Proposed Bad Faith Insurance Bill Would Lead to ‘All Cost, No Benefit,’ NAMIC Tells New Jersey Lawmakers

INDIANAPOLIS (June 11, 2009) – A proposal ostensibly aimed at ramping up consumer protections for New Jersey insurance consumers would likely lead to higher costs instead, according to the National Association of Mutual Insurance Companies (NAMIC). NAMIC said the measure to expand the state’s “bad faith” law is unnecessary.

S-132, An Act Concerning Unfair Claim Practices in the Settlement of Certain Uninsured and Underinsured Motorist Coverage Claims, would negatively impact the insurance claims process, leading to costly litigation and “higher costs that would ultimately be borne by those who purchase automobile insurance,” NAMIC said in its testimony to the New Jersey Senate Commerce Committee today.

“Such a proposal should be viewed with a high level of circumspection in light of both the gains that have been achieved in bringing New Jersey’s auto insurance costs down as well as current economic conditions that would make increased costs difficult to bear for most drivers,” wrote Paul Tetrault, NAMIC’s Northeast state affairs manager.

The language in New Jersey’s statutes, case law, and regulations enforced by the state’s Department of Banking & Insurance are more than adequate to protect insurance consumers and ensure proper conduct on the part of insurers, Tetrault testified. “This legislation, in other words, should be viewed not as an effort to address any weakness or loophole in existing law but rather as an attempt to increase the volume of litigation and to inflate damage awards and settlement values,” he said.

Tetrault also pointed to a pair of studies that indicate the legislation would result in higher costs. A public policy paper published by NAMIC last year identifies evidence suggesting that “allowing tort liability for insurance bad faith results in reduced insurer incentives to challenge disputable claims, and in higher claims costs as a result.” A study of bad faith legislation in Washington state estimated that bad faith legislation enacted there in December 2007 may have increased homeowners insurance claim costs by $58 million in the first three quarters of 2008.

“Since it is unnecessary in light of existing legal standards and the enforcement powers of the New Jersey Department while available evidence and comparative analysis suggest it would result in higher costs, S-132 fails the cost-benefit analysis that should be undertaken for any measure with the potential to create or increase a societal cost,” Tetrault testified. “In fact, in NAMIC’s view, this legislation would produce all cost and no benefit.”

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