Thursday, July 26, 2007

Referendum 67

What is a Referendum?

In the State of Washington, the citizens may put on the ballot measures passed by the Legislature provided they collect 112,440 registered voters. In this way, it is a direct check by the citizens on their elected officials.


At the outset, I wish to provide you with three links:

  • The text of Referendum 67 (.pdf file)
  • Approve Referendum 67 website
  • Reject Referendum 67 website

    My analysis draws primarily from the first link, but I have consulted both of the others as well.

    This will shortly become a bruising fight as millions of dollars have been already poured in. You will undoubtedly hear commercials on the radio, see commercials on tv, and hear countless individuals opine on the subject. And so I thought it would be productive to look into what the law would accomplish, if passed. I should make clear, I am not yet an official law-talking guy, but I am certainly a "law-reading guy" and have a sense of what the words mean and what to expect.

    Referendum 67 would, at the end of the day, do one thing: it would prohibit insurers from "unreasonably" denying claims. The devil, as they say, is in the details.1 The first detail, and this is a very large one, is that the law does NOT apply to health insurance. That particular disaster is left for another day. Instead, think insurance for automobiles, homeowners, and so on. The next detail, and the true source of disagreement between the "Approve" and "Reject" camps,2 is the method for prohibiting unreasonable denials.

    Referendum 67 would allow, but not require, an award of triple the amount of actual damages where the court determines that the insurer acted unreasonably. Worth noting is that for even the possibility of triple damages to apply, the denial must not only be wrongful, but also unreasonable. Thus, even where a denial was wrongful and in violation of the policy, the insurance company would face the prospect of triple damages. Prior to filing the lawsuit, the insured must provide the insurer with 20 days written notice of the basis for the lawsuit, thereby providing the insured with an opportunity to correct an unreasonable denial. If the denial was merely wrongful, but not unreasonable, the insured would still be entitled to sue for actual damages, attorneys' fees, and litigation costs.

    The astute reader may be wondering how this relates to punitive damages. In the State of Washington, punitive damages are prohibited unless specifically allowed by statute. In a very real sense, then, Referendum 67 allows for a limited amount of punitive damages in limited situations.

    And so, at last, we reach the least important part of this post - my thoughts on the advisability of Referendum 67. First, having reviewed the websites, I assure you that the dire warnings from those opposed are overstated. IF insurance rates go up, it will be because insurers are unreasonably denying claims. And if that is the case, insurance rates SHOULD go up. Imagine - would you like to save $10 on your monthly auto insurance, but increase the likelihood they would unreasonably deny your legitimate $15,000 claim? The concern about increased litigiousness is also overstated. Going to court is an expensive business. These cases will often be on a contingency basis and no lawyer is going to take the expenses of frivolous cases. Indeed, even if a lawyer did so, where the case is truly frivolous, the court can impose sanctions and order the lawyer to pay the insurance company's legal fees.

    No, the major impact, I suspect, will be that the same people will take their insurance companies to court over wrongful denials, but instead of asking to merely be made whole, they will ask for an additional amount. The courts will be reticent to award that additional amount (frustratingly so, I suspect), but in certain cases the denial will be so egregiously unreasonable that the court will award additional damages. Insurances companies, presuming they are rational actors, will seek to avoid that expense by altering their claims process to ensure that it is reasonable. Again, I emphasize that Referendum 67 requires not that the systems are perfect, merely that they are reasonable. For those who are concerned about individuals getting excessive amounts of money to which they are not entitled, there are other solutions available (e.g. substantial taxes levied against the amount awarded in excess of actual damages), but that is a post for another day.

    In sum, I offer Referendum 67 my qualified approval - it is no panacea, but it creates an incentive for insurers to act reasonably.

    1 Or, if the Internet is to be believed, the smoke on 9/11.
    2 Reject camp, as it happens, does not sound like a particularly appealing summer activity.