LANSING – Macomb County State Representatives Sarah Roberts (D-St. Clair Shores) and Jon Switalski (D-Warren) today voted to pass 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, is modeled after laws in 46 other states.
"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 Roberts, 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."
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.
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 plan passed today 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.
"Especially in these tough economic times, insurance companies and their leaders need to live up to the promises they make to consumers," said Switalski, a sponsor of the plan. "People need to come before profits. Our plan says that CEOS and companies that knowingly wrongfully delay and deny consumer's claim aren't above the law. I am pleased with the action on this plan today to put Michigan consumers' best interests first."
Note: Wrongful denial testimony is available at: www.stopinsurancedenial.com
[1] Dietz, David and Preston, Darrell. "Home Insurers' Secret Tactics Cheat Fire Victims, Hike Profits," Bloomberg News, Aug. 3, 2007.