Class Actions Against Insurance Companies for Bad Faith

A primer to confronting insurance fraud.

New Jersey Lawyer,
June 2002

By Gerald H. Baker

The state of New Jersey adopted the Insurance Fraud Prevention Act in 1983 in order to aggressively confront the problem of insurance fraud.1 The Legislature explained that the purpose of the act is to facilitate the detection of insurance fraud, to eliminate the occurrence of fraud through the development of prevention programs, to require the restitution of insurance benefits obtained by fraud and to reduce the premium dollars used to pay fraudulent claims.

The Insurance Fraud Prevention Act prescribes a course of conduct for the submission of an insurance claim by a person (the individual who was injured) or a practitioner (a licensed health care provider). The act states that a person or practitioner shall not present a written or oral statement in support of a claim for the payment of a benefit pursuant to an insurance policy while "knowing that the statement contains false or misleading information concerning any fact or thing material to the claim." A person who violates the act shall be subject to a civil penalty not to exceed $5,000 for the first violation; $10,000 for the second violation; and $15,000 for each subsequent violation. In addition, any insurance company damaged as a result of a violation may file a suit to recover compensatory damages, including reasonable investigation expenses, costs of suit and attorneys fees. If a court determines that the claimant has engaged in a pattern of violation, the insurance company may recover treble damages.

Automobile Insurance Fraud

On May 19, 1998, the Legislature expanded the attack on fraud into the arena of automobile insurance. The Automobile insurance Cost Reduction Act (AICRA) and the regulations adopted by the Department of Banking and Insurance created an Office of Insurance Fraud Prosecutor, required every carrier to file a fraud prevention and detection plan and expanded the activities of the carriers' special investigation units (SIU).2

There have been very few cases dealing with automobile insurance fraud since the enactment of AICRA. In Allstate v. Lopez,3 the plaintiff claimed that it had received 434 personal injury and PIP claims from insureds, drivers, passengers and health care providers who had participated in "the largest automobile accident fraud ring documented in United States history."

Allstate alleged that the claimants staged many accidents in Passaic County within a nine-month period. Each vehicle was filled to capacity with passengers who were in no real danger of harm, but who complained of pain without visible injuries. Based upon the allegations of insurance fraud, Allstate filed a declaratory judgment action to void each of the insurance policies and to request a stay of all pending claims.

At the outset, Judge Charles E. Villa-neuva stated that insurance fraud is a problem of "massive proportions," and that there were 33 other cases pending in Morris County that involved 5,100 defendants. He noted that the Insurance Fraud Prevention Act reflects a strong public policy to curb "rampant and blatant abuses" of the no fault system. The court found that a declaratory judgment action in the superior court is the appropriate forum for the resolution of multiple claims of fraud. Accordingly, the court held that all pending lawsuits or arbitrations arising from the accidents would be stayed until the underlying declaratory judgment action was resolved. If any of the claimants survive the allegations of fraud, their claims would be remanded to the superior court or the American Arbitration Association for resolution.

In addition to fraudulent claims of injury, several cases have dealt with alleged fraud in the rendering of medical services. For example, in Allstate v. Schick,⁴ a PIP carrier filed suit against several medical diagnostic testing facilities based upon the allegation that their structure violated administrative regulations because they were not owned by a plenary licensed physician. The court found that the allegations of Allstate that the defendants created a sharn corporation and submitted bills under the name of a company that was not owned by a licensee were sufficient to establish violation of the fraud act.

Likewise, in Prudential v. Midlantic Motion X-ray,5 the court held that a chiropractor was a limited licensee and was not permitted to own a medical diagnostic testing facility- Accordingly, Midlantic, a diagnostic facility operating in a violation of state regulations, was not eligible for PIP reimbursement.

Bad Faith

While the Insurance Fraud Prevention Act and AICRA have concentrated on fraud by claimants, the courts have considered the equally important issue involving fraud by insurance companies, more gently known as bad faith. In their excellent treatise, George Kenny and Frank Lattal note that insurance policies are contracts of adhesion (where the parties have unequal 'bargaining power) that impose upon insurance companies a fiduciary duty for the "protection" of the policyholder.6

Before the adoption of the No Fault Act, the New Jersey Supreme Court had already recognized that all contracts contain an implied duty of good faith and fair dealing7 and that the good faith doctrine applies to insurance policies.8 Likewise, the court stressed the necessity for good faith in the handling of claims, such as falling to defend a suit, failing to agree to a reasonable settlement and failing to deal promptly with a proof of loss.⁹

Third-Party Claims

The New Jersey Supreme Court has extended an insurance carrier's obligation of good faith and fair dealing to the settlement of third-party liability claims against its insured. In Rova farms v. Investors Insurance,10 the plaintiff was a resort that was sued by a patron for lack of supervision and failure to warn. The patron was rendered a quadriplegic when he dove into three feet of water and struck his head on the shallow bottom of the lake.

Rova Farms had purchased an insurance policy from Investors Realty with a liability limit of $50,000. The personal counsel of Rova Farms suggested that Investors offer its policy limit; however, the carrier made an offer of only $12,500. The jury returned a verdict of $225,000- Rova Farms paid the excess judgment of $175,000 and sued its carrier for bad faith.

The Supreme Court held that an insurer has a fiduciary obligation to explore and initiate settlement possibilities (even if the claimant has not made a firm and explicit demand), to exercise good faith in settling claims and to attempt to negotiate a settlement within the policy limits. Accordingly, the failure of an insurance company to offer its policy limits in settlement of a personal injury claim may constitute sufficient bad faith to make the insurer fully responsible for the payment of a jury verdict in excess of the policy limit.

It is important to understand that the fiduciary obligation of an insurance company to its insured arises from the insurance contract, and is founded upon an implied convenient of good faith and fair dealing.¹¹ Nonetheless, the carrier's breach of contract has evolved into the tort of bad faith and subjects the carrier to an action for damages.

First-Party Claims

While Rova Farms requires an insurance carrier to exercise good faith in the resolution of third-party claims, the traditional rule in New Jersey does not support the award of damages against an insurance company for bad faith in the handling of first-party claims. Instead, the No Fault Act imposes a statutory obligation upon a PIP carrier to pay interest, costs and counsel fees to a claimant who is successful in a PIP arbitration.¹² As a result, the courts have not permitted a claimant to recover compensatory, consequential or punitive •damages against a PIP carrier.

For example, in Milcarek v. Nationwide,¹¹ the plaintiff obtained a judgment against her PIP carrier for medical expenses, interest, counsel fees and costs; however, she also claimed punitive damages since the carrier violated the statutory requirement to make payment within 30 days. The court acknowledged that the No Fault Act "imposed an affirmative duty upon defendant to deal fairly with plaintiff"; however, "with the other remedies available in this state with respect to insurance companies, we do not think it is necessary or wise to subject them also to a claim for punitive . damages for contractual breach,"

Likewise, in Kubiak v, Allstate,¹⁴ the court held that the right to recover counsel fees and interest "should sufficiently guard against a situation where an injured party is subjected to protracted aggravated consequences because of an insurer's failure to pay." In Pierzga v. Ohio Casualty,15 the court denied a claim for punitive damages against the PIP carrier and suggested that any "change in the present state of the law concerning the non-availability of compensatory or punitive damages" would have to be undertaken by the Supreme Court or the Legislature.

Unfair Claim Practices

The only legislative reaction to claims of bad faith by insurance companies was the adoption of the Unfair Claim Settlement Practices Act (also known as the Insurance Trade Practices Act),16 The act prohibits insurers from engaging in "unfair claim practices" including failing to act promptly upon communications with respect to claims; failing to conduct a reasonable investigation of claims; failing to accept or deny coverage promptly; failing to effectuate prompt, fair and equitable settlements without compelling insureds to institute litigation; and failing to provide reasonable explanations for the denial of a claim.17

If an insurer violates the statute, the insured may file a complaint with the Department of Banking and Insurance, " and the carrier may be fined or suspended. Nonetheless, the statute does not provide a private cause of action for damages. In Pierzga,18 the plaintiff argued that the carrier's failure to pay PIP benefits violated the Unfair Claim Settlement Practices Act so as to require the payment of compensatory and punitive damages. The court held that the act "applies to wrongs to the public rather than any individual and violations of a statute do not create individual or private causes of action."

The Assault Upon the Citadel

A citadel is a stronghold, a fortress that commands a city. In the law, a citadel is a doctrine that provides a culpable party with an immunity from legal responsibility.

In June 1960, Dean William Prosser wrote his famous article titled "The Assault Upon the Citadel," in which he discussed how their doctrine of privity of contract provided immunity to the manufacturers of defective products." He told "the tale of the storming of the heights of negligence" and the assault upon the citadel of privity.

In New Jersey, the common law recognized many other citadels. For example, insurance companies were immune from suit for any bad faith in the resolution of first-party claims. As previously indicated, this immunity continued to exist after the adoption of the No Fault Act in 1972.

Nevertheless, the New-Jersey Supreme Court launched the first assault against the citadel of bad faith in the seminal case of Pickett v. Lloyd's,20 The plaintiff, Burton Pickett, was the owner/operator of a tractor-trailer that was totally destroyed in a motor vehicle accident. He submitted a property damage claim under an insurance policy underwritten by the defendant, Lloyd's; however, it took the carrier nine months to pay the full amount of the policy. In the meantime, Pickett was unable to work until his vehicle was repaired, lost his seniority status with his freight hauler, withdrew money from his retirement plan and obtained a bank loan to meet his expenses.

Pickett sued Lloyd's for the breach of his insurance contract and for bad faith in the handling of his claim. A jury returned a verdict of extra-contractual damages of $70,000 for his loss of income and loss of seniority status. The Supreme Court affirmed.

At the outset, the court confirmed that every insurance policy imposes upon the carrier an implied duty of "good faith and fair dealing" in its performance. Accordingly, "an insurance company owes a duty of good faith to its insured in processing a first party claim." Second, the court explained that New Jersey should provide a remedy for bad-faith refusal, even in the absence of a legislative enactment.

Third, the court held that an insurance company may "be liable to a policy-holder for bad faith in handling a claim for first-party benefits in the following circumstances:

1. If there are no debatable reasons for the denial of benefits.

2. If there are no valid reasons for the delay in processing the claim.

Finally, the court held that a carrier that engages in bad faith may be liable "for consequential economic losses that are fairly within the contemplation of the insurance company."

In addition to consequential damages, the court recognized that a claimant might be entitled to recover compensatory damages for the negligent infliction of emotional harm if   there are egregious circumstances. Likewise, a plaintiff might be able to sustain a claim for punitive damages if the carrier's conduct — in addition to reflecting bad faith is intentionally wrongful.

Nonetheless, the Supreme Court in dicta indicated that it would not extend the doctrine of bad faith to "the highly-regulated area" of PIP benefits under the No Fault Act. Accordingly, the court suggested (on an issue that was not raised by any of the parties) that the wrongful failure to pay PIP benefits does not give rise to a claim for punitive damages.

On the other hand, the court recog-nized that insurance companies "are not insulated from liability for independent torts in the conduct of their business," such as "deliberate, overt or dishonest dealings." Accordingly, a carrier's   response to a PIP claim may constitute an independent tort.

The Second Assault

A major foundation of the Supreme Court's opinion in Pickett was the recognition that the Legislature and the Department of Insurance have promulgated a broad range of regulations dealing with unfair trade practices, including the 'duty to exercise "good faith to effectuate prompt fair and equitable settlement of claims."²¹ While the statute and the regulations do not create "a private cause of action," the court acknowledged that they do declare "state policy" and do not conflict with the establishment of "a cause of action for the breach of the duty of good faith and fair dealing."

Two years later, Superior Court Judge Michael Winkelstein, (recently elevated to the Appellate Division), launched the second assault against the citadel of immunity in the* arena of first-party unisured motorist/under insured motorist (UM/UIM) claims,, (Pickett having dealt with a property damage claim). In the case of Miglicio v, HCM 22, the plaintiff claimed that the carrier exercised bad faith in the resolution of a UM claim in failing to consent to the settlement of the liability claim; in failing to appoint an arbitrator to resolve the UM claim; and in failing to acknowledge the arbitrators' award.

Judge Winkelstein noted that the Unfair Claim Settlement Practices Act did not provide a civil remedy for damages; however, he found that the act sets forth a standard of conduct for insurers in the resolution of claims (the state policy referred to by the Supreme Court in Pickett), and that "any deviations from the standards may be considered as evidence of bad faith." Accordingly, the court held that the plaintiff would be entitled to compensatory damages if the jury found that the carrier acted in bad faith. In addition, Miglicio would be entitled to punitive damages if the defendant acted intentionally in delay-ing payment of the claim,

The Fall of the Citadel

Dean Prosser continued his study of the law of products liability in his second famous article, "The Fall of the Citadel."23 He noted that "the fall of the citadel is a dramatic moment," and that the date of the fall of "the citadel of privity" occurred on May 9, 1960, when the New Jersey Supreme Court announced the decision in Henninssen v. Bloomfield Motors.²⁴

The New Jersey courts have an outstanding reputation for their leadership in the development of tort law. Accordingly, there are no good reasons why our courts should not recognize the fall of the citadel of immunity for PIP carriers. While Pickett and Miglicio deal with first-party property damage and UM/UIM claims and Rova Farms deals with third-party liability claims, the analysis of the courts in those cases should be extended to first-party PIP  claims.

In the first place, an insurance company that issues an automobile insurance policy with personal injury protection benefits owes its insured the same implied duty of good faith in processing a first-party PIP claim as a carrier that provides coverage for a property damage or uninsured motorist claim.

Second, the Unfair Claim Settlement Practices Act creates the same state policy and standard of conduct for PIP carriers as for other insurance companies. The obligation to use good faith "to effectuate prompt, fair and equitable settlements" applies equally to PIP claims as well as to property damage and UM/UIM claims.

Third, the optimism of the Supreme Court in Pickett that there is no reason to allow a claim for punitive damages "in the highly regulated area of personal injury protection" has been belied by the experiences of numerous accident victims and health care providers since the opinion was published in 1993. Likewise, the suggestion of the Appellate Division in Milcarek in 1983 that the payment of interest, like punitive damages, "serves in some measure to deter insurance companies from declining to make the necessary payments" has not been supported by the test of time.25 Similarly, the comment in Kubiak that interest and counsel fees "should sufficiently guard against" the "protracted aggravated consequences" caused by a carrier's failure to pay is not accurate 17 years later,¹⁶

In fact, the statutory remedies of interest, counsel fees and costs provided by the No Fault Act have not deterred insurance companies from failing to pay PIP claims, and have not guarded accident victims and health care providers from the protracted aggravated consequences caused by the carrier's failure to pay. The Joint Committee on Automobile Insurance Reform conducted a series of hearings in 1997 and 1998 that documented the increase in claims filed by injured claimants and doctors against insurance companies that failed to pay PIP benefits. While AICRA created a new system for resolution of disputes, the number of lawsuits filed in the superior court and PIP demands filed with the American Arbitration Association have continued to increase dramatically.

The sheer magnitude of these PIP claims suggests that the statutory remedies provided by the No Fault Act have not deterred insurance companies from failing to pay PIP claims. As stated by Judge Martin L. Greenberg in.Piergza, there is no doubt "that no matter how severe the penalties imposed on insurance companies for failure to make PIP payments, there will be cases in which a court in retrospect finds the companies were willful and wanton in refusing payment "27

A review of claims filed with the American Arbitration Association reveals many cases in which PIP carriers delay payment pending investigations that are never completed. In many cases, PIP carriers do not request statements from insureds (EUOs) or medical examinations (inaccurately called IMEs) until after a PIP arbitration is filed (sometimes one to two years after the accident). While the No Fault Act requires the payment of claims within 60 days, it is rare that a carrier pays the medical bills on time. In reality, most PIP carriers do not pay claims for 6-12 months, if at all.

Class Actions

The Rules Governing Civil Practice permit a member of a class to file suit as a representative party if the class is so numerous that joinder of all members is impracticable, if there are common issues of law or fact, if the claims are typical and if the interests of the class will be fairly and adequately protected.²⁸ The consequences of a class action are to permit the equalization of the ability of all parties to pay "for the advocacy of their rights.29 -

The No Fault Act offers a claimant the option to file a demand for arbitration with the American Arbitration Association for the payment of an outstanding claim.³⁰ As a matter of general practice, a health care provider obtains an assignment of benefits from each patient that permits the provider to file a claim for payment in the name of the patient. While the act provides a simple procedure to obtain payment for a single claim, there is no statutory remedy for an individual provider who has been targeted by a PIP carrier and who has been unfairly denied payment for multiple claims. Under those circumstances, the provider will be faced with the protracted aggravated consequences caused by the carrier's failure to pay, including financial ruin or the inability to treat the victims of automobile accidents.

In the hearings before the Joint Committee on Automobile Insurance Reform, several doctors testified that they had hundreds of outstanding claims with individual carriers, sometimes exceeding $1 million, and that some carriers denied payments to a large number of doctors as a matter of course, sometimes fabricating reasons in order to negotiate global settlements. For example, in Cobo v. Market Transition Facility,³¹ the assignee, Hudson Physical Therapy, claimed that it was intentionally underpaid over $2 million on 500 claims for treatment rendered to patients insured with the Joint Underwriters Association and the Market Transition Facility.

A health care provider who has been damaged by the bad faith of a PIP carrier will probably not have the economic resources to challenge an insurance company on an individual basis. Nonetheless, a provider who has a typical claim and can fairly represent other providers who have not been paid should be permitted to file an action as the representative of a class that is so numerous that all members cannot be joined, and who have common questions of law and fact

A Modest Proposal

The fight to combat insurance fraud is a two-way street. A claimant should be penalized for the submission of a fraudulent claim including the payment of compensatory and treble damages. Likewise, an insurance company should be liable for compensatory and punitive damages for unfair claim settlement practices.

The bad faith failure of insurance car-riers to pay PIP claims has had a detri-mental effect oh the victims of automobile accidents. As a result, health care providers are required to Incur exor-bitant administrative costs to obtain payment of their bills. A representative of the New Jersey Society of Physical Medicine & Rehabilitation predicted that the practices of the insurance industry "will force good physicians and therapists...to leave the system."

The fall of the citadel of privity was a dramatic moment in the development of product liability law in New Jersey. Likewise, the opinion in Pickett (as extended by Miglicio) was a dramatic moment whose potential has not yet been realized. The assault against the citadel of immunity for PIP carriers goes on. "The stronghold has been invested...and a grim cannonade has made breaches in the great wall." The utilization of class actions against insurance carriers who exercise bad faith in the denial of first-party PIP claims will hasten the fall. "There is a final heavy bombardment; the assault goes forward against the main breach, and the storming party ascends over the corpses of the slain."'

Endnotes

1.. N.J.S.A. 17:33A-1, etseq. L-1983, c. 320.

2.   NJ.S.A.  17:33A-16; N.J-A.C  11:L6-6.1;L1998, c. 21.

3.   311 NJ. Super. 660 (Law Div. 1998).

4.   328 N.J. Super. 611 (Law Div. 1999).

5.   325 NJ. Super. 54 (Law Div. 1999),

6.   New Jersev Insurance Law Second Edition, §3-1.1 (2000).

7.   Palisades Properties v. Brunetti, 44 NJ. 117(1965).

8.   Bowler v. Fidelity & Casualty, 55 NJ, 313 (1969).

9.   Fireman's Fund v. Security Insurance, 72 NJ. 63(1976).

10. 65 NJ. 474 (1974).

11. 5 Williston on Contracts § 670.

12. NJ.S.A. 39:6A-5.

13. 190 NJ. Super, 358 (App. Div. 1983).

14. 198 NJ. Super. 115 (App. Div. 1984).

15. 208 NJ. Super. 40 (App. Div. 1986).

16. N.J.S.A. 17:29B.

17. NJ.S.A. 17:29B-4(9), L1975, c. 100.

18. 208 NJ. Super, at 47.

19. Yale Law Journal, Vol. 69:1098 (1960).

20. 131 N.J. 457(1993).

21. Unfair Claim Settlement Practices Act, NJ.S.A. 17:29B-4(9].

22. 288 NJ. Super. 331 (Law Div. 1995).

23. Minnesota Law Review, Vol 50:791 (1966).

24. 32 NJ. 358 (1960).

25. 190 NJ. Super, at 367.

26. 198 NJ. Super, at 119-120.

27. 208 NJ, Super, at 45.

28. Rule 4:32-1.

29. In re Cadillac V8-6-4 Class Action, 93

NJ. 412 (1983), 30. N.J.S.A. 39:6A-5.

31. 293 NJ. Super. 374 (App. Div. 1996).

32. Minnesota Law Review, Vol 50 at 791.