Legislation under consideration in four states this year could significantly expand consumers' ability to sue insurance companies over unfair claims practices.
Both New Jersey and Connecticut are now considering bills that would allow claimants to directly sue insurance companies over individual claims disputes involving "bad faith" claims practices. If the measures pass, they would join states like Minnesota, Maryland, and Washington, which have instituted similar measures.
In addition, the Colorado legislature may prohibit insurance companies from giving bonuses to employees for claims determinations that go against consumers, and Montana plans to amend its own bad faith claims law so that consumers can recoup their legal fees.
While all states allow insureds to bring breach of contract claims against their insurance companies, not all states allow them to sue for bad faith or unfair claims practices. "That would involve things outside the four corners of the contract, such as engaging in a consistent practice that indicated the company wasn't taking the claim seriously, or not investigating in good faith, or having a practice in place in which the first reaction of the insurance company is to lowball the estimate or deny the claim," says Rey Becker, vice president of global issues and research at the Property Casualty Insurers Association of America (PCI).
Many states follow a model law developed by the National Association of Insurance Commissioners (NAIC) that requires consumers to prove that an insurance company has engaged in unfair claims practices with enough frequency to indicate a "general business practice." In recent years, a number of states (usually at the request of the state's trial lawyers association) have initiated legislation that allows for unfair claims suits based on a single violation. In other states, case law has established a right to a private cause of action in these disputes.
Response to bad faith claims legislation has been mixed in the autobody industry, as it is unclear exactly how these suits might impact claims disputes involving collision damage. Litigation against insurers could conceivably help uncover unfair claim practices, but many local collision repair associations have refrained from endorsing bad faith legislation.
"We're not ready to support or oppose these bills," says Bob Redding, Washington representative for the Automotive Service Association (ASA). "Our Collision Operations Committee will be talking about this issue in the coming weeks."
The situation in Connecticut is typical of bad faith claim legislative battles, with the state's attorney general and the trial lawyers association supporting the bill, and insurers opposing it.
The proposal, Senate Bill 763, would allow any person who suffers "ascertainable loss of money or property, real or personal" as a result of an unfair claims violation to sue the insurance company to recover actual damages and, if the court deems it applicable, punitive damages. The law would also apply to third-party claimants (for instance, if one driver sued another driver's insurance company after a collision). If passed, the law would take affect in October.
"Insurers enjoy unique protection from accountability for their unfair and illegal actions," said Connecticut Attorney General Richard Blumenthal in a written statement supporting the measure. "Proving that the insurer engaged in illegal activity 'with such frequency as to indicate a general business practice,' is a huge obstacle to consumer recovery of damages for illegal settlement acts and a significant incentive to insurer illegality … Senate Bill 763 will bring accountability and fairness to insurance claims settlements by treating insurers in the same manner as virtually every other industry in Connecticut."
The insurance industry counters that that the Connecticut bill would lead to an increase in litigation and liability costs for insurers and consumers. Because the claims process involves hundreds of transactions by claims personnel, clerical staff and computer systems, insurance companies say they shouldn’t be held accountable for single acts because they may have been caused by an honest mistake or computer glitch.
"These laws add cost to the court system and greatly expand the type of damages that can be awarded," Becker says. "You want to go after the few bad actors in the industry who are engaging in a pattern of these practices. If you go beyond the general business practice requirement, you penalize companies that are just making honest clerical mistakes.
"Obviously we think this is going to add costs for consumers," Becker adds. "It duplicates activities that are already being performed by taxpayer-funded insurance departments, and the only reason these bills have come up, quite frankly, is to provide additional revenue for the trial bar."
According to PCI, such laws have a "chilling effect" on claims handling and discourage insurers from aggressively investigating suspected fraudulent claims.
“Few measures would be as costly to consumers or as damaging to the state’s insurance industry,” says Paul Magaril, regional manager and counsel for PCI. "The net effect of this measure would be to bring a huge windfall to the state’s personal injury attorneys.”
“We are not aware of any compelling reason for Connecticut to change what has been the standard for the state for more than 50 years and is currently the norm throughout the country," says Laura Kersey, northeast region assistant vice president for the American Insurance Association (AIA).
Bob Skrip, president of the Auto Body Association of Connecticut and owner of Skrip's Auto Body in Prospect, says his organization is supporting the bill, "but we don't see a lot of urgency for this in our industry."
According to PCI, in five of the six states with third-party bad faith laws, auto bodily injury liability cost trends were higher than the national average. Research from Milliman Inc. estimated that the first party bad faith law in Washington would cost consumers an additional $466 million annually, increasing premiums by as much as 14.5 percent.
Washington passed the Insurance Fair Conduct Act in 2007 in a referendum, despite a lengthy and expensive insurance industry campaign to defeat it. As of last December, about 900 people had notified the Insurance Commissioner's office they planned to sue their insurance companies under the act. It is still unclear if rates will increase because of the law.
The bills up for consideration in Montana and Colorado, meanwhile, would tweak existing statutes.
In Montana, House Bill 345 would allow the recovery of legal expenses, in addition to damages, in bad faith claims suits. The Montana Supreme Court has denied claims for legal expenses because they were not explicitly included in the existing legislation.
According to Bruce Halco, president of the Montana Collision Repair Specialists, his organization has not taken a position on the bill.
In Colorado, Senate Bill 203 would prohibit insurance companies from providing financial incentives to their employees for making claims determinations that adversely affect their customers. The bill would amend the current unfair claims settlement practices statute.
"ASA Colorado has not taken a position on the measure," says Donny Seyfer, chairman of the Colorado ASA and co-owner of Seyfer Automotive in Wheat Ridge. "We recognize the value of the bill for the health care industry but will review relative to its impact on collision repairers."
Colorado previously lowered the legal standard for asserting bad faith claims, and the law allows consumers to recover legal fees and two times the policy benefit that was unreasonably denied.
The Association of Automotive Service Providers in New Jersey (AASP-NJ), on the other hand, is enthusiastic about Senate Bill 132, which is similar to the Connecticut legislation (but does not apply to third-party claimants).
According to Charles Bryant, executive director of AASP-NJ, the bill will empower consumers, who previously had to meet the general business practice standard in order to prove their insurer was violating regulations. "The insurance department could fine the company, but they rarely choose to do so," Bryant says. "Under this bill, consumers can sue the insurance company, and get court costs and attorneys fees. If they can show the insurance company acted with malice and forethought, they can get punitive damages.
"This basically puts teeth into the regulations that govern the claims settlement practices of insurance companies," he adds.
