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Faithless: does $200 million turn bad faith into good?

May 1, 2015
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5min read

In America, the courts are open to anybody who feels wronged.

Anybody, that is, except someone who feels wronged by an insurance company.

Why? When insurance companies do wrong, i.e. when they act in "bad faith," they are protected by a ring of legal obstacles that make suing them very difficult. The insurance companies aren't talking, but keeping those obstacles in place may be the driving force behind the $200 million that the industry invests annually in lobbying and political donations.

Insurance contracts aren't like other contracts. The difference in power and information between insurer and insured - insurance companies often know more about insurance (clearly) and have more money to spend on lawyers than do the insured people - means that an insurance  contract isn't the product of fair bargaining.

In response, almost all states have enacted laws that require insurance companies to act in good faith. To play fair, in other words. Playing fair means no stalling and making reasonable offers to settle claims.

When an insurance company breaks the rules, proving bad faith is tough. And the number of attempts is low because few lawyers will take a bad faith case on contingency, and few plaintiffs have the money to pay the legal fees.

"We'll do it - if the case is big enough," says William O'Mahony of Sepe & O'Mahony of Rockville Centre, NY. "But we scrutinize those case very carefully. Going in, we know it's going to be a tough fight. It could be ten years or more."

Still, insurance companies have been unable to plug every leak. One case - State Farm Mutual Automobile Insurance Company v. Campbell - even made it to the Supreme Court. And the Supreme Court's opinion is a conspiracy theorist's nightmare come true. By the time the case reached the Court, about two decades after the accident, the facts of State Farm's behavior were not in dispute. Starting in the early 1990s, wrote the Court, State Farm had implanted "a national scheme to meet corporate fiscal goals by capping payouts on claims nationwide."

The scheme required State Farm - Allstate Insurance Company and Farmer's Group, Inc. soon followed suit - to spend hundreds of millions to redesign their claims departments and buy massive computer systems to standardize claims and cut human adjusters out of the loop. The scheme "continues to function as an unlawful scheme to deny benefits owed consumers by paying out less than fair value in order to meet arbitrary payout targets designed to enhance corporate profits," the Court wrote in 2003.  

The effectiveness of the insurers' strategy is evident in the lack of legislative action in the decade that followed the decision. As this article goes to press, research does not reveal any active proposal in any state to change bad faith laws. The last time the issue was raised in a state legislature, in Florida in 2011, it provoked a split in the Florida Bar Association, but ended without making headlines or a new law.

The American Legislative Exchange Council, which lobbies for conservative causes in state capitals and is on record as opposing changes to bad faith laws, did not respond to calls or emails seeking comment.

Federal political action is a bit more transparent, thanks to laws requiring interest groups to report some of their spending. In 2014 - an off year, election-wise - the insurance industry donated almost $50 million to political candidates and spent another $150 million lobbying incumbents, according to the Center for Responsive Politics. (Those numbers don't count healthcare-related lobbying or donations.)

Over the years, politicians and insurers have been quick to deny that the money buys them influence. The National Association of Insurance & Financial Advisors, the insurance industry's largest trade group, didn't return calls seeking comment.

When you combine the money that insurance companies spend in the political arena with what they've spent on the own claims practices in order to hold down claims, it comes to... a lot of money. The people who run insurance companies are smart. It's hard to believe all that money has been spent for nothing. 

  Photo credit: landahlauts

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