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Proposed Michigan Insurance “Bill of Rights” Imposes Significant Burdens on Insurers

A new bill has been proposed in the Michigan Senate to create a “Bill of Rights” for insureds. This bill applies to all insurance policies, other than health insurance policies, and also applies to the handling of claims under insurance policies.

The bill outlines various responsibilities and duties of an insurer. The responsibilities and duties apply to a “claimant” defined as “a first-party claimant, a third-party claimant, or both, and includes the claimant’s designated legal representative and a member of the claimant’s immediate family designated by the claimant . . .” “First-party claimant” is defined as “a person asserting a right to payment under insurance policy or insurance contract, or from a person that has obtained permission from a regulatory agency to be self-insured, arising out of the occurrence of a contingency of loss covered by the policy or contract.” “Third-party claimant” is defined as “a person asserting a claim against a person that is insured under an insurance policy or insurance contract.” Some of the following duties thus apply to a third-party claimant and not just to an insured, which is basically absurd. There are numerous duties set forth which include the following:

  1. An insurer shall exercise good faith and fair dealing in the investigation, adjustment, evaluation and payment of a claim. This includes:
    1. Not delaying or failing to pay a claim unless there is a reasonable basis and support in the policy to do so.
    2. Set out with specificity the factual and legal basis for the delay, denial or failure to pay a claim in writing and provide it to the claimant within 7 days.
    3. Not changing the factual or legal basis for the action once a suit is filed.
  2. An insurer shall give the claimant all reasonable benefit of the doubt in the investigation and evaluation of the claim.
  3. An insurer shall establish and maintain written standards for prompt investigation, adjustment, evaluation and payment of claims.
  4. An insurer shall not deny or forfeit a claim for failure to comply with a policy condition unless the insurer first provides the claimant with written notice that a policy condition has not been met and provides the claimant a reasonable period of time, not less than 30 days, to cure the defect in satisfying the condition.
  5. A claim cannot be denied without the insurer conducting a reasonable investigation.
  6. Any ambiguity in an insurance contract or policy must be construed in favor of the insured.
  7. There must be reasonable notice for any examination under oath and the claimant’s attorney must be permitted to attend.

Additionally, the Bill requires production of various documents and information within 7 days of a request from a claimant, such as:

  1. All underwriting files, policies, and applications.
  2. Update on the status of a claim.
  3. Any written and/or recorded statements made by the Inspection documents if the claimant was not present at the time of the examination.

Further, a status report is required to be sent to the claimant every 30 days regardless of whether one was requested, advising of the status of the claim, what additional information, if any, is necessary for the insurer to make a claim decision, and when a claim decision can reasonably be expected to be made.

An insurer shall also pay a claimant’s additional living expenses under a fire policy and pay business interruption and extra expenses under a commercial or business policy during the investigation of a claim under the policy. If an insurer denies a claim, the insurer shall not terminate the payments before 14 days after the insurer notifies the claimant of the denial.

Regarding a fire insurance policy that provides for replacement cost of damaged property or for replacement cost of personal property, the insurer shall provide the claimant a reasonable period of time after payment of the actual cash value without regard to a time limit set forth in the policy for repair and replacement of the property.

An insurer or an adjuster, agent or other representative of the insurer shall not misrepresent pertinent facts or fail to fully disclose to a first-party claimant all pertinent benefits, coverages, coverage limits, or other provisions of an insurance policy or insurance contract under which a claim is presented.

An insurer shall not deny a claim for failure to provide written notice of loss or proof of loss within a specified time limit unless the failure to comply with the time limit materially prejudices the insurer’s rights, and unless the insurer has specified ahead of time the reasonable materials that constitute proof of loss and has provided adequate time to provide proof.

The proposed Bill also contains a section regarding bad-faith failure to settle a third-party claim. The insurer has a non-delegable duty to its insured and a claimant to handle the claim in good faith including:

  1. Assign an insurance adjuster to investigate the claim and resolve any questions concerning the existence or extent of the insured’s coverage.
  2. Advise the insured or claimant of any additional relevant information that is necessary for the evaluation of whether to settle a claim within the applicable policy limits.
  3. Exercise due diligence and good faith in advising the insured of any cooperation required to settle the claim, the purpose of the required cooperation, and the consequences of refusing to cooperate, and confirming that advice in writing to the insured.
  4. Provide reasonable assistance to the insured or the insured’s representative to comply with the insured’s obligations to cooperate and to satisfy any conditions to payment of a claimant’s settlement offer.
  5. On request, provide all communications related to a claim against the insured to the insured or the insured’s representative.
  6. Communicate all of the following to an insured or the insured’s representative:
    1. The identity of any other person that the insurer has reason to believe may be liable.
    2. The insurer’s evaluation of the claim.
    3. The likelihood and possible extent of an excess judgment.
    4. Steps the insured can take to avoid exposure to an excess judgment.
    5. Any settlement offers, and anything required of the insured to accept a settlement offer.
    6. The basis for the insurer’s rejection or nonacceptance of any settlement offer.
  7. Take all reasonable and available actions to avoid or minimize excess exposure to the insured. The insurer shall give fair consideration to any settlement offer that is not unreasonable under the facts and accept it, if possible, if a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.

If an insurer fails to make an offer within the policy limits when liability is reasonably clear and it is reasonably clear that damages may exceed the policy limits, the insurer’s liability is not limited to the policy limits.

These are major changes to Michigan law, directly contrary to appellate cases, particularly regarding duties to third-party claimants, bad faith, and bad faith damages.

This Bill also imposes considerable additional duties on claim handlers. The requirement to create and maintain written standards for claim adjusting will not only create liability issues but will likely result in plaintiff’s attorney’s demanding adjuster depositions.

Click here to view a copy of the proposed Bill.

If you need any further information on these issues, please do not hesitate to ask.