Following the enactment of R-67—which was adopted by the Washington State Legislature in 2007 and approved in a statewide voter referendum—homeowners' claims costs were as much as $190 million greater than such claims otherwise would have been in that 2-year period. Known as “The Insurance Fair Conduct Act,” R-67 eased restrictions for aggrieved insurance claimants filing lawsuits alleging insurer misconduct.

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

The law not only allows for bad-faith claimants to be potentially compensated for punitive damages but also for actual damages, 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 states with similar first-party bad-faith laws that were in effect before the implementation of R-67. For homeowners' insurance, IRC documented a significant increase in average claims payments. Although average claim payments also increased in the control group of states, the average increase in Wash. was 17 percentage points higher than in the control group states.

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

Early supporters of the law theorized that the change regarding punitive damages would deter insurers from questioning or investigating claims that might have been fraudulent or included exorbitant charges. The rationale was that more questionable claims would be paid, and thus claims settlements would generally be higher as insurers sought to reduce the risk of awards for punitive damages. However, perhaps no one could have predicted the extent to which the law would affect the settlement process.

“These findings suggest that major changes to the financial incentives insurers and claimants face in the claim settlement process can have a significant impact on claim settlement behaviors and outcomes, and, ultimately, insurance claim costs,” added Elizabeth Sprinkel, senior vice president of the IRC. “This is important information for legislators to consider when contemplating major changes in liability rules and standards, such as 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 to repeal the law. Clearly R-67 will be a topic of conversation for years to come.