Insurance Regulation

Once again, a Washington Appellate Court has ruled that an insurer’s blanket denial of payment of a medical bill that exceeds a predetermined amount constitutes an unfair practice in violation of the state Consumer Protection Act. [Stan Schiff v Liberty Mutual Fire Insurance Company, No. 82554-2-1 Decided 11/28/2022 footnote 8 at 12]  “Insurers must make an individual assessment of the claim. A “formulaic approach”—such as the 80th percentile practice employed by Liberty Mutual—is not alone sufficient.” [Id. at 12]

As the Liberty Mutual claims manager explained, their database limited payment to a percentage amount that everyone else was charging for a health care service.

Q. . . . [W]hen the payment is made at the eightieth percentile, there’s no individualized investigation to the provider’s fee as to whether it’s reasonable or not? 

A. Correct. 

Q. Liberty Mutual doesn’t look, for example, at the background of the provider, their years of experience or their credentials or any of that information to determine whether what they’re actually charging for the services is reasonable, correct? 

A. That is correct. 

Dr. Schiff asserted “that, pursuant to our Folweiler decision, Liberty Mutual’s conduct constitutes an unfair practice in violation of the insurance regulations and the CPA. Schiff is correct.” [Id.] 

The Court observed that it had already told insurers that the practice was unfair. “[Liberty Mutual] engaged in the precise conduct that we have recently determined constitutes an unfair practice.” [Id. at 2 citing Folweiler Chiropractic, PS v. Am. Fam. Ins. Co., 5 Wn. App. 2d 829, 429 P.3d 813 (2018)].

In Folweiler, we considered the very allegations made here by Schiff. There, Folweiler Chiropractic (Folweiler) filed a class action complaint against American Family, alleging that its practice of utilizing the FAIR Health computer database to assess whether medical provider bills were reasonable, and reducing the amount of those bills pursuant to the 80th percentile of charges, violated the CPA. Folweiler, 5 Wn. App. 2d at 832-33. Folweiler alleged, as Schiff does here, that the insurer’s claims settlement process, in failing to “independently evaluate the identity, background, credentials, or experience or any personal characteristic of the individual provider,” violated the duty to conduct an individualized assessment. Folweiler, 5 Wn. App. 2d at 838. [Id. at 11]

Moreover importantly, the Court rejected the insurer’s argument that the Insurance Commissioner’s approval of its policy was enough to allow the insurer to engage in the practice. The Consumer Protection Act exempts insurer actions permitted by the insurance code.

actions and transactions prohibited or regulated under the laws administered by the insurance commissioner shall be subject to the provisions of [CPA] … except that nothing required or permitted to be done pursuant to Title 48 RCW shall be construed to be a violation of [CPA].

“While an opinion of the Insurance Commissioner is afforded substantial weight, whether an insurance contract violates public policy is ultimately a question of law for the courts. There is a difference, however, between deference and fealty.”

“The OIC’s approval of the policy, Liberty Mutual contends, constitutes “permission” pursuant to the insurance code to engage in the challenged practice. We disagree.” [Id. at 20] The Court found that absent an explicit permission to engage in the activity itself, the CPA did not protect the insurer from a finding that it had engaged in an unfair and deceptive act or practice.

The Court was unimpressed by Liberty Mutual’s introduction of testimony by the Deputy Insurance Commissioner for Legal Affairs that “in approving Liberty’s policy forms, the OIC had determined that the practices described in them did not violate Washington law.” [Insurer Brief at 20] Schiff countered that “OIC deputy commissioner Hood, in 2020, wrote that LM’s investigation of coverage satisfies the WAC, and that LM may use the database as a means to an end but still must meet the requirements of the applicable statutes and regulations.” [Schiff Brief at 30]

So what’s all the hubbub Bub? 

Insurers must justify their actions as reasonable even if the Insurance Commissioner has reviewed filed documents and decided not to do anything about the filings. When the Insurance Commissioner has approved a particular contract, such approval will not prevent a court from deciding that the contract or an action based on the contract violates the Consumer Protection Act.

The regulatory reality is that the Insurance Commissioner’s office has neither the time nor staff to determine whether an insurer is about to engage in practices that are unfair to consumers. In many instances, the Office does not have the experience to make judgments about the business practices of an insurer. And as the Court noted in Schiff, the Commissioner can’t give the consumer a remedy when the consumer is harmed by such practices.

I’d have thought the Commissioner would clarify its rules regarding claim investigations and settlements when the Court ruled on the matter the first time in Folweiler Chiropractic. Maybe insurers should stop relying on regulatory approval and guidance as protection from unfair practice claims. Insurance policy forms are not the only contracts reviewed and approved by the Commissioner. There are many health care provider agreements filed and approved that may be ripe for court review.