Insurance policies have a special status in the law. They are contracts that reflect a fiduciary relationship between an insurance company and a policyholder. In addition to the explicit terms of the contract, all insurance policies include an implied covenant of good faith and fair dealing. "Good faith" means that the parties will conduct themselves honestly to honor the terms of the policy. "Fair dealing" means that the parties will conduct themselves honestly so as to honor the rights of each other.

In 1947, New Jersey adopted the Unfair Claim and Settlement Practices Act. N.J.S.A. 17:29B-4. The Act enunciates 15 specific unfair methods of competition and unfair or deceptive acts in the business of insurance including unfair claim and settlement practices such a misrepresenting coverages; failing to promptly acknowledge claims; failing to promptly investigate claims; refusing to pay claims; not attempting in good faith to settle claims; compelling insureds to institute litigation; delaying the investigation or payment of claims; and failing to explain the basis for a denial of a claim.

In the event of a violation, the Act provides the Commissioner with the authority to issue a cease-and-desist order. In addition, the Commissioner may order a penalty of $1,000 for each violation and $5,000 for each known violation. The Act does not provide a civil remedy to a policyholder whose rights have been violated.