policy and extrinsic evidence, i.e., the “Keybridge Letter,” showing that the claim was first made against the insured during the prior policy period to the policy at issue. Under this scenario, Houston federal district judge Andrew Hanen held:

The Court concludes that the Keybridge Letter falls within the Monroe exception and may be considered as extrinsic evidence. First, the letter goes solely to the coverage issue of when the claim was first made and does not overlap with the merits of liability. Second, it does not contradict facts alleged in the underlying petition. Third, the letter conclusively goes to the heart of the pivotal issue, as it evidences that the claim against the Plaintiffs was first made prior to the inception of the policy period. Thus, the Keystone Letter may be considered in determining whether [the insurer] had a duty to defend [the insured] under the policy. [Citation to Monroe Guaranty].Id. at 5.

So, at this early stage in the post-Monroe Guaranty world, it is hard to predict how and when Monroe Guaranty will be applied to allow the consideration of extrinsic evidence in determining the duty to defend. For example, extrinsic evidence was not utilized to analyze allegations of an amended petition worthy of admission into the artful pleading hall of fame in Keystone Development. Also, extrinsic evidence was rejected in Monroe Guaranty, Knife River and Keystone Development because the extrinsic evidence overlapped with the merits of the case. The lone case which at this point has allowed the use of extrinsic evidence to determine the duty to defend, Drawbridge Energy, involved a claim against the insured that predated the inception of a claims-made policy. Thus, right out of the box, it appears that Monroe Guaranty has not implemented much change in ascertaining whether an insurer owes a duty to defend under Texas law. Nonetheless, there will no doubt be many future disputes over the Monroe Guaranty rule as to when and under what circumstances extrinsic evidence can be utilized in determining an insurer’s duty to defend.

Robert D. Allen practices with The Allen Law Group. His practice is focused on representing insurance and commercial litigation clients in complex insurance coverage, bad faith, fraud, reinsurance, regulatory, insolvency, class action tort and commercial litigation. He has tried cases in state and federal courts throughout Texas, and has acted as lead trial counsel in other states. Mr. Allen also is a Texas board certified appellate specialist, arguing appeals in 11 out of the 14 Texas courts of appeal, and in three of the federal circuits. He serves as a mediator, arbitrator and expert witness in insurance and reinsurance disputes.

First-Party Bad-Faith Lawsuits? New Jersey Expands Exposure to Insurers for Bad Faith Failure to Settle

By Kenneth Sharperson and Aaqib Khan
Edited by Robert F. Friedman

On Jan. 18, 2022, the New Jersey Legislature enacted the New Jersey Insurance Fair Conduct Act (the “Act”), which provides that, under certain circumstances, claimants may file a civil action against their own automobile insurance company. Prior to the Act, there was no remedy against insurance companies that demonstrated bad faith in the settlement of “first party” uninsured and underinsured motorist claims. The Act, however, provides for a new private cause of action for “unreasonable delay” or for “unreasonable denial” of an insured’s uninsured/underinsured motorist (“UM/UIM”) claim. 

Specifically, the Act provides that claimants, defined as individuals injured in a motor vehicle accident and entitled to the uninsured or underinsured motorist coverage owed directly to or on behalf of the insured under that insurance policy, may file a civil action against their own automobile insurance company for an unreasonable delay of a claim for payment of benefits under an insurance policy or an unreasonable denial of a claim for payment of benefits under an insurance policy; or any violation of the provisions of the New Jersey Unfair Claims Settlement Practices Act (“UCSPA”), N.J.S.A. § 17:29B-4. 

A claimant who establishes a violation under the Act is entitled to (1) “Actual damages” which “shall include, but need not be limited to, actual trial verdicts” (not to exceed three times the UM/UIM coverage); (2) Pre-judgment interest; (3) Post-judgment interest; (4) Reasonable attorney fees; and (5) Reasonable litigation expenses.  The Act does prohibit rate increases as a result of compliance with the Act, however, the Commissioner of the Department of Banking and Insurance is permitted to make certain rate adjustments. Insurers are also forbidden from disseminating inaccurate or misleading information about the Act to policyholders or consumers. Notably, with respect to proof, the Act states that “the claimant shall not be required to prove that the insurer’s actions were of such a frequency as to indicate a general business practice.” 

The Act does not define the term “unreasonable,” and the courts will be left to interpret what constitutes an “unreasonable denial” or “unreasonable delay” of a claim.  Under existing New Jersey law, a claimant pursuing a claim for the breach of the duty of good faith and fair dealing for failure to pay benefits or delaying payment must prove the insurer lacked a reasonable basis for its position and knew or recklessly disregarded its lack of a reasonable basis. The well-known “fairly debatable” standard established in Pickett v. Lloyd’s, 131 N.J. 457 (1993) requires the insured to prove it is entitled to summary judgment as a matter of law on its claim for coverage before it can assert a bad faith claim. The Act appears to create a different standard — whether the denial or delay was unreasonable — and it will be up to New Jersey courts to determine whether to apply the fairly debatable standard and the unreasonable standard in the same fashion.  It is likely, however, that courts will adopt some version of the Pickett standard when interpreting the definition of “unreasonable” delay or denial of a UM/UIM claim as previously noted in Badiali v. New Jersey Mfr. Ins. Co., (which addressed the issue of whether an insurer was acting in bad faith when it rejected an arbitration award) and Wadeer v. New Jersey Mfr. Ins. Co., (which address the issue of whether an insurer’s bad faith claim is barred by the Doctrine of Res Judicata). 

The Act also does not set forth a statute of limitations period for its statutory bad faith claim. Common law bad faith claims in New Jersey have a six-year limitations period, which is the same as the limitations period for UM/UIM claims. The Act also does not state whether it applies to pre-suit or post-suit claims handling. As such, insureds may argue that a claim under the Act extends the statute of limitations period for all alleged bad faith actions and is not ripe until the conclusion of the underlying UM/UIM claim. 

In comparison to other states, New Jersey’s law is significantly pro-plaintiff. There are a variety of acts passed in all 50 states that detail each state’s position on unfair claims settlement practices. Insurance Unfair Trade Practices Acts and Unfair Claims Settlement Practices Acts 50 State Chart: Overview (a 50-state survey containing a comprehensive list of statutes and regulations pertaining to unfair claims settlement practices acts, and any applicable private rights of action for an insurer’s violation of statutes). For example, New York does not recognize any statutory authority which allows first-party bad-faith uninsured motorist/underinsured motorist claims. The lack of statutory authority and overall recovery for first-party bad-faith UM/UIM claims in New York constrains the overall volume of plaintiff action regarding bad-faith UM/UIM claims. Thus, New York law is not friendly towards first-party UM/UIM plaintiffs. New York’s Unfair Claims Settlement Practice Act (§ 2601) allow the recovery of damages only for third-party claims. 

Delaware also does not have direct statutory authority pertaining to first-party bad-faith UM/UIM claims. In Enrique v. State Farm Mutual Automobile Insurance Co. the state’s Supreme Court held that a first-party bad-faith UM/UIM claim is grounded in contract law, because “there is no sound theoretical difference between a first-party insurance contract and any other contract.” Further, the Court held, as the law now stands, “given the special nature of the insurance relationship, punitive damages are available as a remedy for bad faith breach of the implied covenant of good faith where the plaintiff can show malice or reckless indifference by the insurer.” The damages recoverable in first-party claims are the insured’s economic losses, the insured’s emotional distress, attorney fees, and punitive damages. Thus, in the absence of relevant statutory law in Delaware, such first-party bad-faith claims are recognized only under the common law of the state, which provides certain remedies. 

Pennsylvania has a very liberal approach towards plaintiffs that bring forth first-party bad-faith UM/UIM claims. Both the state’s common law and statutory law support a plaintiff’s ability to bring forth such claims. 42 Pa.C.S. § 8371 states: 

[I]f the court finds that the insurer has acted in bad faith toward the insured, the court may take the following actions: award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%; award punitive damages against the insurer; assess court costs and attorney fees against the insurer.  

New Jersey, when compared to its neighboring jurisdictions, is unequivocally plaintiff-friendly on the issue of first-party bad-faith UM/UIM claims. While New Jersey is not as favorable to plaintiffs as Pennsylvania because it has a more limited scope on which kinds of bad-faith claims are valid under the Act, Pennsylvania’s law broadly encompasses acts of bad-faith in general and enumerates the available remedies for successful plaintiffs pursuing a claim for bad faith related to a UM/UIM claim. 

The Act also makes New Jersey a more favorable jurisdiction than Delaware for bringing bad faith UM/UIM claims. Indeed, Delaware does not provide any statutory authority that allows a claimant to bring a first-party bad-faith UM/UIM claim because contract law applies. 

Finally, New York law appears to be pro-insurer in the UM/UIM context because it only allows for recovery of damages by third parties for bad faith. 

Insurers in New Jersey will need to have heightened awareness as first-party bad-faith UM/UIM lawsuits are likely to increase as a result of the Act. The enactment of the Act is bound to expose insurance companies in New Jersey to an increased volume of bad-faith UM/UIM suits.  

Takeaways: Although insurance companies handle claims professionally, the Act will expose insurers to bad faith suits even because of honest mistakes. Significantly, the Act increases the exposure presented by UM/UIM claims threefold (where minimum coverage limits are typically only $15,000/$30,000), and insurers should carefully assess their internal processes for handling these types of claims. For example, insurers should make sure that a plaintiff’s lawyer cannot characterize their internal goals, incentives, performance evaluations, or anything else as evidence that individuals who handle claims have a personal motive to deny them even when they should be paid.  While having an internal goal of processing a certain number of claims should not be a problem, having an internal goal of denying a minimum number or a minimum percentage of claims might create liability under the Act.  Further, to minimize the risk of bad-faith claims, insurers may want to consider policy language that requires all policy-related claims resolved by arbitration. 

In sum, the Act will likely increase the volume of bad faith claims being filed, as well as significantly more bad faith claims requiring litigation through discovery and potentially trial. Further, since there are significant undefined terms in the Act, there will also be a significant amount of litigation simply to have the courts define the applicable terms for a cause of action under the statute.  Insurers should keep abreast of developments in this area and be prepared to take advantage of any helpful case law, or subsequent legislation, that may arise.

Kenneth Sharperson, Esquire, is Partner and Diversity, Equity and Inclusion Director at Weber Gallagher. He currently serves as national counsel for clients in sophisticated insurance coverage litigation and commercial litigation matters before federal and state trial and appellate courts. Kenneth has worked with a wide variety of insurance companies on issues related to the duty to defend, bad faith, number of occurrences, allocation and notice and trigger of coverage. He has also handled the defense of claims related to D&O insurance matters, mass tort and environmental issues, media, technology and cyber liability, residual value insurance, financial institution bonds, errors and omissions, employment practices liability insurance, property insurance and professional liability matters.

Aaqib Khan is a Law Clerk at Weber Gallagher.

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