Category: Insurance

Under the Michigan Uniform Trade Practices Act, MCL 500.2001 et seq., an insurer is liable for penalty interest if it fails to timely pay a claim, MCL 500.2006(1). “The purpose of the penalty is to penalize insurers for dilatory practices in settling meritorious claims, not to compensate a plaintiff for delay in recovering benefits to which he or she is ultimately determined to be entitled.” Jones v Jackson Nat Life Ins Co, 819 F Supp 1372, 1379 (WD Mich, 1993). MCL 500.2006(1) states: 

A person must pay on a timely basis to its insured, a person directly entitled to benefits under its insured’s insurance contract, or a third party tort claimant the benefits provided under the terms of its policy, or, in the alternative, the person must pay to its insured, a person directly entitled to benefits under its insured’s insurance contract, or a third party tort claimant 12% interest, as provided in subsection (4), on claims not paid on a timely basis. Failure to pay claims on a timely basis or to pay interest on claims as provided in subsection (4) is an unfair trade practice unless the claim is reasonably in dispute. 

For first-party claims, a 12% penalty interest is owed when the insurer fails to pay benefits within 60 days after receiving a satisfactory proof of loss. MCL 500.2006(4). “If the claimant is a third party tort claimant, the benefits paid bear interest from a date 60 days after satisfactory proof of loss was received by the insurer at the rate of 12% per annum if the liability of the insurer for the claim is not reasonably in dispute, the insurer has refused payment in bad faith, and the bad faith was determined by a court of law.” Id. “The interest must be paid in addition to and at the time of payment of the loss.” Id. If the loss exceeds the available coverage limits, the interest payable is based on the coverage limits rather than the amount of the loss. Id. If the insurer offers payment which is rejected by the claimant, and the claimant does not recover an amount above the amount offered, interest is not due. Id. “Interest paid as provided in this section must be offset by any award of interest that is payable by the insurer as provided in the award.” Id. 

The Michigan Supreme Court has clarified that the 12% interest applies to all claimants but that the “reasonably in dispute” language only applies to third-party tort claimants. Nickola v MIC Gen Ins Co, 500 Mich 115, 131-132; 894 NW2d 552 (2017). An “insured” who makes an underinsured motorist (UIM) claim under their own insurance policy is not considered a third-party tort claimant. Id. at 118 “Insured” means “‘[s]omeone who is covered or protected by an insurance policy[.]’ Id. at 128 n. 31, quoting Black’s Law Dictionary (10th ed.). 

Regarding the “reasonably in dispute” language, the Sixth Circuit Court of Appeals has stated: 

Whether a claim is “reasonably in dispute” is a question of law for the court to decide…. [A] plainly invalid contract clause or a plainly erroneous interpretation of law may be sufficient basis for the court to determine that a policy is not “reasonably in dispute.” However, when there is no indication that the insurer acted unreasonably or with dilatory motive in denying the claim, the court should find that the claim is “reasonably in dispute.” A policy also might be “reasonably in dispute” when the insurer—in good faith—disputes its obligation, contests legitimate issues, and makes no effort to delay recovery of benefits. [Fed Ins Co v Hartford Steam Boiler Inspection & Ins Co, 415 F3d 487, 499-500 (CA 6, 2005) (citations omitted.] 

Commercial Union Ins Co v Liberty Mut Ins Co, 426 Mich 127; 393 NW2d 161 (1986), provides guidance on what can constitute bad faith. “Bad faith” generally means “as arbitrary, reckless, indifferent, or intentional disregard of the interests of the person owed a duty.” Id. at 137. In contrast, 

[g]ood-faith denials, offers of compromise, or other honest errors of judgment are not sufficient to establish bad faith. Further, claims of bad faith cannot be based upon negligence or bad judgment, so long as the actions were made honestly and without concealment. However, because bad faith is a state of mind, there can be bad faith without actual dishonesty or fraud. If the insurer is motivated by selfish purpose or by a desire to protect its own interests at the expense of its insured’s interest, bad faith exists, even though the insurer’s actions were not actually dishonest or fraudulent. [Id. at 136-137.] 

The following factors may also be taken into account when deciding whether a defendant acted in bad faith: 

1. 1. 1. Failure to keep the insured fully informed of all developments in the claim or suit that could reasonably affect the interests of the insured, 
      2. Failure to inform the insured of all settlement offers that do not fall within the policy limits, 
      3. Failure to solicit a settlement offer or initiate settlement negotiations when warranted under the circumstances,
      4. Failure to accept a reasonable compromise offer of settlement when the facts of the case or claim indicate obvious liability and serious injury,
      5. Rejection of a reasonable offer of settlement within the policy limits,
      6. Undue delay in accepting a reasonable offer to settle a potentially dangerous case within the policy limits where the verdict potential is high,
      7. An attempt by the insurer to coerce or obtain an involuntary contribution from the insured in order to settle within the policy limits,
      8. Failure to make a proper investigation of the claim prior to refusing an offer of settlement within the policy limits,
      9. Disregarding the advice or recommendations of an adjuster or attorney,
      10. Serious and recurrent negligence by the insurer,
      11. Refusal to settle a case within the policy limits following an excessive verdict when the chances of reversal on appeal are slight or doubtful, and
      12. Failure to take an appeal following a verdict in excess of the policy limits where there are reasonable grounds for such an appeal, especially where trial counsel so recommended.  [Id. at 137-139.] 

Because the facts of each case are different, the trial court can use its discretion in determining which factors, if any, should be included in the jury instructions. Id. at 137. In addition, these factors are not exclusive and “[n]o single factor shall be decisive.” Id. It is inappropriate to review conduct using a “‘20–20 hindsight vision.’’” Id. at 139. Instead, conduct must be reviewed “in light of the circumstances existing at the time.” Id. 

What This Means

While the content above is intended to provide a background of what may constitute “bad faith,” each case presents unique factual considerations. We suggest that while it is important for insurers to train their claims professionals in background knowledge regarding bad faith law, including the factors above, there is no need to lead with fear. The biggest takeaway is that the opposite of “bad faith” is “good faith.” Therefore, claims professionals should be encouraged to utilize their best judgment with the information at the given time.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions. When it matters in Michigan, we are the trusted legal advisors for businesses and individuals.

Dakota A. Larson is an experienced attorney handling complex liability, coverage, and bad faith claims in multiple lines of insurance and in multiple jurisdictions. You can reach her at 517.377.0872 or at dlarson@fraserlawfirm.com.