LANSING – The Michigan House today passed legislation to protect consumers from the most unfair and abusive insurance company practices, known as "bad faith" or "wrongful denial." The plan creates penalties for insurance companies that deny policyholders' rightful claims, while holding CEOs and other corporate leaders accountable for boosting profits at the expense of consumers. The legislation, which now heads to the Senate for approval, is modeled after laws in 46 other states.
"Michigan consumers deserve the same protections against insurance companies that act in bad faith as the consumers in the 46 other states," said State Representative Barb Byrum (D-Onondaga), Chair of the House Committee on Insurance and bill sponsor. "This plan protects our hard-working men and women by holding insurance companies and CEOs accountable when they violate contracts with policyholders to boost profits. I urge the Senate to quickly pass this plan and better protect our consumers."
Bad faith insurance practices consist of a set of tactics to delay or deny legitimate insurance claims in order to maximize a company's bottom line. Such practices can have devastating consequences for consumers while reaping profits for companies.
Passage of the plan today came even as insurance companies and their lobbying and public relations firms launched radio attacks and automated phone calls against legislators who are working to repair Michigan's lagging consumer protection laws.
"When we buy insurance, we expect the company to be there when we need it, but when the company acts in bad faith the economic and personal results can be devastating," said State Representative Sarah Roberts (D-St. Clair Shores), a sponsor of the plan. "Policyholders could lose their home to foreclosure or lose their entire life savings, all because an insurance company is trying to boost its bottom line – and that's just not right."
Michigan's current law offers little or no protection against bad faith insurance practices, and the state's lack of penalties acts as an incentive to encourage companies to break their promises and exploit residents. According to many stories, including a 2007 Bloomberg News report, insurance companies even make money by low-balling claims and collecting interest when they delay a consumer's claim.
Jo Anne Katzman of Bloomfield Hills, a former claims adjuster with Allstate Insurance Company who became a whistle-blower, saw firsthand why consumers need stronger protections against the wrongful practices of the insurance industry. Katzman said managers regularly threatened that adjusters would lose their jobs if they didn't deny enough claims. She also was ordered not to pay a claim she knew was valid. According to multiple reports by Bloomberg News, both Farmers Insurance and Allstate have employee incentive programs for adjusters who deny the most claims.[1]
"I could no longer look people in the eye knowing our insurance company would turn its back on them in their hour of need just to make even more money," said Katzman, who worked for Allstate from 2002 to 2003. "The employees who regularly delayed or denied claims were awarded with promotions and rewards. Having worked on the inside, I can tell you that no one is in good hands with Allstate or with any other insurance company until Michigan toughens its consumer protection laws."
The House Democrats' plan will:
- Strengthen consumer protections with penalties against insurance companies that illegitimately deny consumer claims. An additional $1 million fine could be issued against companies that repeatedly violate contracts with policyholders.
- Hold CEOs accountable when they knowingly foster or encourage wrongful denial of claims by making the misconduct a felony that could result in four years in prison plus a $50,000 fine.
- Create a whistle-blower protection plan to shield employees who report that an insurance company is engaging in wrongful denial of claims.
- Require insurance companies to repair a consumer's credit rating when it is harmed by wrongful denial of coverage.
"When you and I make a promise, we are expected to keep it," said House Majority Floor Leader Kathy Angerer (D-Dundee). "Insurance company CEOs and executives should not get away with breaking their word. I applaud my colleagues for passing these bills ensuring that insurance companies and their CEOs play by the same rules as everyone else."
[1] Dietz, David and Preston, Darrell. "Home Insurers' Secret Tactics Cheat Fire Victims, Hike Profits," Bloomberg News, Aug. 3, 2007.