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TO:Federal & State Elected Officials

Dear Elected Official:

I am writing to you to express my concern regarding the cost to policyholders of bad faith activity on the part of insurers.

Insurance premiums continue to increase faster than the rate of inflation while coverage steadily decreases, pricing many unfortunate consumers, especially those on low or fixed incomes, out of the market. The insurance industry would have us believe that the rate increases are merely keeping pace with the rising costs of medical care, automobile parts and the like. In fact, however, the rate increases have and continue to outpace increases in the costs of the goods and services covered by a wide margin.

For example, health insurance premiums rose 11% between 2000 and 2001 according the Kaiser Family Foundation and Health Research and Educational Trust. The California Public Employee’s Retirement System- the nation’s largest health insurance plan after the federal government – recently announced a premium increase of 25%. However, the change in the Consumer Price Index -All Urban Consumers, US City Average, Medical Care, from 2000 to 2001 was only 4.6%.

Auto insurance premiums have risen as much as 30% - 60% across the country during recent years. In the State of New Jersey, drivers without comprehensive and collision coverage may see their liability rates increase by as much as 30% at the time of their policy renewal, even if they have spotless driving records.

I suspect that part of the reason for increased premiums is the amounts paid by insurance companies to settle claims for bad faith denials of claim or to pay judgments rendered against them to punish them for such bad faith denials.
When an insurance company fails to honor its obligations to its policyholder in bad faith, the policyholder has a claim for damages (including punitive damages) above and beyond the amount that should have been paid for the claim pursuant to the insurance contract. Policyholders assume that when they submit a claim their insurers will negotiate in good faith and compensate them fairly for their losses. Yet in too many cases, claims adjustors deny legitimate claims or use strong arm tactics to entice claimants to take less than they are entitled to receive under their insurance policies. Claimants know that they can either settle for less than that to which they are entitled or face a lengthy legal process to recover the actual amount of damages owed to them.

Too often, insurers fail to adequately investigate claims, deny claims without adequate supporting evidence, make unreasonably low settlement offers, refuse to reveal policy limits, refuse to negotiate, make oppressive demands not required by the policy, destroy evidence that would support the insured’s claim for benefits, reject the recommendations of counsel regarding settlement, and rely on minor misrepresentation in the insurance application as a reason for denying coverage or to coerce acceptance of a compromise of a claim.

In response to these actions on a claim by an insurance adjuster, a claimant has the option to file a bad faith lawsuit against the insurance company. This is where the big money is paid for bad faith practices to punish insurance companies --- on the policyholder’s dime as well. According to the Jury Verdict Research Series, the average mean for punitive damages for bad faith claims is one million dollars. The report further states that 53% of the claims result in awards for more than one million dollars. Jury Verdict Research Series identifies about 500 bad faith cases against insurers that went to verdict between 1986 and 1992. Punitive damages were awarded in more than one third of the verdicts. The mean punitive damages award was $4.9 million. This is on top of compensatory damages, which in bad faith cases are awarded for “emotional distress.”

The solution to this activity is simple. Insurance companies should be required to publicly disclose this information on their annual reports. Insurance companies are clearly not regulating themselves adequately when it comes to honest claims paying practices. Better state regulation is in order. State regulators should shine a bright light on claims payment practices by requiring insurers to provide better and more detailed reporting of bad faith claims. This should; hopefully, cause claims adjusters to think twice before denying legitimate claims. Fewer bad faith claims should result in smaller rate increases.

At the present time insurance companies do not break down their claims expenses in their financial reports to their shareholders and policyholders. There is no way of knowing what percentage of “Claims and claims expenses” or “Other costs and expenses” consists of punitive damages awards and defense costs as compared to covered goods and services.

In this era of questionable accounting practices, it would be appropriate for regulators and shareholders to insist on a more detailed accountability to ensure ethical management practices. Insurers should be required to report bad faith lawsuits and their outcomes (whether by settlement or verdict) to state insurance regulators. Insurers should also be required to itemize their claims expenses in their financial reports with greater detail. Legal fees should be separately stated, for example, and legal fees for defending insureds should be segregated from legal fees for defending the insurance company itself. Sums paid to insureds or third parties on account of covered claims should be stated separately from sums paid to insureds in settlement or satisfaction of bad faith claims.

I know the issue of affordable health and auto insurance is of top priority to many of your constituents. Please take the necessary steps to protect us from bad faith claims practices by insurance companies by requiring them to make a full public disclosure of bad faith settlement amounts and lawsuit verdicts.

Please acknowledge this message and let me know your position on this matter.

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Sincerely,

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