Herb Denenberg Column For November 13, 1999


The great HMO expose showed the American public what happens when an insuring organization becomes arbitrary and arrogant in its treatment of policyholders. This led to a national debate and intense pressure for reforms to control the unrestrained and anti-social behavior of HMOs.




HMOs are and were telling doctors how to practice medicine and mistreating and endangering policyholders in the process. Legitimate claims were denied altogether or delayed. Doctors were also being abused by slow paying and second guessing from HMOs.


But the HMO assault on the rights of policyholders is just a piece of a bigger and equally unreasonable picture -- arbitrary denial of claims by insurance organization from auto and homeowners to life and health insurers.


This is actually a wider and more pervasive problem than that of the HMOs and it's time it received some attention and action.


THE INSURER ASSAULT ON THE PUBLIC. Insurance companies that write auto, homeowners, health, life and other forms of insurance have long denied claims that should be paid knowing that the claim is meritorious and should be paid.


These insurers take this denial approach as they know that most policyholder won't fight a denial for a number of reasons and can easily be worn down. Here are some of the many reasons policyholders don't get what they are entitled to.




First, insurance companies are adept at stalling and stonewalling on a claim. They move claims along slowly. They may ask for more evidence of loss or proof of value. This is often the start of the process of wearing down the policyholder. Send this form. Get that document. Pretty soon the policyholder may give up without even getting a denial or payment or settle for less than should be paid.


Second, a large proportion of policyholders don't know enough about their policy and the claims process to know they've had an unreasonable denial. So they don't challenge or appeal the denial of their claim. Insurance companies are notorious for writing unreadable policies and for confusing rather than helping and educating their policyholders.


Third, even if they know or suspect an improper denial, policyholders may have neither the will nor resources for a protracted battle. It's hard to get an attorney except for the largest and most meritorious of claims. A policyholder hesitates to do legal battle with a gigantic insurance corporation. Sometimes the policyholder needs money and can't hold out for the full entitlement and can't wait for extended negotiations or litigation to come to an end.


Fourth, even if they have the resources and connections to fight a battle, it may take years to collect as the insurer may vigorously defend itself and drag out the proceedings. If they win a verdict at trial there may be appeals. For the typical policyholder a lawsuit is an unmitigated disaster bringing nothing but uncertainty, aggravation, inconvenience and expense. But to an insurance company, a lawsuit is just a routine cost of business. A large insurer may spend a hundred million dollars a year or more on lawyers and thinks nothing of defending one more lawsuit.


Fifth, most policyholders need a lawyer to assert their claim. But lawyers are not likely to take a case unless there is a substantial amount at stake. But most insurance claims are for small amounts, so lawyers aren't interested in a battle with an insurance company that is likely to produce a minor fee. What's more, even if a lot is at stake lawyers tend to go only for the slam-dunk cases, and turn down most of the rest.




What happens to the insurance company when all this is going on. The policyholder suffers and loses the security, protection, certainty and peace of mind insurance is supposed to provide. But the insurance company, by not paying the claim, has more money to invest and enhances it investment income.


It's win-win for the insurance company and lose-lose for the policyholder. Even if the insurance company finally loses the lawsuit against it, it only had to pay what it owed in the first place. It has no incentive to settle the case or pay up the claim in the first place. But the stalling tactics can backfire explosively when the policyholder is able to take advantage of a law that's been on the books since 1990, the bad faith law.




What's the remedy for all this. There is one law on the books that does provide some help to the put upon policyholder. It was passed in 1990 in Pennsylvania, and is called the bad faith law. Other states have similar laws.


It provides that if the insurance company demonstrates bad faith in handling a claim by totally ignoring the interests of the policyholder, then the

policyholder may sue for bad faith and punitive damages. If the policyholder wins, he can collect interest on the claim, and the costs and attorneys fees of the litigation.


If the policyholder wins a bad faith claim, the court may award punitive damages. Such damages are designed to punish the insurance company and deter its misconduct when bad faith is proven. Punitive damages are not intended to compensate the victim.


Punitive damages can be awarded in the millions and can send a message to the top management of a company to start paying claims fairly and to avoid bad faith denials. The jury is entitled to take into account the net worth, assets and income of the bad faith wrongdoer and so in an amount that gets a message through to the insurance company.


The bad faith law is then an important part of the regulatory structure applicable to the insurance industry. It creates a level playing field and provides an important incentive for insurance companies to treat policyholders fairly.


But the bad faith law does more. It protects not only the victim of a particular act of bad faith, but also protects the entire insurance marketplace by punishing and deterring unfair practices by the insurance industry.


OTHER REMEDIES. The most fundamental reform would be an insurance commissioner and insurance department that protects policyholders instead of being a lap dog for insurance companies. This reform depends on even more fundamental reforms of the political system, and those reforms aren't likely to happen anytime soon. 


(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)

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