Tuesday, April 26, 2005

Summary of West Virginia Third-Party Bad Faith Act (Senate Bill 418)

Following is a summary and commentary on the passage of West Virginia Senate Bill 418 (Third-Party Bad Faith Act) prepared by Erica M. Baumgras, one of my partners at Flaherty, Sensabaugh & Bonasso, PLLC. Erica's practice focuses primarily on insurance defense, insurance coverage and bad faith litigation. She was assisted by Jaclyn Bryk, a new associate in our firm's insurance coverage and defense practice group.

To view or download a history of Senate Bill 418 you can go to the "bill status" section of the West Virginia Legislature website.

UPDATE (5/2/2005): Senate Bill 418 was sent to Governor Manchin for approval and signature on April 27, 2005, and according to an article appearing in the May 1, 2005 Sunday Charleston Gazette Mail the bill was signed by Governor Manchin.

Summary of Senate Bill 418 (Third-Party Bad Faith Act)

The Third-Party Bad Faith Act, W.Va. Code § 33-11-4a, passed on April 9, 2005, eliminates third-party claimant actions against persons engaged in the insurance industry. Rather, third-party claimants must pursue unfair claims settlement practice claims administratively through the Commissioner of Insurance of West Virginia.

The Act requires third-party claimants to file a complaint within one year following the actual or implied discovery of the alleged unfair claims settlement practice. The complaint must be on a form provided by the Commissioner and contain the relative provisions allegedly violated, the facts and circumstances giving rise to the violation, the names of all individuals or entities involved in the alleged violation, and reference to any specific insurance policy language that is relevant to the violation. The Commissioner must provide written notice of the complaint to all persons against whom the administrative complaint is filed.

If the person against whom the complaint is filed substantially corrects, or offers to correct, the circumstances that gave rise to the alleged violation in a manner the Commissioner finds reasonable within sixty days, the complaint will be closed and no further action taken by the Commissioner or the third-party claimant. That person must report to the Commissioner on the disposition of the alleged violation within fifteen days, but no later than sixty days from receipt of the notice of the complaint. Failure to resolve the complaint within sixty days will result in an investigation by the Commissioner to determine if the allegations in the complaint are meritorious.

If the Commissioner finds merit for a complaint which has not been resolved, the Commissioner must forward a copy of the complaint to the Office of Consumer Advocacy and may order further investigation or hearing to determine if the person has committed an unfair claims settlement practice with such frequency as to constitute a general business practice. Notice of hearing must be provided to all parties at least ten days in advance, and the hearing must be held within ninety days from the date of the filing of the complaint, unless continued by agreement of the all parties or the Commissioner for good cause.

If the Commissioner finds that the accused person committed the unfair claim settlement practice with such frequency as to constitute a general business practice, the Commissioner may proceed to take administrative action. A general business practice may only be based on the existence of substantially similar violations in a number of separate claims or causes of action. A good faith disagreement over the value of a claim or the liability of any party is not an unfair claim settlement practice. If the Commissioner finds that the accused person engaged in any method of competition, act or practice that involves an intentional violation of W.Va. Code § 33-11-4(9), the Commissioner may take administrative action.

The Commissioner’s administrative action must be taken in accordance with W.Va. Code § 33-11-6(b), also passed on April 9, 2005. This section allows the Commissioner to file a cease and desist order to preclude the accused persons from engaging in the unfair claims settlement practices, and/or impose a penalty of $1,000 for each violation, up to $10,000, payable to the State of West Virginia. If the person knew or reasonably should have known he or she was in violation of the article, the penalty shall not exceed $5,000 for each act, not to exceed an aggregate penalty of $100,000 in any six-month period.

If the act involves an intentional violation of W.Va. Code § 33-11-4(9), even if it is not established that the person engaged in a general business practice, the Commissioner may require payment to the State of a penalty not to exceed $10,000. If the insurer committed unfair claim settlement practices with such frequency as to indicate a general business practice, the Commissioner may require a penalty of up to $250,000. In addition, the Commissioner may revoke or suspend the license of any person who knew or reasonably should have known he or she was in violation of the Act.

Moreover, the Commissioner may order restitution from the Unfair Claims Settlement Practice Trust Fund to a claimant who has suffered damages from a general business practice or an egregious act by a person whether or not the act constituted a patter or general business practice. Restitution may include actual economic damages, and non-economic damages up to $10,000. Restitution may not be given for attorney fees and punitive damages.

Any person aggrieved by the order of the Commissioner may appeal to the Circuit Court of Kanawha County, by filing a petition within thirty days after receipt, pursuant to W.Va. Code § 33-2-14. The Commissioner must transmit the record of the proceedings to the Clerk of the Court. The Court will set a time to hear the petition and determine the matter, without a jury, upon the record of the proceedings. The Court, at its discretion and for good cause shown, may allow the introduction of additional evidence. The Court may revise, reverse, affirm, or remand the order to the Commissioner for further proceedings. Pending such appeal, the order of the Commissioner is in full force and effect until final determination by appeal unless the Commissioner or the Court elects to stay the effect of the Order. The Supreme Court of Appeals may review the judgment of the Court upon appeal in the same manner as other civil cases to which the state is a party.

The Act goes into effect ninety days from passage – July 8, 2005.

It is important to note that W.Va. Code § 33-11-4a does not eliminate a private right of action by a first-party claimant under the Unfair Trade Practices Act (“UTPA”) or a common law cause of action by a policyholder under the implied covenant of good faith and fair dealing arising from the insurance contract.

Not defined by W.Va. Code § 33-11-4a are the scope of the investigation the Commissioner may conduct or the standard for determining whether the allegations in an administrative complaint are meritorious, whether a person has committed an unfair claims settlement practice, whether the person knew or should have known he or she was in violation of the UTPA, whether the violation of the UTPA were intentional, or whether the act was committed with such frequency as to indicate a general business practice.

It is also important to note that restitution to the claimant under W.Va. Code § 33-11-4a is paid from the Unfair Claims Settlement Practice Trust Fund, not directly by the insurer. The Fund is established by W.Va. Code § 33-11-4b. All property and casualty insurers must pay to the Commissioner annually an examination assessment fee of up to $5,000, and up to $4,200 of that amount shall be paid to the Treasurer to the credit of the Fund. The examination assessment fee may be increased ($5,250) or decreased ($800), depending upon whether the Fund has moneys in excess of or below $1 million.

W.Va. Code § 33-2-16 and 17 establish the Office of Consumer Advocacy, which is authorized to advocate the interests of policyholders or third-party claimants, at their request or in the public interest, in proceedings arising out of any filing made with the Insurance Commissioner by any insurer or relating to any complaint alleging an unfair or deceptive act or practice or an unfair claims settlement practice. The Office of Consumer Advocacy may also institute, intervene or participate, as an advocate for the public interest and the interest of insurance consumers, in proceedings in state and federal courts, before administrative agencies or before the Insurance Commissioner. The Consumer Advocate may exercise all the same rights and powers regarding examination and cross-examination of witnesses, presentation of evidence and rights of appeal as any party in interest appearing before the Insurance Commissioner or the Health Care Authority.

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