Homeowners' claims costs have been climbing in Wash., and a newstudy conducted by the Insurance Research Council (IRC) hasidentified legislation passed in 2007 as the most probableculprit.

Following the enactment of R-67—which was adopted by theWashington State Legislature in 2007 and approved in a statewidevoter referendum—homeowners' claims costs were as much as $190million greater than such claims otherwise would have been in thetwo-year period. Known also as “The Insurance Fair Conduct Act,”R-67 eased restrictions for aggrieved insurance claimants filinglawsuits alleging insurer misconduct.

“The intent was to expand the ability of policyholders to filebad-faith claims against insurers,” said David Corum, CPCU, vicepresident at IRC. “One of the provisions was to authorize paymentof virtually unlimited punitive damages in those cases.”

The law not only allows for bad-faith claimants to bepotentially compensated for punitive damages but also for actualdamages, attorneys' fees, and court expenses.

To assess the impact of the new law, IRC compared claimsfrequency and severity loss trends in Wash. with frequency andseverity trends for a group of four states with similar first-partybad-faith laws that were in effect before the implementation ofR-67. For homeowners' insurance, IRC documented a significantincrease in average claims payments. Although average claimpayments also increased in the control group of states, the averageincrease in Wash. was 17 percentage points higher than in thecontrol group states.

When changes in claims frequency are also considered, IRCestimates that R-67 may be responsible for a 21.9-percent increasein average claims costs for every insured dwelling in the state.With approximately 1.9 million insured exposures in Wash., excesscosts potentially attributable to R-67 for 2008 and 2009 areestimated to total $190 million.

Early supporters of the law theorized that the change regardingpunitive damages would deter insurers from questioning orinvestigating claims that might have been fraudulent or includedexorbitant charges. The rationale was that more questionable claims would be paid, and thus claims settlementswould generally be higher as insurers sought to reduce the risk ofawards for punitive damages. However, perhaps no one could havepredicted the extent to which the law would affect the settlementprocess.

“These findings suggest that major changes to the financialincentives insurers and claimants face in the claim settlementprocess can have a significant impact on claim settlement behaviorsand outcomes, and, ultimately, insurance claim costs,” addedElizabeth Sprinkel, senior vice president of the IRC. “This isimportant information for legislators to consider whencontemplating major changes in liability rules and standards, suchas was the case with R-67.”

So, are P&C insurers getting a raw deal? At press time,there was no hint of follow-up legislation or efforts to try torepeal the law. Clearly R-67 will be a topic of conversation foryears to come.