Battle lines have been drawn in Washington between insurers and the plaintiffs’ bar as both sides square off over the Insurance Fair Conduct Act, which Governor Chris Gregoire signed into law on May 15. The legislation seeks to make a number of changes to state insurance law and includes a provision that permits triple damages to be imposed against insurers found to have unreasonably denied valid claims. However, a coalition called the Consumers Against Higher Insurance Rates submitted 155,220 petition signatures to put the matter to a public vote in November, and insurers and their lobbying groups are pouring millions into a campaign to defeat this ballot measure.

Clearly the biggest impact of the Insurance Fair Conduct Act is that it allows for the possibility of an assessment of punitive damages, up to three times the amount of actual damages, against an insurer that is found to have violated the Act.  This is a very great change from pre-existing Washington law, which historically has allowed a trebling of up to $10,000 per claim, and only if an insurer acted in bad faith or unreasonably violated a provision of the Washington Administrative Code regarding trade practices.  With respect to insurance coverage claims, the penalty was a real possibility only in those instances where there was no reasonable justification for the denial of the claim.

The new Act also changes existing law by authorizing “first party claimants” to assert coverage claims and defines “first party claimant” as any person who has a right to assert a claim for coverage. This broad term is therefore not necessarily limited to a named insured on the policy and can include, in theory at least, an omnibus insured.  Such persons may bring claims for actual damages sustained. 

Insurers blasted the Act as certain to increase the cost of coverage for individuals and businesses and are concerned that the new law will allow virtually every insurance claim, regardless of merit, to become a ‘bad faith’ lawsuit, thereby triggering access the statute's treble damage provision. Various industry groups, including the Property Casualty Insurers Association of America,the American Insurance Association and the National Association of Mutual Insurance Companies have all criticized the law on grounds that it will impose new costs on Washington businesses.

Enter Referendum 67 and the insurance industry’s heavily funded war chest. Public Disclosure Commission records reveal massive donations to the campaign to defeat the ballot measure from Bloomington, Illinois-based State Farm Mutual Automobile Insurance (which has donated more than $1.6 million) and Los Angeles-based Farmers Group (which has donated nearly $1.2 million). Insurers donated $3.9 million of the $5,834.576.40 in total funds since Aug. 1, 2007.

State trial lawyers’ groups working to get this legislation approved have raised the relatively modest sum of $489,016. This amount includes $116,000 contributed by the Washington State Trial Lawyers Association. The trial lawyers groups that led the fight when S.B. 5726 was passed deny that the new legislation will lead to groundless lawsuits or higher premiums and point to studies that fail to support the insurance industry’s contrary views.

Commercials began airing during the week of Aug. 20 directing Washington voters to reject Referendum 67. Insurers are following a take-no-prisoners approach, and until voters decide on Nov. 6 whether to keep the law, the Insurance Fair Conduct Act will undoubtedly remain under siege.

Additional information about the Washington Insurance Fair Conduct and Referendum 67 is available in the September issue of Mealey's Insurance Regulatory Compliance Report . See http://www.lexis.com/xlink?source=mealey;meairc&relativedate=previos_2_months