When 2009 began, insurance lobbyists steeled themselves for state-by-state battles over "bad faith" bills. On the heels of the first anniversary of a popular provision in Washington state, they also found themselves in a political climate friendlier to Democrats and the trial attorneys who strongly support such laws.

Then an interesting thing happened: Insurers won battle after battle. In Connecticut, Iowa, Montana, New Mexico and Oregon, bad faith bills were defeated or withdrawn.

In Montana, state legislators voted 10-1 to reject an amendment to the states existing third-party bad faith law that would have allowed for punitive damages and attorney fees (BestWire, March 30, 2009).

The Connecticut General Assembly's Joint Committee on Insurance and Real Estate defeated a bill that would have expanded the scope of the state's unfair practices law. It would have lowered the standard for violations and allowed insureds or third-party claimants to sue insurance companies for both actual and punitive damages (BestWire, March 13, 2009).

In every state, property/casualty insurers argued that bad faith laws, while sounding consumer friendly, would have spurred unnecessary investigation and increased costs to policyholders. Such laws are blunt instruments and unnecessary for encouraging insurers to act responsibly, they say.

"We've been able to explain to legislators the downside," said Paul Tetrault, Northeast state affairs manager for the National Association of Mutual Insurance Companies. "If there was ever a time not to pass these bills, this is it."

Insurance representatives feared voter anger over the economic crisis could foster a political climate antithetical to industry interests. As they met with state officials, however, they saw skittishness over making changes and a receptiveness to arguments that bad faith laws would increase economic uncertainty.

"Everybody's still in a very uneasy mode. Folks are afraid to change their environment too much," said Tammy Velasquez, vice president and director of state affairs for the American Insurance Association. "It's not a good time to spur lawsuits ... to make that state an unfriendly place to do business."

Al Smith, executive director of the Montana Trial Lawyers Association, sees the recent trend as a lopsided loss for consumers who want their insurance companies to be held accountable.

"Common everyday folks that end up in accidents got the short end of the stick, again," Smith said. "The Republican party in Montana favors insurers over people. I think it's just that simple."

Comprehensive statistical data on the impact of bad faith laws is not yet published, insurance representatives said. An economic analysis prepared for NAMIC found a higher number of claims with "characteristics associated with fraud" among uninsured motorists in states with strict bad faith laws. However, insurers in those states are not more likely to be more aggressive in investigating claims or disallowing claimed costs, suggesting they "may be inhibited in challenging disputable claims due to concerns about bad faith liability."

In Washington state, where a law made it unlawful for insurers to "unreasonably" deny claims and permitted treble damages for unfairly denying claims, insurers point to anecdotes of a chilling effect. But Insurance Commissioner Mike Kreidler said the law is encouraging insurers to be more responsible; companies have improved their professional training for adjusters so they can make more fair and accurate judgments, he said (BestWire, Jan. 26, 2009).

Bad faith bills remain under consideration in Colorado, the District of Columbia, Florida, Georgia, Indiana, Michigan, Minnesota, Nevada, New Jersey and Rhode Island, according to the Property Casualty Insurers Association of America.

While it is too early for insurers to claim a clean sweep on bad faith in 2009, "the highest moments of danger" have passed, Tetrault said.

Velasquez is less certain. "There's ample opportunity for a lot of mischief," she said.

(By Sean P. Carr, senior associate editor, BestWeek: Sean.Carr@ambest.com)