Michigan Insurers Balk As Democrats Advance ‘Bad Faith’ Legislation

Michigan insurance companies say that so-called “bad faith” bills approved by the House Insurance Committee today are unnecessary and will open the floodgates for lawsuits against them, eventually costing consumers money.

Meanwhile, House Democrats who are sponsors of the “bad faith” measures say they will not be intimidated either by the insurers’ complaints or by radio ads opposing their measures.

The package of bills (House bills 4244, 4844, 4858, 5020, 5144-5151) would create new causes of actions and increase fines and penalties against insurance companies for failure to act in good faith in handling claim payments.

“There are already laws to protect policyholders from unfair denials, as there should be,” Pete Kuhnmuench, executive director, Insurance Institute of Michigan (IIM), which represents insurers, said. “It is unfortunate that at a time when House Democrats should be working with the insurance industry to grow jobs to help Michigan’s economy, they are focused on costly and duplicative proposals that would have a negative impact on policyholders.”

IIM says that under a similar “bad faith” law in California, injured third-party claimants “routinely” filed independent actions against insurance companies alleging bad faith. In Washington, where a “bad faith” law was passed last year, “needless, costly lawsuits are already up,” according to the group. Kuhnmuench said that West Virginia repealed its third-party bad faith law after it found it was driving up the cost of insurance for its residents.

“This bad faith legislation is bad for consumers,” Kuhnmuench said. “In reality, the system in Michigan is in good shape. It discourages fraud while at the same time encouraging insurance companies to settle claims promptly and efficiently.”

Another insurer group, the Property Casualty Insurers Association of America (PCI), contends the measures would be a boon for trial attorneys that could mean as much as $554 million in insurance premium increases for drivers and homeowners.

“Michigan consumers are already struggling under the state’s dire economic conditions,” said Ann Weber, PCI vice president, regional manager and counsel for PCI. “At a time when lawmakers should be focused on making things better for consumers, they are essentially adding a tax to Michigan insurance policies to subsidize trial attorneys and creating an extraordinarily harsh environment for responsible businesses that are providing jobs and working hard to serve their policyholders in the state.”

But House Democrats are not backing down.

“Insurance companies and their CEOs who are promoting the practice of breaking promises to policyholders have been let off the hook and treated with kid gloves for far too long,” said Rep. Barb Byrum (D-Onondaga), chair of the House Committee on Insurance. “Radio ads and smear campaigns will not stop us from strengthening consumer protection and holding CEOs accountable when they refuse to honor consumers’ legitimate claims.”

The radio spots, which Byrum calls “attack” ads and says are funded by an “unknown group” called the Coalition to Insure Michigan’s Future, began airing this week.

Byrum says the Democrats’ bills are an effort to have Michigan join 46 other states that punish insurance companies for wrongfully denying legitimate claims. The House Democrats’ plan also will hold CEOs and corporate leaders accountable if they boost profits by denying or low-balling valid claims.

House Democrats’ introduced their measures in July.

“Insurance companies are angry that we are listening to real people hurt by the company’s unfair practice, and not just their high-priced lobbyists,” said another sponsor, Rep. Mike Simpson (D-Jackson), whose family was forced into bankruptcy after fighting an insurance company to get them to live up to their promises after his daughter died from cancer.

“Insurance industry CEOs who promote this unfair practice should be held accountable just like everyone else. No amount of special interest radio attack ads will get me to stop fighting for real people.”

IIM says that the legislation suggests that claims denial or delay is a common practice in the insurance industry but that it is not true. Overall auto insurance satisfaction level has increased, according to a 2008 study by J.D. Power and Associates. According to the study, satisfaction with auto insurance companies has increased steadily during the past five years.

The industry also maintains that laws are already in place in the state to govern unfair claims practices. If insurance companies engage in such conduct, they face up to 12 percent interest penalties on overdue claims payments, possible license revocation and monetary penalties up to $25,000.

The Michigan Office of Financial and Insurance Regulation, the state insurance regulator, also has sufficient tools available to pursue and put out of business, companies that are not abiding by the law, according to insurers.

Other insurance groups including the National Association of Mutual Insurance Companies, the American Insurance Association and the Life Insurance Association of Michigan are also opposing the legislation.