On June 11, our Supreme Court unraveled significant progress
this State has made in recent years to improve West Virginia's
insurance climate. In 2005, the West Virginia Legislature repealed
a law that enabled a third party to sue an insurance company under
a contract to which it is not a party. Earlier this month, the West
Virginia Supreme Court of Appeals, in its decision in Michael
v. Appalachian Heating, LLC, No. 35127 (June 11, 2010), held
that third parties can sue insurance companies under the
West Virginia Human Rights Act.
By way of background, in 1981, the West Virginia Supreme Court gave
third parties the right to sue insurance companies under the Unfair
Trade Practices Act (UTPA). This created a fundamental problem for
insurance companies doing business in our State because they were
no longer able to accurately underwrite -- or price -- the risk of
a particular policy. This drove consumers' prices up because
companies had to account for the speculative risks of writing a
policy in West Virginia.
Over the next two decades, our Supreme Court continued to expand
this rule of law, creating incentives for third parties to pursue
marginal claims and for insurance companies to settle meritless
ones. By the early 1990s, companies in West Virginia had severely
curtailed their willingness to write new policies in West Virginia.
Premiums had skyrocketed, and the Insurance Commissioner estimated
that the cost of these third party suits was approximately $166.7
million per year.
In 2005, Governor Joe Manchin realized that the state's
insurance climate was in crisis and proposed repealing the law. The
Legislature did so, and within four years, the state's largest
insurance companies had reduced rates exceeding $110 million on a
noncumulative basis.
On June 11, however, the West Virginia Supreme Court of Appeals
released its decision in Michael et al. v. Appalachian Heating,
LLC, a third party lawsuit. Plaintiffs, the Michaels, resided
in a public housing complex in Kanawha County and alleged that
Appalachian Heating, a vendor who serviced the complex, negligently
performed work, resulting in a fire that damaged the Michaels'
property. Appalachian Heating was insured by State Auto Insurance
Company, which negotiated a settlement with the Michaels, which
they accepted. After receiving the settlement, however, the
Michaels felt they were owed more and sued, arguing that State Auto
failed to fairly settle their claims for a reasonable amount due to
their race and because they resided in public housing.
This is precisely the type of third party claim against an
insurance company which the Legislature repealed in 2005. By
invoking the West Virginia Human Rights Act, the Michaels
circumvented the clear intent of the Legislature to disallow these
lawsuits, and this court decision allowed it:
The prohibition of a third-party lawsuit against an insurer under [the UTPA] does not preclude a third-party cause of action against an insurer under...the West Virginia Human Rights Act.
Justices Benjamin and Workman having been disqualified, two of
the justices rendering the decision were sitting by temporary
assignment. Justice Menis Ketchum dissented, because, in his view,
"[t]he Human Rights Act contains no language purporting to
regulate insurance settlements" and "the majority opinion
judicially expands the Human Rights Act." And, in his opinion
concurring in part and dissenting in part, Justice Thomas McHugh
wrote:
I wholeheartedly agree with the majority's endeavor to eliminate acts of racial or income-based discrimination in connection with insurance settlements... However, the majority's conclusion that the Legislature has authorized third parties to assert a cause of action for allegedly discriminatory insurance settlements based on the protections extended by the Act is untenable. This is because third-party relief for insurance-related discrimination has never been expressly, or even impliedly authorized in the Act, or in any other legislative enactment for that matter. As a result, the majority has clearly exceeded both the scope of the Act and the intended reach of the Act's protections.
Justices Ketchum and McHugh are right. What the Legislature has
written matters. The Court's failure to abide by the law here
jeopardizes the efficacy of the Governor's and
Legislature's 2005 work and the direct economic benefit it
provided to insurance consumers. The Michael decision is
significant because it opens the floodgates to these types of
lawsuits, rendering insurance companies again vulnerable to the
inability to accurately assess the risks of the policies they
write.
I fear, as Justice Ketchum's dissent contemplates, that this
decision "has created a situation ripe for abuse by a handful
of litigation lawyers."
The Legislature should respond before consumers feel the impact of
this decision.
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