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 that2-year period. Known as “The Insurance Fair Conduct Act,” R-67eased 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,vice president at the IRC. “One of the provisions was to authorizepayment of virtually unlimited punitive damages in thosecases.”

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 claims frequency and severity loss trends in Wash.with the frequency and severity trends for a group of four stateswith similar first-party bad-faith laws that were in effect beforethe implementation of R-67. For homeowners' insurance, IRCdocumented a significant increase in average claims payments.Although average claim payments also increased in the control groupof states, the average increase in Wash. was 17 percentage pointshigher than in the control group states.

When changes in claims frequency are alsoconsidered, IRC estimates that R-67 may be responsible for a21.9-percent increase in average claims costs for every insureddwelling in the state. With approximately 1.9 million insuredexposures in Wash., excess costs potentially attributable to R-67for 2008 and 2009 are estimated 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 settlement process can have a significant impact on claimsettlement behaviors and outcomes, and, ultimately, insurance claimcosts,” added Elizabeth Sprinkel, senior vice president of the IRC.“This is important 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.