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

Based on its findings, IRC estimates that the Third-PartyBad-Faith Act (S.B. 418) introduced by West Virginia statelegislature has reduced underlying insurance coverage costs byabout $200 million in the five-year period since the reforms wereenacted.

In 2005, S.B. 418 had been instated to eliminate the right ofthird-party insurance claimants to file lawsuits against anotherperson's insurer if the claimant believed the company treated themunfairly in the settlement of his or her claim. Instead of relyingon the courts, claimants were provided an administrative processfor filing complaints with the Commissioner of Insurance, who wasthen responsible for investigating complaints and imposingappropriate fines and penalties where it was determined that aninsurer had violated the state's Unfair Trade Practices Act. Thepassage of S.B. 418 was widely viewed as a major accomplishment inefforts to improve West Virginia's litigation environment.

The IRC report, The Impact of Third-Party Bad-Faith Reformson Automobile Liability Insurance Costs in West Virginia,examines the impact of S.B. 418 within the context of personal autobodily injury (BI) liability claim costs. IRC calculated BI claimfrequency and severity loss trends in West Virginia before andafter the reforms were enacted to arrive at its conclusion.Frequency and severity trends during the five calendar years (from2000 to 2004) before the year in which reforms were enacted (2005)were compared with trends during the five calendar years followingenactment (from 2006 to 2010). These “before and after” trends inWest Virginia were then compared with countrywide experience forthe same coverage and for the same time periods. Using countrywideexperience as a control, IRC attributed significant differencesbetween West Virginia and countrywide experience to the reformsenacted in 2005.

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

“These findings suggest that the reforms enacted in 2005 had amajor impact on the incentives insurers and claimants face in theclaim settlement process,” said Elizabeth Sprinkel, senior vicepresident of IRC. “This is important information for legislators toconsider when contemplating similar reforms in other states.”

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