State's Bad-Faith Reforms Have Reduced Auto Liability Costs By $200M

IRC Assesses Impact of West Virginia Legislation

Today the Insurance Research Council (IRC) announced the results of its recent report analyzing the impact of third-party bad-faith reforms adopted in West Virginia.

Based on its findings, IRC estimates that the Third-Party Bad-Faith Act (S.B. 418) introduced by West Virginia state legislature has reduced underlying insurance coverage costs by about $200 million in the five-year period since the reforms were enacted.

In 2005, S.B. 418 had been instated to eliminate the right of third-party insurance claimants to file lawsuits against another person’s insurer if the claimant believed the company treated them unfairly in the settlement of his or her claim. Instead of relying on the courts, claimants were provided an administrative process for filing complaints with the Commissioner of Insurance, who was then responsible for investigating complaints and imposing appropriate fines and penalties where it was determined that an insurer had violated the state’s Unfair Trade Practices Act. The passage of S.B. 418 was widely viewed as a major accomplishment in efforts to improve West Virginia’s litigation environment.

The IRC report, The Impact of Third-Party Bad-Faith Reforms on Automobile Liability Insurance Costs in West Virginia, examines the impact of S.B. 418 within the context of personal auto bodily injury (BI) liability claim costs. IRC calculated BI claim frequency and severity loss trends in West Virginia before and after the reforms were enacted to arrive at its conclusion. Frequency and severity trends during the five calendar years (from 2000 to 2004) before the year in which reforms were enacted (2005) were compared with trends during the five calendar years following enactment (from 2006 to 2010). These “before and after” trends in West Virginia were then compared with countrywide experience for the same coverage and for the same time periods. Using countrywide experience as a control, IRC attributed significant differences between West Virginia and countrywide experience to the reforms enacted in 2005.  

The average BI liability paid losses per insured car in West Virginia fell significantly in the first three years following the adoption of S.B. 418. Loss costs then increased slightly in 2009, but fell again in 2010. For the period 2000-2004, BI liability loss costs in West Virginia were approximately 47 percent greater than loss costs countrywide. By 2010, however, West Virginia loss costs were only 7 percent greater than loss costs countrywide. Nearly all of the difference between West Virginia and countrywide experience was due to a moderation in the severity of West Virginia BI claims following the adoption of S.B. 418. As BI claim severity countrywide increased steadily during the period 2006-2010, West Virginia claim severity declined 8 percent.

“These findings suggest that the reforms enacted in 2005 had a major impact on the incentives insurers and claimants face in the claim settlement process,” said Elizabeth Sprinkel, senior vice president of IRC. “This is important information for legislators to consider when contemplating similar reforms in other states.”

The IRC is a division of the American Institute For CPCU (The Institutes). The Institutes are an independent, nonprofit organization dedicated to providing educational programs, professional certification, and research for the P&C insurance business.

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