Many policyholders were unable to get through to their insurers in the wake of Super-Storm Sandy, while others’ claims have been denied by insurers that never even sent a representative to the damaged property. Is it unreasonable for insurers to handle claims in that fashion, and does your property insurer owe you a duty of good faith in processing your Super-Storm Sandy claim? What are the consequences for an insurer’s unfulfilled promises?
In Pickett v. Lloyds,1 the New Jersey Supreme Court held an insurer owes its insured a duty of good faith in processing a first-party claim. In determining whether an insurer has satisfied its duty, the court adopted the “fairly debatable” standard. The court explained the test:
To recapitulate, an insurance company may be liable to a policyholder for bad faith in the context of paying benefits under a policy. The scope of that duty is not to be equated with simple negligence. In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits . . . .
Under the fairly debatable standard, it is insufficient to establish that the loss was covered under the policy but rather the insured must prove that the insurer was without a “debatably valid” reason for its failure to pay.
Additionally, the New Jersey Legislature has defined the relationship between insurance companies and insureds by putting a broad range of statutes in place. For example, N.J.S.A. 17:29B-1 to -14 regulates the insurance trade by defining and prohibiting unfair practices, among them, “Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”2
The rationale the New Jersey Supreme Court gives for its approach in recognizing a remedy for bad faith says it best:
The trial court best articulated the rationale for such a remedy in its rhetorical question to the insurance companies:
You mean that even if this had taken years that Lloyds [sic] hadn’t paid [.] * * * [I]f you weren’t paid in January, February, March, * * * and you weren’t paid in 1987, you weren’t paid in 1988, you weren’t paid in 1989; you mean that none of that would make any difference? That you folks don’t have to pay until you get around to paying; and that the only remedy would be for loss of interest? That doesn’t seem to be fair.
It would not be fair if insurance companies did not have to pay claims until they felt like getting around to them. Such a practice would only encourage insurers to take advantage of their policyholders by delaying payments. Good thing that is not the case under New Jersey law. I will be conducting similar brief surveys of bad faith laws in insurance claims in New York and other states affected by Sandy in upcoming posts.
1 131 N.J. 457 (1993).
2 N.J.S.A. 17:29B-4(9)(f).