Senate Bill 188 (“SB188”) proposes to give consumers a private right of action under the Consumer Protection Act for unfair claim settlement practices by insurers. This bill has passed the Senate and is now pending in the House. Despite the claim that SB188 will benefit consumers, it will actually harm them because its passage will result in higher insurance premiums for New Hampshire consumers.
Under current law, the Unfair Insurance Trade Practices Act (“Act”) lists 13 acts or practices that constitute unfair claim settlement practices. If the Insurance Department finds that an insurer has committed an unfair claim settlement practice, it has the authority to suspend, revoke or refuse to renew an insurer’s license. In addition, the Insurance Department can assess an administrative penalty of up to $2500 for each act or practice found to be in violation of the Act. If the Insurance Department finds that a violation of the Act has occurred, any consumer who has been adversely affected by an insurer’s violation of the Act may bring an action against the insurer in superior court to recover any damages or loss suffered as a result of the violation.
It is appropriate that the Insurance Department be charged with policing violations of the Act by insurers and necessary that this continue. The Insurance Department is uniquely situated to investigate violations of the Act and to take action against insurers. The Insurance Department knows the insurers that transact business in New Hampshire, understands the way insurance companies should or should not be handling claims and is armed with the authority to take immediate action to curb any violations of the Act.
The purpose of the Act is to protect New Hampshire insurance buying consumers from unfair and deceptive acts and practices. Thus, a regulatory scheme already exists to protect consumers from the very same acts and practices that SB188 claims to address. If this scheme is already in place, is SB188 necessary?
Under the New Hampshire Consumer Protection Act (“CPA”), an injured consumer is entitled to recover the amount of his/her actual damages or $1000, whichever is greater. The injured consumer is also entitled to recover three times the amount of actual damages for a knowing or willful violation of the CPA and is entitled to attorney’s fees and costs. Thus, if SB188 is enacted, a consumer who has been aggrieved by an unfair claim settlement practice is entitled not only to his/her actual damages, but to three times his/her actual damages and an award of attorney’s fees and costs. The increase in costs that insurers will pay in order to litigate and settle these claims will undoubtedly be passed on to consumers in the form of higher insurance premiums.
California and West Virginia experienced this higher insurance premium phenomenon when those states permitted third party bad faith actions to be brought against insurers. In California, this was known as the “Royal Globe era,” so named for the 1979 state supreme court decision that permitted these types of lawsuits. During the Royal Globe era, California saw auto liability premiums increase by between 11 and 19%. Also during that time period, it was estimated that California bodily injury compensation costs increased by 29 to 35%. In reversing itself nine years after the original Royal Globe opinion was issued, the California supreme court pointed to the undesirable social and economic effects that flowed from third party bad faith actions, including escalating insurance coverage costs which were identified as “a certain result” of inflated settlements and costly litigation.
West Virginia consumers faced similar premium increases when third party bad faith actions against insurers were permitted in that state. The West Virginia Insurance Commissioner estimated that the cost of third party causes of action in West Virginia was $166.7 million per year in increased premiums paid by consumers for personal lines liability coverage (mostly auto insurance). In 2006, the governor of West Virginia credited the ban on third party actions for $77 million in policy rate cuts.
When higher premiums are passed on to consumers, more and more people are forced out of the market. SB188 may cause the number of uninsured and underinsured citizens in New Hampshire to rise. Inadequate insurance protection is detrimental to individual citizens and the public in general.
New Hampshire already has a regulatory scheme in place to protect consumers from unfair claim settlement practices by insurers. If SB188 is enacted, the costs that consumers will bear in increased premiums will outweigh any potential benefits that they will receive from having a cause of action under the CPA available to them. For these reasons, SB188 should be defeated.
*Donald Pfundstein is admitted in New Hampshire.