Litigation Defenders

After three months of investigation, the policyholder in your most recent fire claim retains an attorney and files suit. Almost a year of litigation passes, and the judge has denied your motion for summary judgment.

Panel counsel opines there is a near zero chance of a successful appeal and this matter should be resolved. Counsel requests settlement authority and tells you to make sure you have room in your reserve for penalty interest.

Wait… penalty what? Isn’t the insured only entitled to their damages? No, in Michigan insurers must pay penalty interest on any claims which are not paid on a timely basis. MCL 500.2006 (4), states that if a claim is not paid within 60 days after receiving satisfactory proof of loss, then the insurer owes 12% per annum.

However, if the loss exceeds policy limits, then the interest is calculated based on those limits. Furthermore, if any payment is offered but rejected, and the claimant does not recover in excess at trial, then no interest is due. 

So free money for insureds unless the insurer pays within 60 days of receiving proof of loss? Well, not really. The interest clock doesn’t start ticking until the insurer receives ‘satisfactory proof of loss.’ A ‘satisfactory proof of loss’ is minimally the documents and other evidence provided by the insureds, reasonably required by the insurer to begin processing a claim. Disagreements as to the amount of damages will not delay the accumulation of penalty interest.

Most important for an adjuster is when an insurer specifies in writing what constitutes a ‘satisfactory proof of loss,’ the failure of the insured to comply tolls the accumulation of interest. However, when the insured submits materials that do not fully comply, the insurer must, within 30 days of receipt, specify in writing the specific issues and remedies that will render the proof of loss satisfactory. Failure by the insurer to do so excuses the insured from submitting a proof of loss, and the claim proceeds as if one had been submitted.

In practice, this means claims adjusters have less than 30 days from receipt of a proof of loss to review the documentation, identify deficiencies and notify the insured of those deficiencies and remedies. It is important to remember that a written denial of the claim which requests additional information for claim investigation does not toll the accumulation of penalty interest. The denial must specify the deficiencies in the proof of loss and how to fix them. 

While penalty interest is a fact of life for Michigan property loss claims, leveraging panel counsel early in the process and focusing on the submission of a ‘satisfactory proof of loss,’ can keep penalty interest to a minimum. Panel counsel can also assist in drafting your denial letter, ensuring your insureds are not receiving penalty interest.