SALEM (March 4) – This week the Oregon State Legislature will consider legislation to create a direct cause of action for third parties to sue insurance companies for their claims settlement practices.
In a new policy report, R Street Senior Fellow and Director of Finance, Insurance and Trade, R.J. Lehmann examines legislation similar to this across the country. He argues that the experience of other states who have created “third-party bad-faith” actions against insurers has been an explosion of litigation, ultimately leading to higher costs of insurance coverage.
The report goes on to make the case that this change in the law will grant plaintiffs the right to a “second lawsuit” against a defendant’s insurance company. Given the potential to win punitive damages, attorneys will take on lawsuits over much smaller claims, and insurers will be forced to settle many more of these cases quickly for the maximum policy limits. California’s experience with third-party bad-faith lawsuits in the 1980s serves as a good example. Before the state Supreme Court overturned the practice, there was an explosion of litigation. The number of auto liability claim filings in California’s Superior Courts increased by 82 percent, and their severity grew by a factor of four in the years that such suits were allowed, driving up the cost of insurance coverage.
The author points out that insurance is well-regulated in Oregon and regulators have the resources to resolve disputes that might arise. Adjusted for population, the number of consumer complaints Oregon insurance regulators receive every year is about average, as is the number of staff devoted to handle such complaints.
He writes, “The experience of Oregon’s neighbors California and Washington both demonstrate that permitting third-party bad-faith lawsuits invites litigation costs that inevitably threaten the availability and affordability of coverage. There is no question that this would be an attractive proposition for the state’s trial bar, but the prospects for the state’s consumers are far less sanguine.”