How Insurance Companies Balanced Their Books on the Backs of the Injured.

Insurers are professional litigants and economically “rational” actors, whose tactics have been informed by the experience in tens of thousands of cases. They know how to make a profit. Their plan: collect premiums and then deny responsibility, delay payouts, and defend liability actions to keep from paying them out – regardless of the merits. One method that is slightly less attractive for them in Washington State than it used to be: filing frivolous appeals to stretch out the case.

When I served in the Washington State Senate, my first bill addressed frivolous appeals where low interest rates pending appeal encouraged the filing of appeals to courts of appeal without regard to merit. Eight years before, the insurance companies had gotten passed into law a reduced interest rate on tort claims (claims such as personal injury, wrongful death, automobile collision, premises liability, etc.) The insurance companies got the rate on tort judgments against them cut from 12% to two points above treasury bills or 2%! Aside from the tort claims that the insurance companies had targeted, the interest rate on most other judgments remained 12% in Washington State.

The idea of the 12% rate in the past had been to encourage liable parties to pay their judgments! What sense did it make for the negligent party to have a reduced interest rate that would run while it appealed first to the Washington State Court of Appeals and then to the Washington State Supreme Court? It was a windfall for the guilty. Keep in mind, if the appeal has merit and the judgment is reversed, then the insurance company doesn’t have to pay any interest – after all, in such a case, the judgment, together with interest upon it, had been set aside! The only one who benefited from the low interest rate were insurance companies representing wrongdoers who had lost at trial, lost on appeal, and lost on any further appeal. Those were the parties that would benefit on a low rate on judgments.

Imagine this situation: you or a family member are seriously injured, struggling with unemployment, struggling to pay medical bills and get the care you need. The insurance company, in the meantime, is dragging out the process. While the injured person and his or her family may be forced to borrow from family members or use credit at exorbitant interest to survive, insurers were enjoying low interest rates of 2%, while they invested the money they should have paid out to the injured party and profited by getting investment returns at much higher percentages. The innocent, injured person (who had won at trial (!)) was made into the unwilling banker of the insurance company! In political-speak, I called this: “Balancing their books on the backs of quadriplegics!”
I knew this was wrong.

It was an open secret that insurance companies couldn’t “afford” not to file an appeal. The judgment against them would be running at 2% interest while they were investing in, say, mortgages paying 5% or more. Why would they pay? More than that, they would be able to negotiate discounts on what they owed by the threat of dragging things out. Outrageous!

The bill I prime sponsored, initially denominated the “Appellate Congestion Reduction Act,” was signed into law in 2010 (SB 6764) and raised such rates to two points over prime (about 5.25%). Rational economic actors and professional litigants, insurance companies among them, are highly sensitive to the incentives/disincentives built into the architecture of the justice system. But now, at least they have one less way they can profit by delay and frivolous appeals.

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