Bad faith legislation is not good policy

When the topic of bad faith legislation arises in the states, the proverbial hair on the back of the neck rises for insurers nationwide.

If a policyholder were to ask why, the answer is simple: Legislation like this does not benefit consumers, nor does it improve insurance regulation. Its solely for the benefit of trial lawyers. It creates a double lawsuit windfall that clogs the courts, keeping meritorious suits from being heard. Such legislation also countermands the authority of state insurance regulation, and instead interjects a litigation shakedown and lottery-style pursuit of jackpots that ultimately hurt policyholders through increased costs and premiums.

Plainly and simply, bad faith legislation is solely for the benefit of plaintiffs’ attorneys.

In 2018 and 2019, there’s been a spike in the trajectory of bad faith proposals with three hot spots topping the list: Oregon, New Jersey and Virginia.

See also: 10 biggest bad faith verdicts from 2013-2018

‘Grasstop’ success in Salem

Bad faith legislation has been a perennial threat in the Oregon Legislature for the past seven years, with various versions of first- and third-party bills being introduced almost annually.

In response to the constant legislative threat and the advocacy influence of the trial bar, NAMIC helped create an industry coalition specifically dedicated to educating consumers and policymakers about the adverse implications of bad faith on insurance consumers and small businesses in the state. An organizational initiative called Fighting Against Increased Insurance Rates successfully helped the insurance industry defeat bills with targeted grassroots and grasstops messaging to key legislators.

The 2018 elections saw expanded Democratic control of both legislative chambers. The Democratic governor, a former trial lawyer, also remains in power. With a slight super majority in both chambers and less moderate Democrats in the Senate to help defeat bad bills, the task faced by the industry is much more challenging this year.

To date, two bills have been introduced. HB 2421 allows for a private cause of action for an alleged violation of the insurance code and authorizes an award of actual damages, attorney’s fees, and punitive damages. The bill also expands the investigative powers and civil claims settlement authority of the director of the Department of Consumer and Business Services. In effect, it grants plaintiff’s attorneys broad pre-trial discovery at no cost to the plaintiff and could adversely impact due process protections afforded to insurers.

The other bill — SB 728 — would add insurance to the state’s Unfair Trade Practices Act, so that the attorney general could assert jurisdiction. This cause of action also would expose insurers to standard bad faith exemplary damages and attorney’s fees claims.

Advocacy in New Jersey

Another multi-year effort on bad faith legislation is happening in the Garden State. The pending bills would establish a cause of action for “unnecessary delay or unreasonable denial for payment of claims under an insurance policy.” Additionally, the language states that there would be no need to show a pattern or practice.  It would allow for a plaintiff to receive actual damages, prejudgment interest, reasonable attorney’s fees, all reasonable litigation expenses, and treble damages.

While SB 2144 passed the Senate on June 7, 2018, by a 21-14 vote, the Assembly companion bill, A-3850, has been pending in the Assembly Financial Institutions & Insurance Committee.

Again, NAMIC is part of a coalition opposing this bad faith bill and has prevented prior attempts to fast track this legislation. To understand the potential impact of the bill, in 2018, NAMIC and other partners hired Milliman to conduct actuarial research. The Milliman study highlights the potential magnitude of the problem. It indicates that the bill could lead to a variety of adverse effects, including:

• Increase of premiums for property/casualty insurance policyholders by $2.5 billion in New Jersey, which is driven largely by increase annual loss and loss adjustment expense;
• An increased likelihood of a more adversarial litigation environment driving up costs and further burdening already congested court dockets with unfounded bad faith claims;
• Potential increase of mandated auto insurance coverage rates by 20 percent to 40 percent;
• Increase in homeowners’ insurance rates by 17 percent; and
• Increase in incentives for insurance fraud.

Commonsense in the Commonwealth

Most recently, a somewhat perennial offering from a Virginia senator unexpectedly gathered steam and was advanced out of committee to the Senate floor, where members waived constitutional third reading and passed it ahead of the commonwealth’s crossover deadline when all bills must be out of their house of origin.

SB 1117 aimed to create an expanded bad faith action for underinsured/uninsured motorist coverages where an insured seeks coverage from their insurer due to another driver’s lack of adequate insurance.

Because SB 1117 gives judges vague instruction, such as the term “reasonable settlement offer” is undefined, in determining whether an insurer acted in “good faith,” it is likely that the bill would have caused long and complex litigation battles that add costs to consumers.  SB 1117 also bizarrely tried to require judges to decide when an insurer “knew or should have known” that a claim was covered under the terms of a policy.  Permitting judges to determine when an insurer “should have known” a complex, often nuanced coverage question invites inconsistent and overreaching decisions.

NAMIC has been fighting this particularly bad idea with abundant grassroots assistance from members, and the good is the bill died in the House Commerce and Labor Committee earlier this month.

These bills are a terrible blight on the insurance market and stand in the way of the lowest cost insurance solutions for policyholders to match their risk and needs. NAMIC will continue fighting against bad faith bills throughout the country to ensure that it’s the policyholders who benefit, not the lawyers.

Erin Collins (ecollins@namic.org) is the assistant vice president of State Affairs at the National Association of Mutual Insurance Companies. These opinions are her own.

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