Merritt Personal Lines Manual: Booming Lawsuits and an Industry Response
A growing number of people sue first and figure out what happened later.
Litigation between policyholders and insurance companies increased steadily during the 1990s and early 2000s. One mid-1990s study estimated that property and liability insurance companies alone spend more than one billion dollars yearly in coverage litigation.
One thing that may be adding to these costs is the fact that given the state-by-state regulation of insurance some savvy lawyers channel the lawsuits into states with consumer-friendly laws. This practice, which lawyers call "forum shopping," increases costs dramatically.
In an effort to make regulation somewhat consistent, the National Association of Insurance Commissioners (NAIC) adopted a number of measures to increase uniformity in market conduct matters across states.
In December 1971, the NAIC added a claims settlement practices section to the existing Model Unfair Trade Practices Act. Prior to that time, the Unfair Trade Practices Act did not contain language specifically relating to insurance claims practices so there was not explicit regulatory oversight of the claims process.
The Unfair Claims Settlement Practices section of the Unfair Trade Practices Act of 1971 delineates fourteen acts, each of which qualify as an unfair claims practice if "committed with such frequency to indicate a general business practice."
Under the 1990 model amendments to the 1971 Act, if a single violation is found to be flagrant or in conscious disregard of the Act, fines may be increased to $25,000 per violation with a maximum fine of $250,000. The commissioner also has the authority to suspend or revoke an offending company's license if it knew or reasonably should have known, that it was in violation of the Act.
All states have adopted some form of this amended Act or similar legislation, although the laws still vary widely from state to state.
Most state legislatures intended that the amended Unfair Claims Settlement Practices Acts of the early 1970s were designed to benefit the public in general, rather than individual claimants and that this intent was misinterpreted by several liberal courts that allowed individuals to recover damages under the statutes.
There have been significant legislative and judicial changes recently at both the state and the national level. The NAIC revisited unfair claims settlement practices regulation in the late 1980s in light of the emerging growth of private causes of action under comparable state provisions and whether the actions were appropriate and beneficial to consumers in general.
Of particular concern was the possibility of higher insurance prices resulting from coerced settlements, high judgments against insurance companies and increased attorney fees incurred to defend and settle claims. In 1990, the NAIC separated the claims provisions from the Model Unfair Trade Practices Act to establish free-standing Unfair Claims Settlement Acts for insurance companies.
The NAIC didn't intend for the Model Unfair Claims Settlement Act to create an increase in litigation. The objective of the Act was to promote an environment in which consumers are protected from claims practices which are inequitable in a broad sense.
But it did encourage more lawsuits.
