Litigation Defenders

Part 1 of a 3-part Series

A bill recently introduced in the Michigan Legislature and pending in committee would create a bad faith cause of action against insurers for not timely paying insurance claims.

As drafted, this proposed legislation would not relieve an insurer of other statutory duties contained in other provisions of the act or case law, only create a bad faith cause of action. But what duties is the proposed legislation referencing? In the realm of property claims, the duties the proposed bill is referencing include the Uniform Trade Practices Act (UTPA).

This first post of a three-part series provides a basic primer on the UTPA, the case law surrounding it, and its application to day-to-day claims handling.

One of the stated purposes of the UTPA, MCL 500.2001 et seq., is to identify practices that constitute unfair or deceptive acts or practices and to penalize insurers for dilatory practices in settling meritorious claims as adjudicated in Dept of Transport v Initial Transp, Inc., 276 Mich App 318, 330–31; 740 NW2d 720 (2007), rev’d in part on other grounds.  

Of the 14 sections of the UTPA, only the first five subsections apply to claims for non-medical benefits. The specific subsection to be examined at length is MCL 500.2006, which is sometimes called the penalty interest provision.

It states the failure to timely pay claims under an insurance contract is an unfair trade practice. This section imposes 12% penalty interest on all first-party claims. It also imposes 12% interest on third-party claims unless the claim is reasonably in dispute. However, under the following section, it is not an unfair trade practice if the insurer is found liable by way of a judgment and timely pays the claim.

The UTPA also requires insurers to specify in writing what constitutes a “satisfactory proof of loss” within 30 days of receipt of the claim. Additionally, payment is considered timely if made for amounts supported by a “satisfactory proof of loss” within 60 days after receipt.

So, what constitutes a “satisfactory proof of loss?” Unfortunately, it is an undefined term within the UTPA, so this term will be examined more closely in a future post.

The UTPA also creates two classes of claimants who are entitled to penalty interest, and the act lays out separate schemes for each. Lastly, the UTPA makes reinsurers of all or part of the risk liable for penalty interest if they fail to timely pay benefits.

The next post in this series will review when payment is considered timely, so penalty interest does not apply under the UTPA.