THE NAIC MODEL UNFAIR CLAIMS SETTLEMENT PRACTICES ACT

REPRINTED IN PART FROM: The Punitive Damages Lottery Chase Is Over: Is There A Regulatory Alternative To The Tort Of Common Law Bad Faith And Does It Provide An Alternative Deterrent? 37 ARIZ. ST. L.J. 1221 (Winter 2005) I. THE REGULATIONS OF THE BUSINESS OF INSURANCE * * * C. THE NAIC AND DEVELOPMENT OF THE MODEL ACT. A nationwide organization of state insurance commissioners was founded in 1871. This organization evolved into the National Association of Insurance Commissioners. The NAIC has, since its creation, served as a focal point for cooperation among the states in matters of insurance regulation. Numerous uniform insurance laws have been drafted and successfully lobbied through enactment by the NAIC. II. THE NAIC MODEL UNFAIR CLAIMS SETTLEMENT PRACTICES ACT As part of its effort to ensure uniform insurance laws, the NAIC has drafted Acts and regulations dealing with required conduct in claims handling and related aspects of the insurance business. The purpose of these Acts and regulations was to curb precisely that conduct which necessitated the invocation of a tort remedy for certain breaches of insurance contracts. In 1971, the Unfair Trade Practices Subcommittee identified several changes needed in the Unfair Trade Practices Act. One of those areas was related to claims practices particularly unreasonable delay or refusal. As a result, the NAIC amended its Model Unfair Claims Practices Act to include a section on unfair claims settlement practices. In 1990, the NAIC made further amendments and promulgated two new Acts. In a prefatory note to both Acts, the NAIC stated that separating the issues regarding unfair claims settlement practices into a freestanding Act apart from the Unfair Trade Practices Act, was done to focus more attention on unfair claims as a function of market conduct surveillance separate and apart from general unfair trade practices. The NAIC also addressed deceptive and unfair practice in insurance sales and claims settlement through a Model Act that governs these areas. Forty-three states have Page 1

adopted some version of the Model Act. The Model Act is designed to prevent insurers from disputing claims on pretext, or to force claimants to litigate valid claims to judgment in the hope of wearing them down to accept a settlement for less than the value of the losses. The Model Act authorizes a state s insurance commissioner to enforce its provisions through investigation and sanctions, if warranted. The Act also outlines the activities which constitute unfair claims practices. These include (1) misrepresentation of insurance policy provisions, (2) failing to adopt and implement reasonable standards for the prompt investigation of claims, (3) failing to acknowledge or to act reasonably promptly when claims are presented; and (4) refusing to pay claims without an investigation. The only question, then, is whether courts should enforce this statement of legislative policy through the development of common law causes of action. Most jurisdictions have addressed whether a state s unfair claims settlement practices act gives rise to a private cause of action. Those courts have held that the Act does not create private causes of action, but merely empowers state regulatory authorities to discipline insurance companies. Often, a prohibited act is sanctionable only when it is performed with regularity sufficient to indicate that it is a general business practice of the insurer. Although the obligations of the Unfair Claims Practices Act are subject to administrative enforcement by the state agency charged with regulating the business of insurance, nothing in the Act provides that administrative enforcement is the exclusive remedy for violations of the Unfair Claims Practices Act. Apart from administrative remedies available against insurers for violating provisions of the Act, the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, and infliction of emotional distress. Punitive damages may be available in actions not arising from contract, where fraud, oppression or malice is proved. In addition, prejudgment interest may be awarded where an insurer has attempted to avoid a prompt, fair settlement. The Model Act provisions are further analyzed below. Page 2

A. TRIGGERING THE MODEL ACT Under Section 3, the Model Act regulates improper claims practice where an insurance company commits a single violation flagrantly and in conscious disregard of [the] Act; or.. under Section 3B, where the insurance company, without flagrant and conscious disregard, violates the Act with such frequency as to indicate a general business practice to engage in that type of conduct. Thirty-three states have adopted Section 3B of the Model Act with minor variance. Only four states have adopted Section 3A with minor variance. Several states have used different verbiage to express the conscious disregard trigger, including willful and knowing. The Kentucky legislature has provided that it is sufficient for an insurance company to commit or perform any of the acts or omissions without subjective criteria such as intentional disregard, knowing or reckless conduct. Most jurisdictions adopting section 3 of the Model Act require a pattern of violations before penalties will be warranted. The enactments of California, Massachusetts, Alaska, Texas, and Nevada only require a single act violation to support the imposition of penalties. The various state enactments do not attempt to quantify frequency that such violations need to occur. However, the Maryland legislature did provide a method for determining if the frequency standard has been met: It shall be considered prima facie evidence of a general business practice of committing unfair claims settlement practices if, in any 12 month period, it is found that the number of unfair claims settlement practices with respect to all claims of the insurer, equal or exceeds [l]ess than $10,000, three claims with the same unfair claims settlement practice out of a random sampling of 50 claims; or $10,000 or more, six claims with the same unfair claims settlement practice out of a sampling of 100 claims. This presumption may be overcome by a presentation of evidence relating to the harm to claimants caused by the violation, the nature of the violation, the insurer s intent, and other relevant factors. West Virginia courts have explained frequency as more than a single violation of the unfair claims settlement provisions, that the violation arises from separate, discrete acts or omissions in the claim settlement, and that the acts arise from a habit, custom, usage, or Page 3

business policy of the insurer. In Dodrill v. Nationwide Mutual Insurance Co. the West Virginia Supreme Court observed that a plaintiff must show more than a single violation of the act. The court explained that one option for proving a general business practice is to show that the same insurance company committed the same violation in handling other claims involving other insureds. The court determined that the trier of fact must be able to conclude that the practices are sufficiently pervasive or sufficiently sanctioned by the insurance company that the conduct can be considered a general business practice and by fair minds not be an isolated event. The Oregon Act describes the evidence that would establish the existence of a general business practice of delay or non-settlement by establishing a substantial increase in the number of complaints against the insurer received by the Department of Consumer and Business Services a substantial increase in the number of lawsuits filed against the insurer or its insureds or other relevant evidence. Some states have adopted a just cause safe harbor, which is not present in the Model Act. As an example, in Maine, an insurance company engages in an unfair claims practice if the insurance company [f]ail[s] to deal with insureds in good faith to resolve claims made against policies of insured without just cause and with such frequency as to indicate a general business practice. In New Hampshire, an insurance company can defend itself against allegations of unfair claim practices by proving just cause and that the prohibited acts were accidentally engaged in. B. PROHIBITED CLAIMS PRACTICES Section 4 of the Model Act identifies 14 prohibited unfair claims practices. These prohibited practices can be generally categorized into three areas: (1) adoption of required standard for adjusting claims; (2) communications with insureds and claimants; and (3) prohibited conduct. Each of these areas is surveyed below. In addition to the provisions Page 4

of the Model Act, several states have gone beyond the Model Act. These additional requirements are also surveyed below. 1. Adoption of Required Standards for Claim Adjustment The Model Act, Section 4C, requires insurance companies to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under its policies and that failure to adopt and implement such standards constitutes a prohibited unfair claim practice. Forty-three states have adopted this requirement of the Model Act. 2. Communications with Insureds and Claimants Section 4 of the Model Act delineates five prohibited practices involving communications with insureds and claimants: A. knowingly misrepresenting to claimants and insureds relevant facts or policy provisions relating to coverages at issue; B. failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; G. failing to affirm or deny coverage of claims within a reasonable time after having completed its investigation relating to such claim or claims; L. failing in the case of claims denials or offers of compromise settlement to promptly provide a reasonable and accurate explanation of the basis for such action; M. failing to provide forms necessary to present claims within 15 calendar days of a request with reasonable explanations regarding their use. Section 4A of the Model Act has been adopted by 43 states. Three states have not impose a knowingly requirement. Section 4B has been adopted by 41 states. Section 4G has been adopted by 38 states. Two states, Florida and Rhode Island, require claims to be accepted or denied within 30 days after proof has been presented. Section 4L has been adopted by 37 states. Section 4M has been adopted by11 states. Rhode Island adopted a time limit of ten days for providing forms. Page 5

prohibited: 3. Prohibited Conduct Section 4 of the Model Act delineates seven specific acts/practices which are D. not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; E. compelling insureds or beneficiaries to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them; F. refusing to pay claims without conducting a reasonable investigation; H. attempting to settle or settling claims for less than the amount that a reasonable person would believe the insured or beneficiary was entitled by reference to written or printed advertising material accompanying or made part of an application; I. attempting to settle or settling claims on the basis of an application that was materially altered without notice to, or knowledge or consent of, the insured; J. making claims payments to an insured or beneficiary without indicating the coverage under which each payment is being made; K. unreasonably delaying the investigation or payment of claims by requiring both a formal proof of loss form and subsequent verification that would result in duplication of information and verification appearing in the formal proof of loss form; Section 4D has been adopted by 42 states. This provision presumes the opportunity to adequately investigate the claim submission. At least one state has made specific provision for the prompt settlement of catastrophic claims. Section 4E has been adopted by 40 states. The Alaska legislature amplified the language of 4E to prohibit insurance companies from compelling insureds to institute suit in which liability is clear to litigate for recovery of an amount by offering an amount that does not have an objectively reasonable basis in law and fact and that has not been documented in the claim file. Section 4F has been adopted by 33 states. The Maine legislature has adopted a without Page 6

just cause standard. In Maryland, an insurance company commits an unfair claim practice when it refuses to pay a claim for any arbitrary or capricious reason based on all available information. In New York, the legislature has established a 30-day requirement for settlement as a defined substitute for the Model Act s prompt settlement requirement. Section 4H has been adopted by36 states. Section 4I has been adopted by 36 states. Section 4J has been adopted by 37 states. Section 4K has been adopted by 38 states. C. PENALTIES Under the Model Act, monetary penalties can be imposed if the state insurance commissioner finds that there has been an unfair claims practice. A two-tier penalty structure was adopted by NAIC. The first tier is applicable in those situations where the Act has been violated without aggravating circumstances. First tier monetary penalties have a per violation cap of $1,000 and an aggregate cap for all violations of $100,000. Second tier penalties are applicable where the violation was committed flagrantly and in conscious disregard of [the] Act. Many jurisdictions trigger tier two penalties when the insurance company knew or should have known that its conduct violated their respective acts. Second tier penalties are capped at $25,000 for each violation with an aggregate cap of $250,000. Five states have adopted the same penalty structure and amounts as the Model Act (Louisiana, New York, North Carolina, North Dakota and Arizona). Go ahead and move these per your comment - Move the states to one footnote just like the rest of this section. Most states have adopted the two-tier penalty structure of the Model Act but have provided lower penalty amounts. A few states follow a two-tier penalty structure without caps on the per violation and aggregate penalties. Three states do not directly specify monetary penalties. The Model Act provides no guidance to the commissioners in assessing the amount of a monetary penalty that should be assessed. The Alaska legislature provided its commissioner with the elements to be considered and weighed: The Alaska commissioner is to consider (1) the amount of loss or harm caused by the violation; (2) the amount of Page 7

benefit derived by the insurance company by reason of the violation; (3) the seriousness of the violation; (4) the promptness and completeness of the insurance companies remedial action; (5) whether a single act or a pattern of practice was involved; and (6) deterrence. The South Dakota legislature provided similar guidance to its commissioner. In determining an appropriate penalty, the Division of Insurance will balance four specific factors of the insurance company and the insured: (1) the magnitude of the harm to the insured or claimant; (2) the actions taken by the insurance company, insured and/or claimant that either lessen or worsen the result of the violation; (3) any impediments that the insured or the claimant caused to the insurance company in either the process or the settling of the claim; and (4) the actions of the insurance company, specifically those that worsen the harm to the claimant or the insured from the violation. The South Dakota statutes also require the courts to interpret and enforce the Act based upon a consideration of all pertinent facts and circumstances. The Model Act does not provide for awards of punitive damages. However, the Unfair Claims Acts of Connecticut allows a court, in its discretion, to award punitive damages as it deems necessary and proper. In Texas, a violation of its Act exposes the insurance company to an award of punitive damages upon a finding of knowing misconduct. The punitive damage award is capped at three times the actual damages. In Massachusetts, awards of punitive damages are available in addition to the amount of the claim, not to exceed 25% of the claim if the court finds that the party seeking to recover on the claim has been damaged by a violation. At least one court has found that a breach of Montana s insurance code would support an award of punitive damages. Vexatious conduct has been elaborately addressed by the Missouri legislature in the context of third party claim settlement practices. There are seven elements that the Missouri courts look to in conducting an analysis of vexatiousness under 375.420. First, the insured s claim must be assessed and determined as it was presented to the insurance company at the time it was presented. Second, the insured must show that the refusal to pay by the insurance company was willful and without reasonable cause of excuse, as facts would have appeared to a reasonable person before trial. Third, the existence of a Page 8

litigatable issue, factual or legal, does not preclude a vexatious refusal to pay penalty where there is evidence that [the] insurer s attitude was vexatious and recalcitrant. Fourth, a holding that coverage is adverse to the insurance company in and of itself does not mandate damages be assessed to the insurer s vexatious delay in paying. Fifth, the insurance company is liable for vexatious delay in paying when it continues to refuse to pay even after it becomes aware that its defense is without merit. Sixth, despite the fact that the insurance company may have had a valid dispute on a question of law or fact up through trial, does not prevent a statutory penalty for unfairly treating the insured. Seventh, a jury may consider all of the evidence and surrounding circumstances of the case and even without any direct evidence, find the insurance company guilty of a vexatious delay. D. BEYOND THE MODEL ACT A majority of states have enacted two additions to the Model Act s prohibited conduct. Thirty-two states prohibit insurance companies from making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration. Thirty states prohibit insurance companies from delaying claims settlement where liability has become reasonably clear under one portion of the insurance policy coverage in order to influence settlement under other portions of the insurance policy coverage. Several states have proscribed any attempt by insurance companies to mislead insureds and claimants by using releases that extend beyond the subject matter of the claim payment; or by using checks in partial settlement of a claim which contain language releasing the total liability for the claim. One state specifically prohibits insurance companies from indicating in a check or letter that payment is final unless a full policy or claim compromise has been previously agreed to. The New Jersey Legislature requires insurance companies to provide claimants with a written disclosure statement explaining their rights under the New Jersey statute and that they may seek legal representation. This applies only to personal injury or wrongful death claims from which a release is executed within 30 days after the date on which the accident Page 9

or disaster occurred. The claimant has 10 days following the execution of the release or waiver of rights to rescind the release. In the state of Washington, insurance companies are required to implement reasonable standards for the processing and payment of claims once the insurance company s obligation to pay has been established. Insurance companies are required to furnish an appropriate release or settlement document to the insured or claimant within 20 days after a settlement has been reached. There are additional significant enactments which support the spirit of the Model Act, but which have only been enacted in a few states. The legislatures of New Hampshire, Pennsylvania and North Dakota have identified as a prohibited practice, refusing payment of a claim solely on the basis of the insured s request to do so without making an independent evaluation of the insured s liability based on all available information. Requiring claimants to sign a release that extends beyond the subject matter of the claim payment is prohibited in Oklahoma. Issuing checks in partial settlement of a claim which contain a release of total liability is prohibited in Oklahoma, Georgia and New Jersey. In Nevada, it is improper to advise an insured or claimant not to seek legal counsel or to mislead them concerning any applicable statute of limitations. South Caroline prohibits any invocation or threat of invocation of policy defenses or attempted rescission at the inception of the policy for the purpose of discouraging or reducing a claim. To that end, any attempt at rescission or invocation must be made in good faith or with a reasonable expectation of prevailing with respect to the policy defense.. Illinois has a few unusual provisions defining prohibited practices. Under the Illinois Act, an insurance company is prohibited from engaging in any other [non-specified] acts which are in substance equivalent to any specified prohibited acts. In addition, insurance companies in Illinois are prohibited from engaging in activity which results in a disproportionate number of meritorious complaints against the insurer received by the Department of Insurance, or a disproportionate number of lawsuits brought by insureds or claimants. Page 10

E. MONITORING INSURANCE COMPANY MISCONDUCT Fifteen states require insurance companies to maintain records regarding complaints of improper claim handling. Typically these states require insurance companies to keep a complete record of all complaints of its insureds. Most states that impose this requirement specify that the records must indicate the total number of complaints, their classification by type of insurance, the nature of each complaint, the disposition of the complaint, and the time it took to process each complaint. Shile most states require information regarding complaints, four states (Vermont, Florida, Kansas and Massachusetts) also require recordation of any grievance in addition to complaints. Only New Hampshire requires an annual report to the insurance department regarding complaints. Moreover, New Hampshire permits claimants to use this information in administrative and judicial proceedings. Evidence as to the numbers and types of complaints to the insurance department against an insurer, and said department s complaint experience with other insurers writing similar lines of insurance, shall be admissible in evidence in an administrative or judicial proceeding brought under this title, provided that no insurer shall be deemed in violation of this section solely by reason of the numbers and types of such complaints. The standard time frame for keeping this complaint information is from the date of the last insurance department examination. However, Massachusetts only requires the information to be kept for two years; Oklahoma requires information to be kept for three years or since the date of its last financial examination, whichever is longer; Texas requires the information be kept for three years or since the date of its last examination, whichever time is shorter; and Pennsylvania requires the information to be kept for a four year period. F. PRIVATE CAUSES OF ACTION The NAIC did not intend the Model Act to include a private right of action. Many states, however, have construed their Acts to give rise to recovery through a common bad faith cause of action. Some states have relied upon their legislature s statutory language to imply a private cause of action. Other jurisdictions have inferred a private right of action Page 11

even though their statutory schemes do not expressly grant such a right. Most jurisdictions have followed the Model Act and expressly disclaim a private right of action. 1. Exhaustion of Administrative Remedies Some jurisdictions, however, have imposed an additional hurdle before an insured can pursue a private cause of action against an insurer for violations of the unfair claims practices act. Exhaustion of remedies will apply where a claim is cognizable in the first instance by an administrative agency alone; judicial interference is withheld until the administrative process has run its course. In other words, exhaustion applies where an agency alone has exclusive jurisdiction over a case. Twenty-seven states require a claimant to pursue administrative remedies. When a procedure for review of administrative action and court review of the administrative decision is set forth by statute, the remedy is exclusive and must be employed before other remedies are used. Parties must complete the administrative proceedings prior to seeking a remedy in court. This general doctrine, known as exhaustion of administrative remedies, is premised on the idea that an administrative remedy is available to the party on her initiative; relatively rapid, and will protect the party s claim of right. The rule is designed to allow the exercise of administrative discretion and fact-finding prior to judicial intervention. The administrative remedy may be primary but not exclusive. Twenty-four jurisdictions provide for non-exclusive administrative remedies. In this situation, a claimant must invoke and exhaust the administrative remedy, and seek judicial review of an adverse administrative decision before a court can properly adjudicate the merits of the alternative judicial remedy. Once the administrative procedures are exhausted, the trial court may proceed [with both the independent judicial action and the administrative review action]; the plaintiff whose case is meritorious may be entitled to whatever relief is available under either the independent judicial action or the administrative/judicial review remedy. ). Third, the administrative remedy and the alternative judicial remedy may be concurrent, with neither remedy being primary, and the plaintiff at his or her option may Page 12

pursue the judicial remedy without the necessity of invoking and exhausting the administrative remedy. Some jurisdictions unfair practices acts contain an exhaustion requirement as a necessary precedent to use of other remedies expressly given by statute. As an illustration, California courts have held that its statutory scheme bars private causes of action from proceeding prior to exhaustion of administrative remedies available under the Insurance Code. Pursuant to California s Insurance Code, claims under that code are exclusively the province of the Insurance Commissioner. The... enforcement of this chapter shall be governed solely by the provisions of this chapter. Judicial review is of course available to challenge those administrative determinations but such review may be obtained only after the available administrative procedures have been invoked and exhausted. I don t think the detailed explanation of the CA statute is useful. Similarly, Wisconsin s Insurance Code also requires exhaustion of administrative remedies prior to bringing a private cause of action. However, while California does not bar judicial review if the complaint is not first disposed of by the Insurance Commission, Wisconsin holds that if the administrative remedies are not completely exhausted prior to seeking review in court, the failure to do so bars judicial review of the Commissioner s decision. All jurisdictions provide for administrative remedies in their unfair practices and claims acts. However, not all jurisdictions require exhaustion of those remedies prior to pursuing a private cause of action against an insurer for violations of the unfair claims act. 2. Statutorily Created Private Right of Action A statutory private cause of action is created when an insurance company engages in unfair claims practices in violation of the State s Unfair Settlement Practices Act. In Florida, the private right of action created by the Act is not limited to insureds, but is also available to third parties. New Mexico is even more specific in its statutory grant of a private cause of action. Under New Mexico s Unfair Claims Practices Act if an insured is damaged by any acts by the insurance company or its agent that are specified under the Unfair Claims Practices Page 13

Act, that person can bring an action in District Court to recover actual damages. An interesting procedural fencing can take place here. If the Superintendent finds that an insurance company may be engaging in unfair conduct, a hearing will be held where notice and charges are brought against the insurance company. Following the hearing, the Superintendent must provide a written report of his findings of fact to the insurance company and to any other interveners present at the hearing. If the Superintendent makes a finding that the insurance company has not engaged in violative practices then, where there is an intervener present, the intervener has the opportunity to bring a proceeding to appeal the Superintendent s decision. In the suit to recover actual damages, the insured is entitled to attorneys fees if the court finds that the insurance company or agent had willfully engaged in the actions specified under the Unfair Claims Practices Act. However, the insurance company will be entitled to attorneys fees if it prevails in the action upon proof that the action was brought when the insured knew it was groundless. An insured may also bring a bad faith lawsuit against the insurance company for violation of the Unfair Claims Settlement Practices Act in New Mexico. A suit for bad faith can be brought if the insurance company s actions are frivolous or if the insurance company was unfounded in the refusal to pay an insurance claim. Tennessee s Unfair Claims Settlement Practices Act provides for a private right of action for bad faith claims practices, rather than unfair claims practices. In order to maintain such an action, the insurance policy benefit must become due and payable. The insured must make a formal demand for payment under the policy. The insured must wait 60 days, without receiving payment. Finally, the insured must prove that the insurance company s refusal to pay policy benefits was not made in good faith. In determining whether the insurance company has acted in good faith, the Tennessee courts require that the denial be based upon reasonable grounds or that there was a legitimate question or issue that was unresolved. Where there is a legitimate dispute over value or coverage, reasonable grounds exist. However, clerical errors which result in a denial of coverage are not considered bad faith. When an insurance company is presented with a legitimate coverage issue that required judicial guidance, especially in cases of first Page 14

impression, the insurance company should not be forced to pay damages under threat of bad faith. The Tennessee courts have held that the statutory requirement of good faith action includes the insurance company s obligation to inform its insured of his or her rights or lack thereof and extends to the negotiation process so that the insured can be placed on an equal footing with the insurance company when discussing settlement options. 3. Implied by Law Private Right of Action Several courts have allowed a private right of action even though their statutory schemes do not expressly provide for such a remedy. Some courts have implied a right of action just because in an attempt to provide consumers with the utmost protection. For example, French Market Plaza Corp. v. Sequoia Ins. Co., the court explained that while the reasoning behind the Unfair Claims Settlement Practices provisions were to provide administrative remedies by the Commissioner to protect all insureds, the court held that the statute did not preclude a private right of action and therefore claimants could bring suit against the insurance company under he Louisiana Act. Likewise, First Security Bank of Bozeman v. Goddard, the Montana court explained that insurance companies are subject to statutory duties, aside from those required under the insurance contract itself, to settle claims as soon as possible and in accordance with the terms of the insurance contract. The court concluded, without elaboration, that a breach of that statutory requirement gives rise to tort liability. Under Kentucky law, the element of the cause of actions for tortious misconduct that justify a claim for bad faith against an insurance company under the Kentucky Unfair Claims Settlement Practices Act are: (1) the insurer was obligated to pay; (2) the insurer lacked a reasonable basis in law or fact for denying the claim; and (3) the insurer either knew there was no reasonable basis for denying the claim, or acted with reckless disregard for whether such a breach existed. Interestingly, the Kentucky courts have also allowed damages for anxiety and mental anguish in an action for statutory bad faith by an insurance company in connection with settlement of a claim, if there is direct or circumstantial evidence which supports an inference that the anxiety or mental anguish in fact occurred. Page 15

4. State Acts that Disclaim A Private Right of Action The majority of courts that have addressed the issue have interpreted their State Acts to disclaim private enforcement actions. Some courts have not provided an explanation or analysis for disclaiming private causes of action, while others have merely relied on their State Acts for express denial of such claims. 5. Private Right of Action Not Acknowledged To further complicate the uniform Model Act, many states have adopted the Model Act s language disallowing a private cause of action, however courts have yet to rule upon the application of the Act. By implication, these states have decided not to expand their acts to allow for private recovery, presumably because these jurisdictions believe that administrative remedies allowed under their respective Acts are sufficient. For example, Illinois courts have decided that the intent of the Act adopted is for public remedy only. Hence, Illinois Unfair Claims Practices Act provides no private cause of action or remedy beyond those powers given to the State Director of Insurance. However, an insured as allowed to bring a cause of action against the insurance company for common law negligence or bad faith refusal to settle. The duty of good faith is mutual to the insured and the insurance companies under Illinois law. In the third party context, Illinois law does not impose a duty of liability on insurance companies to settle within the policy limits. Such a duty arises only where the probability of an adverse finding on liability is great and where the amount of probably recovery would greatly exceed coverage. Idaho courts recognize the common law duties insurance companies have to their insureds to settle first party claims in good faith. The Idaho courts have also held that a breach of this duty will give rise to a tort claim. Thus, the Idaho Supreme Court concluded that a statutory remedy under the Idaho Act is not necessary or allowed. In sum, states have taken several different approaches to private rights of action under the various State acts. Some have simply created the right by statute, others have inferred such right, yet most have expressly disclaimed a private right of action. Because the overwhelming majority of jurisdictions do not allow for a private right of action, this Page 16

implies that the Model Act is merely an administrative and public remedy for an insurance company s violations in handling and settling claims of insureds. Page 17