Industry Group Reviewing Insurance Rate Practices for Racial Bias

An industry group known as the Insurance Information Institute is analyzing the role racial bias plays in calculating insurance premiums. Explicit racial bias, i.e.., setting premiums directly based on race (known as “redlining”) has been illegal since the mid 20th century.  But rates continue to bet set based on criteria that indirectly reflect racial bias. One study found persistent rate increases for homeowners’ insurance in minority neighborhoods that exceeded legitimate risk differentials.

Rate criteria reflecting implicit racial bias include credit scores and occupations. The insurance industry has long defended these criteria as reliable predictors of risk. But the new working group pushes back on those assumptions:

Research shows that average credit scores for white and Asian customers are better than those for Black and Hispanic customers…Insurance credit scores reflect and perpetuate historic racism and unfairly discriminate against Black and Hispanic communities.

Other facially neutral rate setting policies can have a discriminatory impact. Motor vehicle records (e.g., traffic tickets) can reflect systemic racism on the basis that affluent white drivers are better able to afford hiring lawyers to dismiss or downgrade citations.

The industry group is also investigating whether the use of computer algorithms to analyze so-called “big data” about drivers can reflect implicit racial bias. This mirrors concerns in other fields (e.g., facial recognition software) that computer programs inadvertently perpetuate existing biases.

This new report shows the insurance industry as a whole is following up on efforts from state regulators to limit discriminatory premium rates. New York’s Department of Financial Services recently prohibited using education and occupation to price car insurance. The rule only applies in New York. Hopefully this pushback will become more widespread as other groups take note.

 

 

 

 

Court Confirms Health Insurers Can’t Sell Discriminatory Insurance Policies

The Ninth Circuit Court of Appeals (the federal appeals court with jurisdiction over Washington and other west coast states) is having a busy summer for insurance cases. On the heels of recent decisions regarding attorneys’ fees in ERISA-governed insurance disputes and insurers’ duty to reasonably investigate insurance claims comes the July 14, 2020 ruling in Schmitt v. Kaiser Foundation Health Plan of Washingtonholding health insurers cannot design health plans that have a discriminatory impact under the Affordable Care Act (a/k/a “Obamacare”).

For decades before the ACA, it was legal for health insurers to design health plan benefits however they chose, even if those plan designs had a discriminatory impact. As long as the insurer provided the same benefits to everyone, the insurer could decide what benefits to offer and what not to offer. Insureds could not sue their insurer for designing a health plan that had a discriminatory effect.

The Schmitt ruling confirms that the ACA changed that. Part of the ACA’s purpose is to expand so-called “minimum essential coverage” under health insurance policies. There are certain minimum benefits that must be included in most health plans. This includes, for instance, emergency services, maternity care, mental health treatment, and rehabilitative treatment.

Additionally, the ACA specifically provides that insurers cannot design health plans in a discriminatory manner. It states that an insurer may not “design benefits in ways that discriminate against individuals because of their…disability.”

The Schmitt ruling emphasizes that the ACA is different from prior federal laws that had been interpreted not to prohibit discriminatory plan design. Prior to the ACA, no federal law guaranteed any person adequate health care. The ACA, on the other hand, explicitly guarantees the right to minimum health insurance benefits and prohibits designing health plans that deprive people of those minimum benefits on a discriminatory basis.

The court noted the ACA does not require insurers cover all treatment no matter how costly or ineffective. But the court emphasized insurers cannot design health coverage that has a discriminatory impact.

The Schmitt ruling is an important victory for advocates of fair insurance coverage.

Ninth Circuit Ruling Emphasizes the Importance of Acting Reasonably in Insurance Disputes

A recent ruling from the Ninth Circuit Court of Appeals is a good reminder that, as we’ve observed before, the “moral high ground” is crucial in insurance bad faith disputes.

The Ninth Circuit (the federal appeals court with jurisdiction over Washington and other west coast states) recently upheld the dismissal of insurance bad faith claims in Pureco v. Allstate, Case No. 19-55061. The ruling is unpublished and applied California law, so it is not precedent in Washington State. But it’s still helpful in seeing how courts treat insurance issues.

The upshot of the dispute was Pureco’s allegation Allstate failed to make a reasonable settlement offer in response to the settlement demand Pureco’s lawyer sent Allstate’s adjuster. Pureco was injured in a car crash with David Carillo. Carillo was covered under an Allstate car insurance policy. Pureco’s lawyer sent Allstate information showing the extent of Pureco’s injuries and demanded Allstate pay to settle the claim before Pureco sued Carillo.

When Allstate refused to pay by the deadline provided by Pureco’s lawyer, Pureco sued Carrillo and was awarded $5 million. Pureco and Carillo reached an agreement to settle the case in exchange for Carillo assigning his rights under the Allstate insurance policy to Pureco. Pureco then sued Allstate asserting Carrillo’s rights under the insurance policy, claiming Allstate’s failure to pay the demand before Pureco sued Carrillo was bad faith.

But, like most insurance disputes, the devil is in the details. Allstate had actually responded to Pureco’s lawyer and offered to pay Carrillo’s policy limit just one day after the deadline. The reason for Allstate’s delay was that Pureco’s lawyer waited to send Allstate all the information about Pureco’s injuries until the Friday afternoon where the deadline expired on Monday. Allstate’s adjuster had been on vacation that Friday. He responded and offered to pay the policy limits the following Tuesday.

The Ninth Circuit concluded Allstate had no liability. The court determined that Allstate may have made a mistake by failing to pay the policy limits sooner, but it did not act “in a deliberate manner that would support a finding of bad faith.” The court emphasized that the information Pureco’s attorney initially provided to Allstate did not put Allstate on notice that Pureco’s injuries were significant enough to risk an excess verdict against Carrillo, and Allstate paid the claim just a few days after receiving the additional information.

Although the court never comes right out and says it, the crux of the case seems to have been the court’s perception that Pureco’s attorney was not being forthright. Implicit in the court’s ruling is the fairly unremarkable conclusion that sending somebody information on Friday and expecting a decision the next Monday is fairly unreasonable, especially when you know they’re out of the office.

The upshot is that policyholders in disputes with their insurers rarely help their case by making unreasonable demands. Policyholders have broad legal protections under Washington law. Acting unreasonably often gives the insurer an out where the policyholder otherwise would have a strong case.

 

COVID-19 Insurance Updates

Here are some updates in the fast-evolving COVID-19 insurance world:

  • Washington State’s insurance commissioner extended the deadline for insurers to file certain kinds of lawsuits over property insurance coverage. Most homeowners’ insurance policies require any lawsuit against the insurer be filed within a certain length of time from the loss (often one year). Missing the deadline can deprive the policyholder of their right to sue the insurer for any misconduct. The insurance commissioner’s order requires insurers to extend this deadline for certain claims where the policyholder is in the process of completing repairs. Since the residential construction industry has been shut down due to emergency “stay at home” orders, many folks have been unable to complete repairs on time. Extending this deadline will help these policyholders protect their rights.
  • Washington’s insurance commissioner also warns against Medicare coronavirus scams. Scammers are targeting Medicare enrollees with bogus vaccines for the virus.
  • Many states, mostly in the northeast for now, are considering legislation requiring insurers to provide coverage for businesses losing money because they cannot operate during the pandemic. For example, Pennsylvania’s proposed legislation requires commercial insurers providing so-called “business interruption coverage” to cover COVID-19 related losses. Many insurance policies are believed to exclude such losses unless such legislation becomes effective.

Stay healthy!

Replacement Cost Coverage Under Homeowners Insurance Can Be Broader Than You Might Think

Most homeowners insurance provides what’s known as “replacement cost” coverage. Replacement cost coverage varies from policy to policy, but generally provides that the insurance company will pay to repair or replace damaged portions of the home with materials of the same or similar quality that existed before the loss. This coverage basically provides the insurer will pay to repair your home after a loss, so it’s an important component of a homeowners insurance policy.

It’s critical to keep in mind that insurance policies can use many different definitions of replacement cost coverage. The only way to know what a particular insurance policy covers is to have a qualified attorney review the entire policy and all the facts related to the loss. With that in mind, a replacement cost provision typically looks something like this:

The insurance company will pay the cost to repair or replace the damaged part of property insured with material of like construction for similar use on the same premises.

In most insurance policies, this language comes with exclusions, limitations, loss settlement provisions, and other policy language that can change how the replacement coverage applies. It’s critical to have a lawyer review the entire policy to determine how replacement cost coverage works in a particular situation.

Replacement cost coverage can involve several important issues that sometimes cause disputes between the policyholder and the insurer. The first is that the policyholder generally gets to choose the contractor who performs the repairs or replacement. In general, whatever a qualified contractor charges is the cost to repair or replace the damaged property and, therefore, what the insurer should pay under the policy. Unless the insurer hires the contractor and pays for the repairs directly, the insurer should, absent special circumstances, pay the policyholder whatever the contractor charges to repair or replace the damaged property.

Second, replacement cost typically means the cost to replace the materials that were there. If high quality materials were damaged, the insurer should pay for high quality replacements. If damaged materials cannot be repaired to the same condition they were in before the loss, the materials need to be replaced with new materials. Again, this depends on the insurance policy fine print– the devil is in the details.

Third, replacement cost generally includes all the costs to repair or replace the damaged property. These costs often go beyond the mere costs of the new building materials. For instance, replacing a leaky pipe might require removing sections of the drywall and other fixtures to get access to the pipe. In that scenario, the costs to tear out the drywall and fixtures, and to restore them to their pre-loss condition, would exceed the mere cost of the replacement pipe.

Fourth, most policies would require the policyholder to commit to actually performing the repairs or replacement before paying replacement cost benefits. If the policyholder doesn’t plan to actually perform the repair or replacement, many policies would pay only the “actual cash value” of the damaged property. Actual cash value is typically the dollar value the property had immediately before the loss. Replacement cost value is often much higher than actual cash value.

It is important to be mindful that, as with any insurance law question, replacement cost coverage and other benefits vary from case to case. Tiny nuances in the insurance policy fine print of the facts of the specific loss can make a huge difference. In some cases, removing a single word could alter the policyholder’s rights. The only way to know what a particular insurance policy covers, and what benefits the policy holder is entitled to, is to consult a qualified attorney.