Controversial insurance proposal on ballot in Washington state

Washington physicians and insurers are working against a new law regarding "bad-faith" handling of insurance claims.

On the Nov. 6 ballot, Referendum 67 will ask voters to reject or approve the statute. The law allows policyholders to sue their insurance companies for up to triple damages, plus legal fees, when insurers unreasonably turn down their claims. A state court would decide whether the claims denial was unreasonable and whether triple damages were warranted.

The law is on hold pending the referendum's outcome.

Washington does not allow punitive damage awards. Although the new law, called the Insurance Fair Conduct Act, does not define its penalties as punitive damages, they are the equivalent, legal and policy experts said.

The act, signed by Gov. Chris Gregoire in May, would apply to most types of insurance, except health plans. It remains unclear whether the law would directly impact medical liability carriers.

The confusion arises because physicians are policyholders of medical liability insurance. However, medical liability claims are triggered by a legal complaint by, or on behalf of, a patient -- a third party. The question, then, is whether a patient or a patient's attorney can sue a physician's medical liability insurer for allegedly failing to properly cover the doctor's claim.

Also unclear is whether a physician, as a medical liability insurance policyholder, could sue his or her insurer for settling or defending a case in bad faith, or refusing to take on the doctor's claim altogether.

Trial lawyers and other supporters of the law said it's a way to hold insurance companies responsible for doing good business.

But physicians, insurers and some consumer advocacy groups worry the law would lead to a broader application of punitive damages. Ultimately, this would result in higher medical liability insurance premiums for doctors and possibly higher health insurance premiums for patients if health plans are targeted in the future.

"All it does is increase the incentive for trial attorneys to fish for cases that may not have merit," said Washington State Medical Assn. Executive Director and CEO Thomas J. Curry.

Though the current statute excludes health plans and might not directly impact medical liability carriers, they are likely next in line, he said. The original draft of the bill allowed third-party claims and applied to health plans. State consumer-protection laws already give doctors and patients the right to sue insurers for wrongfully denying them coverage, so the law is excessive, Curry said. The state's insurance department also can fine carriers, he added.

Gary Morse, general counsel to Physicians Insurance A Mutual Co., the state's largest medical liability carrier, said Washington's law has a lower threshold for proving misconduct. Whereas states that permit punitive awards typically require proof of bad intent, Washington's standard would be reasonableness, he said.

"This bill creates the potential for treble damages for mere negligence, and that's very bad public policy anywhere," Morse said. "Once you have a foot in the door, what's to prevent punitive damages in treating a patient?" he warned.

A study of five other states with similar laws by the actuarial firm Milliman Inc. and a report by Washington's Office of Financial Management, both suggest that such bad-faith insurance measures generally increase lawsuit filings and insurance premiums. Insurers could be forced to settle claims just to avoid the threat, the Milliman study stated.

"You have guaranteed mandatory attorney's fees, triple damages and the lowest legal threshold in the nation -- it's a perfect storm," said Dana Childers, executive director of the Washington Liability Reform Coalition, which supports tort reform. She also is a spokeswoman for Consumers Against Higher Insurance Rates, a campaign to overturn the new state law.

This year, at least eight other states pursued similar measures, some of which include medical liability carriers and health plans, according to research by the Property Casualty Insurers Assn. of America. At press time in late October, the status of those efforts was unclear.

Another view

On the other hand, trial lawyers and the consumer advocates who approve of the law say it would simply encourage insurers to treat doctors and patients fairly. As long as they did so, insurance premiums would not be affected, said Sue Evans, spokeswoman for Approve 67, a campaign to uphold the measure. She said previous state insurance laws don't go far enough because they require carriers to pay only the value of the denied claim, without additional consequences.

"It actually pays to delay [claims] and gives [insurers] incentive to drag policyholders into the court system," where legal fees come out of consumers' pockets, Evans said. "The difference [under the new law] is if there is bad faith, there will be consequences."

Larry Shannon, government affairs director for the Washington State Trial Lawyers Assn., noted it would be up to a judge to decide if triple damages were warranted. He believes the law would apply to medical liability carriers, though in rare circumstances. The new act would serve as a reminder to insurers that they have an obligation to properly communicate with physicians about the scope of their policy coverage and "provide him or her with the security of knowing the insurance has to be there," Shannon said.

But it also could help with continuity of care for patients injured in auto crashes and ensure payments to doctors for treatment they provide.

Evans said there are no plans to expand the statute into other areas.

Jonathan Seib, a policy adviser in Gregoire's office, said the governor will vote "yes" on the referendum to keep the law on the books. If needed, she'll provide further clarification on its application.