Good Faith Fracas

Nonsense, the trial lawyers say. “I think they’re doing poor business if they’re paying fraudulent claims,” Messerly says, noting that insurance companies already regularly investigate and refuse questionable claims. Besides, he says, “the judges in our state are pretty good about dismissing non-meritorious claims.”

Higher Awards, Higher Premiums

A new law might cause insurance companies, as a group, to pay more in legal fees and damages. It would also result in larger settlements in cases that don’t go to court and a greater number of total claims paid, insurers say. Under those circumstances, they say, they’ll have to charge higher premiums. “It’s cheaper to pay fraudulent claims, but that means higher prices for everyone,” Kulda says.

Insurers say that it has happened elsewhere. In California, Kulda says, a legal decision allowed good faith lawsuits. Ten years later, the courts reversed themselves. He says the intervening decade saw an 80 percent increase in frivolous lawsuits related to auto accidents, as determined by the courts. The corresponding increase in legal and court fees were passed on to insurance consumers.

In West Virginia, he says, voters first approved and then repealed a good faith bill. “Once they repealed the law, insurers saw claims activity drop considerably, and they were able to pass along a savings of 15 percent,” Kulda says.

Henderson estimates that Minnesota would ultimately see higher premiums, too. “Rates are very competitive and going down now, so I don’t think you’ll see a rate increase right away,” he says. Eventually, though, a new law could inflate liability premiums by 10 percent. Property claims, he says, could go up by more than 10 percent, particularly on smaller claims that could see higher overall settlements.

For their part, trial lawyers say that new legislation could reduce overall lawsuit volume by encouraging insurers to reach a fair settlement without going  to court. “I think the law, if it is passed, will force insurance companies to change their behavior,” Crumley says. “As a result, a lot of people aren’t going to need a lawyer.

“I think it’s undeniable that insurance companies will have to pay more,” he adds, “but I think that’s because they will be paying claims that they should pay now. That’s what they’re in business for. They’re settling claims at a discount now, largely because they can.”

Finally, insurers argue, every consumer will pay higher premiums, but only a few will benefit from the new law that helped increase costs. Less than 10 percent of Western National’s policies have claims in any given year, Henderson says, and fewer still of those customers will have any reason to allege bad faith on the part of their insurer. That small minority of claimants, however, stands to benefit when insurance companies pay larger damages—in amounts that could be substantial—under the threat of new lawsuits.

In the last days of the 2007 legislative sessions, representatives for both sides of this issue tried to hammer out a compromise bill, but were unable to agree on the issues of damages and attorney’s fees. Whether they have better luck in 2008—and whether either side is willing to compromise—remains to be seen.