On August 19, 2009, Michigan’s House Insurance Committee advanced the package of “bad faith” bills (House bills 4244, 4844, 4858, 5020, 5144-5151) by voting to toughen penalties for insurance companies that deny or delay valid claims.  The bills aim to create new causes of action and increase fines and penalties against insurance companies for failure to act in good faith in handling claim payments.  It has been reported, however, that despite the advancement of the bills the legislation will stall in the Republican-controlled Senate.

Supporters of the legislation contend that Michigan is one of only four states that lacks the imposition of financial penalties upon an insurer when a court rules that such insurer has not fairly settled a claim.  Rep. Barb Bynum (D-Onondaga), chair of the House Committee on Insurance, says that the bills are an effort to have Michigan join the 46 other states that punish insurance companies for wrongfully denying claims.  These bills will also serve to hold CEOs and corporate leaders accountable if they boost profits by denying or low-balling valid claims.

Alternatively, insurance industry supporters argue that the bills are unnecessary and will open the floodgates for frivolous lawsuits against insurance companies, the cost of which will eventually be passed along to consumers.  According to the Insurance Institute of Michigan (IIM), “needless, costly lawsuits are already up” in Washington, where similar “bad faith” legislation was passed last year.  Likewise, according to IIM’s executive director, Pete Kuhnmuench, West Virginia repealed its third-party “bad faith” law after the state found that the law was driving up the cost of insurance for its residents.  Other insurance groups including the National Association of Mutual Insurance Companies, the American Insurance Association and the Life Insurance Association of Michigan are also opposing the legislation.

We will continue to monitor future developments on this topic on InsureReinsure.com.