NJ High Court: State Consumer Fraud Act Applies To Insurance Producers
Insurance producers licensed in New Jersey are now subject to the state’s Consumer Fraud Act (CFA) following a court decision last month. On July 15th, the New Jersey Supreme Court unanimously ruled that “insurance brokers, producers, and agents are not exempt from the CFA…”
The act requires courts to triple the damages awarded to a victim of a violation. In other words, an agency found liable for $100,000 in damages would owe the plaintiff $300,000.
The CFA defines a broad range of conduct as an “unlawful practice” when it happens in connection with selling or advertising merchandise or real estate—or with conducting the transaction afterward. (The law defines “merchandise” as including “services.”) This includes things like fraud, deception, false promises, misrepresentations, and what the law calls an “unconscionable commercial practice.” It also includes deliberately hiding or omitting important information in consumer communications about a service.
A court might conclude that knowingly selling a policy without telling the insured that it includes a significant exclusion is a CFA violation. It might reach the same conclusion about assurances that a Homeowners insurance policy “covers everything.”
The case before the New Jersey Supreme Court involved two producers and their agency who, over a 13-year period, sold disability insurance policies to a neurosurgeon. The producers allegedly told him, “he would receive maximum benefits under his policies should he become disabled and never advised him that business interests unrelated to his medical practice could affect a benefits claim.”
In 2021, after being diagnosed with a vision condition that prevents him from performing surgery, the physician made a claim for maximum disability benefits. However, the insurers reduced his benefits to reflect his income from other business interests he had separate from his medical practice. He sued the producers and their agency for violating the CFA, accusing them of “knowingly omitting and concealing material facts with the intent to mislead consumers.”
Prior state court decisions exempted “professionals” and “semi-professionals” from liability under the CFA. The producers and their agency argued that they were “semi-professionals” because of state testing and licensing requirements and because their activities were separately subject to state insurance regulations. The trial and appellate courts accepted this argument.
The Supreme Court did not. The opinion by Associate Justice Douglas M. Fasciale was blunt:
Insurance brokers do not fall under either the learned professional or semi-professional exception, no matter what methodology one uses to define those terms. They are not one of the narrow class of professionals who have historically been recognized as “learned”: physicians, attorneys, and theologians. And although they are licensed, (the 1997 court decision in Lemelledo v. Benefit Management Corp. of America) makes clear that licensing and regulation alone are not a sufficient basis for exemption from the CFA, and there is no direct, unavoidable conflict between the CFA and the regulations governing insurance brokers. While we do not doubt that insurance brokers are skilled in their field, we note that the educational requirements are minimal: a 20-hour state-approved course for each license type, with no requirement for a high school diploma or equivalent. [Emphasis added]
The result is that New Jersey licensed insurance producers now face potential liability under the CFA and its requirement for triple damages and you shouldn’t assume that your Errors & Omissions (E&O) Liability Insurance policy will fully cover damages resulting from a CFA violation. One sample policy on the market excludes coverage for loss resulting from “intentional acts” which include “acts of dishonesty, fraud, criminal conduct …” It also excludes “penalties imposed by law” from the definition of covered damages.
If you hold a New Jersey license, be aware of this development. Producers in every state should avoid even the appearance of fraudulent conduct, but they should double down on prevention in New Jersey. The financial outcome from doing otherwise may be painful.
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