Good Faith Fracas

. . . Or Completely Unnecessary?

Insurance companies and trade associations strongly object to the potential legislation and the effects they say a new law would have.

There’s no need for a law allowing law suits against insurance companies acting in bad faith, they say, because insurance companies typically act in good faith. “In Minnesota every year, insurance companies handle thousands of claims with no problem whatsoever,” says Ann Weber, vice president and regional manager and counsel for the Chicago-based Property Casualty Insurers Association of America, an industry group. “Inevitably, when you have thousands of claims filed, you will have some where someone is not happy,” she says, though that doesn’t mean the insurance company is wrong.

If an insurance company does act badly, the insurance industry says, Minnesota already has legal and governmental safeguards that protect policyholders. Minnesota law includes the Claims Practices Act and the Unfair and Deceptive Practices Act, which outline standards for handling claims. A Minnesota consumer who is unhappy with a settlement can contact the Minnesota Department of Commerce. If the department determines that an insurance company has violated the law or is otherwise in the wrong, they can and do pressure insurers to correct problems.

“We go to bat for consumers daily,” says Bill Walsh, spokesman for the Minnesota Department of Commerce. “We recover millions of dollars a year beyond what insurance companies have offered.” To do that, the department relies on their relationships within the insurance industry and on the department’s ability to levy fines and control state business licenses. “We are limited in our power, but we do have power over licenses, and because of that, we can get companies to do a lot,” Walsh says.

Trial lawyers recognize the department’s power, but say it lacks the ultimate legal force of a lawsuit. Though they can remove a company’s ability to write policies in Minnesota, the department doesn’t have the power that a court has to order payment.

As for the proposed law, the insurance industry argues that the triggering event for a good faith lawsuit is much lower in proposed Minnesota legislation than in other states’ laws. “Other states have a trigger that includes reckless conduct—the insurer knew or should have known that it was acting in bad faith,” says Mark Kulda, vice president of public affairs at the Insurance Federation of Minnesota, which is based in St. Paul. “This particular trigger”—that of unreasonable denial, underpayment, or delay—“would be the weakest in the country, and would open the floodgates to an enormous number of frivolous lawsuits that will cost consumers money.”

Insurance companies might also find themselves pressured into paying more than they should on legitimate claims, says Stu Henderson, president and CEO of Western National Insurance Group in Edina. “Lawyers in negotiations can threaten to bring a bad faith lawsuit if the insurance company doesn’t give them what they want,” he says. “That’s hanging over the adjuster’s head.”

Henderson worries that a law change could even encourage arson, by limiting the resources insurance companies are willing to devote to investigating suspicious fires. “Without a [good] faith law, we can be a lot more vigilant about denying claims if we think someone burned a property,” he says.