The National Association of Mutual Insurance Companies says a proposed bill in New Jersey regarding unfair claim practices will likely lead to higher costs.

S-132, An Act Concerning Unfair Claim Practices in the Settlement of Certain Uninsured and Underinsured Motorist Coverage Claims, also known as the “bad faith” law, establishes a private cause of action for policyholders in the settlement or attempted settlement of claims involving their insurance coverage, including first-party claims.

According to a summary of the bill, such first-party claims include those in which an insured driver sues his automobile insurance company for benefits when the insured is injured by an uninsured/ underinsured driver, or an unidentified driver, as in the case of a hit-and-run accident, and the insurance company is obligated to provide indemnity for that uninsured, underinsured or unidentified driver.

The bill states that damages recoverable by a first-party claimant include the benefits properly due under the claimant’s policy with interest and may include punitive damages when the violations demonstrate, by clear and convincing evidence, “actual malice or wanton and willful disregard of persons who foreseeably might be harmed by the insurer’s acts or omissions.”

NAMIC says the bill 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,” the group said in testimony before the New Jersey Senate Commerce Committee.

“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, in his testimony.

Tetrault added that language in state statutes, case law and regulations enforced by New Jersey’s insurance regulators are more than adequate to protect consumers and ensure proper conduct on the part of insurers, NAMIC said.

“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,” Tetrault said.

He also pointed to a pair of studies indicating that the proposed legislation would result in higher costs, including a NAMIC public policy paper published last year 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.”

“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.”