Beaujeaux de Lapouyade | Property Insurance Coverage Law Blog | May 16, 2019
Prompt-pay laws are important to a policyholder’s rights to recover insurance benefits following a wrongful denial or delay in payment of a property damage claim. Prompt-pay laws vary from state to state. The implementation of statutory prompt-pay laws is critical to a policyholder’s recovery following a devastating loss.
A policyholder’s entitlement to prejudgment interest on wrongfully delayed or denied claim payments is a necessary tool to encourage insurance carriers to properly investigate claims and issue payments in a timely manner.
The State of Michigan enforces statutory interest penalties for a carrier’s failure to issue payments promptly. The Michigan State Legislature enacted prompt-pay laws to protect consumers from delayed payment of owed policy benefits.
Michigan’s Prejudgment Interest Statute1 allows interest on any money judgment recovered in a civil action and calculated from the date of filing the complaint at 6% per year.
In addition, claims not paid timely will constitute an unfair trade practice unless the claim is “reasonably in dispute.” The statute provides as follows:
Mich. Comp. Laws §500.2006. Payment of benefits on timely basis; payment of interest in alternative; failure to pay claims or interest as unfair trade practice.
(1) A person must pay on a timely basis to its insured, a person directly entitled to benefits under its insured’s insurance contract . . . or, in the alternative, a person must pay to its insured, a person directly entitled to benefits under its insured’s insurance contract . . . 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.
The last sentence of subsection (1) tells us that we should also consider the language of subsection (4), which provides:
(4) If benefits are not paid on a timely basis, the benefits paid bear simple 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 claimant is the insured or a person directly entitled to benefits under the insured’s insurance contract. . . . The interest must be paid in addition to and at the time of payment of the loss. If payment is offered by the insurer but is rejected by the claimant, and the claimant does not subsequently recover an amount in excess of the amount offered, interest is not due. Interest paid as provided in this section must be offset by an award of interest that is payable by the insurer as provided in the award.
Policyholder’s should be mindful of subsection (4) above, which notes that interest is not payable on payments offered by the carrier and rejected by the policyholder if the policyholder subsequently fails to recover an amount more than the offered amount.
In Denham v. Bedford,2 the Michigan Supreme Court confirmed that Michigan’s Prejudgment Interest Statute is a “remedial statute entitled to liberal interpretation.” In Denham, the court determined that carriers owe interest to the policyholder on the entire judgment regardless of whether the interest owed allows the total payment to exceed policy limits. A noteworthy portion of the opinion provides:
Payment of prejudgment interest not only compensates the prevailing party but also liability for prejudgment interest may act as an incentive to the insurer to promptly settle a meritorious claim. Without such an incentive, the insurer may refuse to settle a meritorious claim in hopes of forcing plaintiff to settle for less than the claim’s true value. The insurer risks nothing. Even if protracted litigation results, the insurer will only be liable for its policy limits all the while reaping a tidy sum from its investment of the policy limits.
Delay tactics are a real burden many policyholders face when dealing with property damage claims. It is important to be aware of the various tools available to assist policyholders in efficiently obtaining full payment of owed policy benefits.
1 M.C.L.A §600.6013.
2 Denham v. Bedford, 287 N.W.2d 168, 528 (Mich. 1980).