Tuesday, October 16, 2007

Insurance Bad Faith Legislation

The city of Puyallup disputes the allegations in one of the ads in support of R-67, the provision that would authorize damages in actions against insurance companies for bad faith. Ad's assertions questioned, Olympian, Oct. 8, 2007.

As the election draws near, I thought I'd post a little information related to R-67. It is a referendum on a law adopted by the legislature and signed by the governor: 2007 Laws, Ch. 498. You can read the bill reports here.

The question is whether we voters want to accept or undo that law. The controversial part is about is section 3, which says that an insured person can sue the insurance company for denying a claim in bad faith. The suit is for actual damages and "reasonable attorneys' fees and litigation costs." If the superior court finds bad faith it may "increase the total award of damages to an amount not to exceed three times the actual damages."

The catchphrase in the opposition's ads is "frivolous lawsuits." But I note that the insurance company doesn't have to pay damages and costs unless the plaintiff shows bad faith. Even then, the treble damages are discretionary. If a lawsuit is truly frivolous (not just unpleasant for the insurance company), then plaintiff's counsel would be vulnerable to sanctions under CR 11. (I wonder how often Rule 11 sanctions are imposed in Washington...)

Some scholarship on the difference that bad faith legislation might make:

  • Mark J. Browne, Ellen S. Pryor, & Bob Puelz, The Effect of Bad-Faith Laws on First-Party Insurance Claims Decisions, 33 J. Legal Studies 358 (2004). The authors did some serious number-crunching (using data from 1992) to compare claim recoveries in states with and without a bad-faith tort action (or with one but with a damage cap). Washington was among the states without. Id. at 362 n.15. Here's their conclusion:

    Our study supports several assumptions about how the law of bad faith affects insurers’ claims settlement practices. Higher overall settlement amounts are paid in states with a bad-faith remedy. Moreover, . . . the higher overall settlements are a result of higher payments for both economic and noneconomic damages.

    Somewhat surprisingly, we find that bad-faith laws are associated with a greater increase in loss settlement amounts when claimants are not represented by an attorney. We find this effect in all of our models. The presence of a bad-faith law may encourage insurers to offer greater amounts to claimants who then do not feel the need to engage the services of attorneys. If so, this would result in a change in the mix of cases represented by attorneys. To the extent that the tort of bad faith reduces litigation costs, it would also lead to a more efficient resolution of claims. If, however, the tort is resulting in inappropriately higher payments to insureds, it is contributing to unnecessarily high insurance costs. The economic efficiency of the tort of bad faith warrants future research.
    Id. at 386.

  • A study by the Rand Institute for Civil Justice, comparing California claims before and after a period when bad-faith suits were possible, also found increased payments. But, contrary to the above study, it found claimants were more likely to be represented by counsel. Angela Hawken, Stephen J. Carroll, Allan Abrahamse, How Do Third-Party, Bad Faith Bodily Injury Claims Affect Automobile Insurance Costs and Compensation? (2001) (summarizing research reported in The Effects of Third-Party, Bad Faith Doctrine on Automobile Insurance Costs and Compensation (MR-1199-ICJ), by the same authors).


Rita K said...

This whole campaign bothers me - as I remember what Mary Mulcahy had to go through. Bad faith was just one of the problems in her case.
Rita K

Richard Thompson said...

It is not unusual for an insurance company to limit or even deny coverage of a claim without proper justification or warning. Not every act of an insurance company with which you disagree is bad faith, but if you have been treated unfairly and have been denied coverage or a reasonable settlement wrongfully, you may have a case for bad faith against your carrier.

Insurance Bad Faith Attorney