Legislators Guide to Michigan s Insurance Issues

Transcription

1 Legislators Guide to Michigan s Insurance Issues Published by:

2 FORWARD The Michigan Insurance Coalition (MIC), based in Lansing, is a statewide property and casualty insurance trade association. MIC s members are insurers who annually write more than $3 billion in insurance premiums in Michigan. MIC members also proudly employ thousands of Michigan residents and contract with thousands of individual agents to help serve their customers. All MIC member companies are represented by government relations professionals, who are dedicated to positively impacting Michigan public policy and becoming a trusted resource for you. MIC also retains McAlvey, Merchant & Associates to monitor issues and serve as an additional liaison to the Legislature. Public service is demanding, and the number and complexity of issues you will face this session will be truly staggering. Our hope is that you will use this guide as a resource when you encounter insurance issues or questions. While the pages that follow provide some high level information and reference sources, this is only a starting point. MIC members stand ready and willing to share additional information and context to help you navigate issues that affect the insurance industry, and our contact information is provided, as well. We hope you find this guide helpful and that you will pick up the phone or send an whenever you have a question or a constituent problem see the Contact Information tab. We encourage you to visit our website at and to follow us on Facebook and Twitter for the latest news and updates regarding Michigan s insurance issues. Thank you for your service to Michigan! 2

3 CONTENTS Insurance and the Michigan Economy... 5 Insurance Regulation... 9 DIFS FIO NAIC NCOIL Industry Segments Insurance Pools MCCA Michigan Assigned Claims Plan ATPA Premium and Retaliatory Taxes Essential Insurance Act No-Fault Automobile Insurance The Verbal Threshold Surplus Lines Contact Information Michigan Insurance Coalition 3

4 4 Legislators Guide to Michigan s Insurance Issues

5 Insurance and the Michigan Economy Michigan Insurance Coalition 5

6 Insurance and the Michigan Economy DISCUSSION The insurance industry has a significant impact on the Michigan economy that extends well beyond its responsibilities to collect premiums and settle claims. It employs licensed professionals; pays taxes; owns municipal bonds; and serves individuals, families, and businesses in their times of greatest need. U.S. Department of Commerce data indicates that the insurance industry provided 77,336 jobs in Michigan in 2013, accounting for about $4.8 billion in compensation. With forty percent of the employees in insurance-related occupations earning $40,000 to $60,000 annually in an industry that continues to grow, the insurance industry is an important economic growth engine for Michigan. Insurers provide significant revenue to the state through taxes. The insurance industry contributed $12.3 billion to the Michigan gross state product in 2012, accounting for 2.95 percent of the state GSP. Premium taxes paid by insurance companies in 2013 totaled $294.3 million. The insurance industry also plays a critical role in the state s economy by providing security to individuals and businesses, protecting them against unexpected large losses. The benefits are not just in the replacement of lost property but also in the stability provided by restoring revenue and compensation during times of crisis. 6 Legislators Guide to Michigan s Insurance Issues

7 MIC s POSITION By attracting and retaining insurance companies to the state, Michigan can increase both the number of jobs and tax revenues available to the Michigan economy. Such growth can flourish only in an environment free from unnecessary regulation, taxes, and mandates that stifle industry competition. MIC does not seek out an agenda to create marketplace advantage for its members; rather, its members simply want to compete on a level playing field without burdensome government intervention. Related References/Resources Michigan Firm Foundation: Key Facts The Insurance Industry s Contribution to the Michigan Economy, Insurance Information Institute, 2014 Michigan Insurance Coalition 7

9 Insurance Regulation Michigan Insurance Coalition 9

10 Insurance Regulation DISCUSSION Unlike most other closely-regulated industries, insurance companies are regulated by the various states rather than the federal government. This unique circumstance results from a law known as the McCarran-Ferguson Act enacted by Congress in This law delegates regulatory authority from Congress to the states while preserving federal prerogative to pass laws regulating the business of insurance. A significant provision of the McCarran-Ferguson Act provides that federal laws that may regulate other businesses and activities do not apply to insurance companies unless they expressly regulate the business of insurance by their terms. This provision helps to preserve the delegation from Congress and protects against dual- or conflicting state and federal regulations. Another significant, but often misunderstood, provision of McCarran-Ferguson provides that federal anti-trust laws will not apply to the business of insurance as long as the state has enacted regulation in that area. However, federal anti-trust laws prohibiting boycott, coercion and intimidation always apply to insurance companies. In large part, the anti-trust provisions of McCarran-Ferguson were designed to permit the states to regulate rating bureaus that compiled industry-wide loss data in order to help determine appropriate rate levels. 10 Legislators Guide to Michigan s Insurance Issues

11 MIC s POSITION Regulation by the states under McCarran-Ferguson has proven very effective, if sometimes unwieldy, at ensuring the solvency of insurance companies across the country. MIC supports thoughtful insurance laws designed to ensure a vibrant and safe insurance marketplace in which financially sound insurance companies provide their customers peace of mind. Related References/Resources The McCarran Ferguson Act, 15 U.S.C United States vs. South-Eastern Underwriters Association, 322 U. S. 533, 1944 Michigan Insurance Coalition 11

13 Department of Insurance and Financial Services (DIFS) Michigan Insurance Coalition 13

14 Department of Insurance and Financial Services (DIFS) DISCUSSION DIFS is the Department within Michigan government responsible for regulating the insurance, banking, and securities markets. The Director of DIFS is appointed by the Governor. In regulating insurers, DIFS administers the Michigan Insurance Code and the regulations based on the Code. Key functions within DIFS include solvency regulation, market conduct regulation, agency and company licensing, and consumer services. DIFS also participates in public policy development through its legislative liaison to the state legislature and its participation in the National Association of Insurance Commissioners (see NAIC tab for further information). DIFS regulates approximately 1,600 insurance companies, 209,000 insurance licensees, and 26 HMOs. In addition to its insurance-related responsibilities, DIFS also regulates banks, credit unions, investment advisors, investment adviser representatives, securities agents, consumer finance licensees and registrants, and securities broker-dealers. 14 Legislators Guide to Michigan s Insurance Issues

15 MIC s POSITION DIFS serves a critical role in Michigan s insurance marketplace by regulating the financial condition of companies doing business in Michigan to ensure they can fulfill the promises made to consumers. MIC companies value and support DIFS in solvency regulation. Similarly, because bad actors in the marketplace can create ill-will and public dissatisfaction with insurers generally, MIC companies regularly work with DIFS s consumer assistance personnel to resolve consumer issues that may arise. MIC encourages DIFS to be an active contributor to Michigan s economic recovery by focusing on activities and policies that increase competition and encourage insurers to locate- and do business in Michigan. Related References/Resources Department of Insurance and Financial Services 611 W. Ottawa Street P.O. Box Lansing, MI (517) (877) Michigan Insurance Coalition 15

17 Federal Insurance Office (FIO) Michigan Insurance Coalition 17

18 Federal Insurance Office (FIO) DISCUSSION The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Federal Insurance Office (FIO) within the U.S. Department of Treasury. FIO is vested with the authority to monitor all aspects of the insurance sector, and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors. In addition, FIO serves as an advisory member of the Financial Stability Oversight Council, assists the Secretary with administration of the Terrorism Risk Insurance Program, and advises the Secretary on important national and international insurance matters. While FIO has no direct regulatory authority over the insurance industry, it is expected to comment on domestic market conduct and to become directly involved in establishing international regulatory protocols affecting the insurance industry. For example, the FIO s work with the Financial Stability Oversight Council includes discussions about proper insurer capitalization standards and insurer group governance. 18 Legislators Guide to Michigan s Insurance Issues

19 MIC s POSITION While FIO was expressly not created as a regulatory agency, it is engaged in negotiating international accords that may create prudential regulatory standards duplicative of- or inconsistent with existing state-based regulation. Clearly its monitoring of domestic market conduct duplicates the role of existing state regulators. MIC is watching developments at FIO closely to guard against dual regulation and/or the adoption of inappropriate international regulatory standards. Related References/Resources The Dodd Frank Wall Street Reform and Consumer Protection Act (Pub.L , H.R Michigan Insurance Coalition 19

21 National Association of Insurance Commissioners (NAIC) Michigan Insurance Coalition 21

22 National Association of Insurance Commissioners DISCUSSION The National Association of Insurance Commissioners (NAIC) is the organization of insurance regulators from the 50 dates, the District of Columbia and the five U.S. territories. The NAIC provides a forum for the development of uniform policy when it determines uniformity is desirable. State insurance regulators created the NAIC in 1871 as a forum to coordinate regulation of multistate insurers. Early on, it developed uniform financial reporting by insurance companies. Since then, new regulatory concepts, new data collection technology, and fee-generating initiatives have transformed the NAIC into a large, powerful trade organization. The NAIC meets quarterly and is attended by the commissioners, their staff, industry representatives, and their trade associations. The NAIC is organized into subject-matter committees that develop formal policy positions, model laws, regulations, and resolutions for publication to legislatures, regulators, the media, and Congress. NAIC officers also regularly testify in Congress. The NAIC maintains offices in Kansas City, New York, and Washington D.C. It recently announced that its headquarters, formerly in Kansas City would be transitioning to Washington D.C. The annual budget for the NAIC exceeds $70 million. 22 Legislators Guide to Michigan s Insurance Issues

23 MIC s POSITION The NAIC has been an important contributor to the successes of state regulation. Although it has no authority to regulate or to enact public policy, it has become a quasi-regulator. Its revenues are generated through assessments to insurers and feegenerating activities such as its Securities Valuation Office and its System for Electronic Rate and Form Filings to which insurers are required to pay fees. Due to the power it wields and the expenses it adds to the cost of insurance, its activities must be closely monitored by state legislators, NCOIL, and the insurance industry. Related References/Resources NAIC 2301 McGee Street Suite 800 Kansas City, MO Main Phone: (816) Media Relations: (816) NAIC 444 North Capitol Street NW Suite 701 Washington, DC (202) Michigan Insurance Coalition 23

25 National Conference of Insurance Legislators (NCOIL) Michigan Insurance Coalition 25

26 National Conference of Insurance Legislators DISCUSSION The National Conference of Insurance Legislators (NCOIL) is an organization of state legislators whose main area of public policy concern is insurance legislation and regulation. Many legislators active in NCOIL either chair or are members of the committees responsible for insurance legislation in their respective states. NCOIL has three meetings each year in the spring, summer and fall. The Executive Committee and each of the topical committees meet to discuss and debate the issues de jure. Out of the committee work, NCOIL develops formal policy positions, model laws, and resolutions for publication to legislatures, regulators, the media and Congress. NCOIL officers also regularly testify at the National Association of Insurance Commissioners and in Congress. Michigan legislators have enjoyed a high participation level and visibility at NCOIL, including as NCOIL President. Participation is bi-partisan and Michigan legislators can receive funding for their travel and lodging costs from the Insurance Bureau Fund administered by the Director of Insurance and Financial Services. (Funding may be limited based on budgets and allocations.) All insurance companies doing business in Michigan are assessed their pro-rata share of the Insurance Bureau Fund. 26 Legislators Guide to Michigan s Insurance Issues

27 MIC s POSITION MIC regularly participates in NCOIL meetings and regards NCOIL as an important contributor to the review, oversight and upkeep of laws, regulations, and public policy affecting insurance regulation. MIC supports the statutory funding mechanism for Michigan legislators to attend NCOIL meetings. Related References/Resources Money in the insurance bureau fund may be appropriated by the legislature to pay for legislators designated by the senate majority leader and speaker of the house of representatives to participate in insurance activities coordinated by insurance and legislative associations including the national association of insurance commissioners and the national council of insurance legislators. MCL Michigan Insurance Coalition 27

29 Industry Segments Michigan Insurance Coalition 29

30 Industry Segments DISCUSSION A fundamental principle of insurance risk classification allows insurers to maintain financially sound and equitable rates. Insurers accomplish this by grouping risks with similar characteristics in order to develop products and classifications that best respond to consumer needs and demands. Similarly, it may be helpful to distinguish the insurance industry by segments based on the similarity of their product offerings because the differences in products require different approaches to public policy and regulation. The insurance industry is often described in three distinct segments life, health, and property/ casualty. The life and health segments may sound self-descriptive, but new product offerings in each segment are constantly, if slowly, redefining each. For example, the life insurance segment has increasingly shifted to annuity products with fixed or variable income streams and away from traditional individual and group lump-sum contracts. The health insurance segment today includes HMOs, PPOs, and health management services. Additionally, life and health services and products often have more to do with delivering specified benefits than transferring the risk of loss. Property and casualty insurance covers a broad array of products that assume the risk of loss for policyholders property and legal liability for damages. Property and casualty insurance 30 Legislators Guide to Michigan s Insurance Issues

31 includes auto, home, workers compensation, commercial/business coverages, and medical malpractice, for example. These products may have a long payment duration, such as with medical injuries covered by auto insurance, or a short payment duration such as with fire damage covered by home insurance. Within each insurance segment, competitors strive to identify consumer needs and demands in order develop and deliver products and services that best meet those challenges. Similarly, legislators and regulators are challenged to keep up with an ever-evolving marketplace in order craft public policy and regulation that preserves a vibrant marketplace. MIC s POSITION MIC is an association of property and casualty companies. Its interests and activities is limited to that segment of the overall insurance industry except where segment interests overlap as they frequently do. Because of the differences in products, services, and consumer needs and demands, one size does not fit all when it comes to insurance or insurance public policy and regulation. Related References/Resources Michigan Insurance Code, MCL et seq. Insurance Information Institute (III) Michigan Insurance Coalition 31

33 Insurance Pools Michigan Insurance Coalition 33

34 Insurance Pools DISCUSSION When insurance is mandated by law, everyone even those considered to be uninsurable or very high risk must be able to obtain coverage. In order to spread the risk of these individuals, government-sponsored mechanisms called pools have been created to provide the necessary insurance and to spread the costs across the insurance industry, its policyholders and Michigan taxpayers. There are three such pools in Michigan for automobile, home, and workers compensation insurance, respectively. They are the Michigan Automobile Insurance Placement Facility (also referred to as the MAIPF or Facility), the Michigan Basic Property Insurance Association (also referred to as Michigan Basic or the FAIR Plan), and the Michigan Workers Compensation Placement Facility. 34 Each pool operates like a take-all-comers insurance company, in that it accepts applications and issues policies to nearly every applicant regardless of insurability. However, unlike an insurer, to varying degrees each pool is limited by the law as to what it can charge, which is designed to artificially lower rates for individuals in the pools. When a pool doesn t take in enough premiums to cover its losses, the shortfall is spread among all insurers in the form of an assessment. In exchange for subsidizing these government mandates, insurers are permitted tax credits, subject to limits, under the Corporate Income Tax. Legislators Guide to Michigan s Insurance Issues

35 MIC s POSITION Although MIC does not support government mandated insurance, pools are a necessary evil once you impose such mandates. It would be unconstitutional to mandate the purchase of insurance without a mechanism to make coverage generally available. By mandating the subsidization of these pools and then providing partially offsetting tax credits, the state of Michigan is effectively disguising a tax. It is MIC s position that Michigan should be moving away from mandates and hidden taxes. Michigan Insurance Coalition 35

37 Michigan Catastrophic Claims Association (MCCA) Michigan Insurance Coalition 37

38 Michigan Catastrophic Claims Association (MCCA) DISCUSSION The unlimited, lifetime medical benefits available to a seriously injured person under Michigan s auto no-fault system can result in millions of dollars being paid for the care of one person. Just a few of these claims could cause serious financial difficulty for a single insurer. Insurers regularly protect themselves from large claims by purchasing reinsurance insurance for insurers from other insurance companies. However, traditional reinsurers would not provide coverage for the unlimited lifetime benefits under our system. In order to support our system, the legislature created the MCCA. The MCCA is a private, non-profit association that operates as a reinsurer for every insurer providing automobile insurance in Michigan. 38 The assessment charged to insurers and paid by consumers for the cost of the reinsurance provided by the MCCA is now at the highest level in its history, although it has fluctuated significantly at times. This is due in large part to the rapid increase in provider chargers for care for patients whose injuries resulted from an automobile accident. The MCCA charges insurers for the catastrophic coverage it provides and every insurer that sells auto insurance in Michigan is ultimately responsible for the financial liabilities of the MCCA. Even though the MCCA has no direct contact with policyholders, some have argued that the MCCA should be subject Legislators Guide to Michigan s Insurance Issues

39 to public scrutiny through public members on the Board, and to laws applicable to government agencies, such as the Open Meetings Act and the Freedom of Information Act. MIC s POSITION MIC strongly believes it is irresponsible to suggest that the MCCA should be treated like a governmental agency, subject to state sunshine laws unless the government assumes the financial responsibility for the MCCA and turns it into a state agency. As long as insurance companies remain financially liable for the MCCA, any legislative, political, or regulatory interference with this important reinsurance mechanism is unfair and reckless because it would threaten the economic viability of Michigan s no-fault system and its insurance companies. Related References/Resources No-fault Chapter of the Insurance Code, MCL Michigan Insurance Coalition 39

41 Michigan Assigned Claims Plan (MACP) Michigan Insurance Coalition 41

42 Michigan Assigned Claims Plan (MACP) DISCUSSION The Michigan Assigned Claims Plan was created by statute to provide no-fault medical benefits to individuals injured in auto accidents who, through no fault of their own, have no auto insurance. An example of this would be a person who is injured by a hit-andrun driver or is a passenger in an uninsured vehicle but who has no insurance because he lives in a household with no vehicle. The injured person applies to the MACP and, once the MACP determines he is eligible, the claim is assigned to one of several insurers who have agreed to handle these claims. The servicing insurer handles the claim in the same manner as if it were from one of its policyholders. The costs of these claims the benefits paid and the expenses incurred by the handling insurers -- are billed to the MACP. The MACP then assesses all insurers (pro-rated by market share) for the claims costs, as well as the expenses to operate the MACP. The yearly assessment for the MACP has risen dramatically in recent years, increasing from $58.2 million in the year 2000 to $226.8 million in In December of 2012, responsibility for Assigned Claims was transferred by statute from the Department of State to the Michigan Automobile Insurance Placement Facility (MAIPF). RECENT DEVELOPMENTS 42 Since assuming responsibility for Assigned Claims, the MAIPF has implemented a number of changes designed to increase efficiency, decrease litigation expense, and identify potential fraud. A new online application for benefits has been created that requests all necessary documentation to assist in the completion of the Legislators Guide to Michigan s Insurance Issues

43 investigation, including identification of other avenues of potential coverage for the loss. Doing this investigative work in-house also allows MACP staff to identify patterns and questionable practices by claimants and/or medical providers to assist in the identification of fraud and abuse. The MACP is holding servicing insurers accountable by auditing their claim files for accurate and appropriate payments and efficient claims handling procedures. Automation allows MACP to track audit results from yearto-year and provide appropriate feedback to servicing insurers. Further efficiencies were gained by consolidating litigation with a law firm that is experienced with Michigan assigned claims cases and by consolidating the collection of judgments against persons responsible for the auto accidents with an experienced collections firm. Financial recordkeeping was improved and a new process was implemented to ensure the secure transmission of sensitive claims and medical data. In its first year of operation, the total MACP assessment increased by only 0.4% ($991,760), compared to an average annual increase for the past ten years of over 12% (which would have been over $27 million). MIC s POSITION Even with the great progress that has been made, there are still clarifications needed in statute to further reduce expenses. A great deal of litigation still takes place over ambiguous language in statute, which must be very specific for MACP because there is no underlying policy of insurance to refer to when adjusting a claim. Some ambiguities in statute have actually been interpreted by the courts to provide MACP claimants with greater benefits than those afforded to persons who purchase their own coverage. A bill to address many of these issues was introduced during the session, but unfortunately the session ended before it could be taken up by the Legislature. Michigan Insurance Coalition 43

45 Automobile Theft Prevention Authority (ATPA) Michigan Insurance Coalition 45

46 Automobile Theft Prevention Authority (ATPA) DISCUSSION In response to Michigan having one of the highest auto theft rates in the country, the legislature created the Automobile Theft Prevention Authority (ATPA) in The ATPA is a special entity housed and staffed by the Department of State Police but governed by a seven-member board appointed by the Governor. The Board provides financial support in the form of grants to law enforcement, prosecutorial, and judicial agencies, and others, for programs designed to reduce the incidence of auto theft. Each insurer writing auto insurance in the state is assessed $1 per insured car per year to fund the activities of the ATPA, which amounts to over $6 million annually. MIC s POSITION Because the ATPA was created as a separate public body corporate and politic it is not an agency within a state department. The money it collects from insurers must be administered by its board according to the statute and is not subject to the state appropriation process. In hard economic times however, the ATPA account has proven a desirable cache of funds for some to try to appropriate despite the specific statutory language stating that the ATPA funds are not state monies. 46 Legislators Guide to Michigan s Insurance Issues

47 While continuing to fight auto theft remains important, a larger but related problem not addressed under the ATPA statute is auto insurance fraud. It has become apparent that creating additional funding for law enforcement without funding prosecutors makes it difficult for successful prosecution. With the funding disparity that exists today, fraud cases are often not pursued. For these reasons, and others, MIC supports changing the ATPA statute to house the ATPA in the Michigan Automobile Insurance Placement Facility (an existing pool funded by all insurers writing automobile insurance in Michigan), and expanding its scope to include financial support to fight fraud as well as theft. Related References/Resources Chapter 61 of the Insurance Code, MCL et seq. Michigan Insurance Coalition 47

49 Premium and Retaliatory Taxes Michigan Insurance Coalition 49

50 Premium and Retaliatory Taxes DISCUSSION Insurers transacting business in Michigan generate approximately one quarter billion dollars in annual revenue to the state through tax payments. An insurer s tax liability arises from one of two alternative taxes the Corporate Income Tax (CIT), which equates to a premiums tax (based on the premiums collected from policy holders) or the alternative Retaliatory Tax. Every insurer pays one or the other of these taxes. Michigan-based insurers pay the CIT. Each company domiciled elsewhere determines which tax it pays by comparing its CIT liability with the taxes and burdens the company s home state would impose on a Michigan insurer doing business there. The company then pays the CIT or the Retaliatory Tax whichever is greater. Only insurers from states or countries with discriminatory or excessive taxes pay the Retaliatory Tax. Almost every state has a retaliatory tax for the same reason Michigan does: to promote the interstate business of domestic insurers by deterring other states from enacting discriminatory or excessive taxes. Retaliatory taxes are not new and they have been thoroughly tested and accepted as a constitutional exercise of state authority. 50 Legislators Guide to Michigan s Insurance Issues

51 Under the CIT, all insurers are eligible for specified credits. By design, Michigan s Retaliatory Tax does not offer any credits because to do so would undercut the very purpose of the tax and the goals the legislature sought to attain by its enactment. MIC s POSITION In the recent past, at least two large insurers from high-tax states have sued Michigan either to determine the Retaliatory Tax is unlawful or to have CIT credits applied against the Retaliatory Tax. The courts have upheld the Retaliatory Tax and refused to dampen its effect through the use of unauthorized credits. MIC supports preservation of the Retaliatory Tax and the protections it affords the marketplace. Related References/Resources MCL a Retaliatory Tax Michigan Insurance Coalition 51

53 Essential Insurance Act Michigan Insurance Coalition 53

54 Essential Insurance Act DISCUSSION The Essential Insurance Act (EIA) requires insurers to accept most applicants for automobile or home insurance, and it restricts the number and type of classifications insurers can use in order to develop rates. A large impetus for the EIA was a 1978 Michigan Supreme Court decision commonly referred to as the Shavers case. In Shavers, the court determined that Michigan s no-fault law was unconstitutional because it lacked consumer protections and failed to ensure that coverage would be available at fair and reasonable rates. The Court gave the Legislature 18 months to correct the deficiencies in the law. Accordingly, the legislature enacted the EIA in 1979, within the time frame required by the Shavers court. Although the EIA immediately addressed the constitutional problems outlined in Shavers, it also created some unintended consequences. Original EIA provisions required some lower-risk drivers and homeowners to subsidize higher-risk drivers and homeowners through artificially high premiums. Consumer dissatisfaction led to the repeal of so-called territorial rating restrictions that were in part responsible for the cost of premiums. In its present form, the EIA still has its take-allcomers provisions, restrictions on rating and underwriting classifications, requirements for detailed consumer disclosures, and dispute resolution mechanisms for aggrieved consumers. 54 Legislators Guide to Michigan s Insurance Issues

55 MIC s POSITION In it present form, the EIA remains one of the most restrictive and complex regulatory systems in the country for automobile and home insurance. While many of the most egregious cost-shifting provisions have been amended or repealed, the EIA still severely restricts rating and underwriting flexibility and, therefore, consumer choice. In addition, the reputation of the EIA and the difficulty insurers have in conforming their systems to its unique provisions means fewer companies choose to do business in Michigan, limiting choice and the benefits of competition for Michigan s insurance consumers. Related References/Resources Chapter 21 of the Insurance Code, MCL et seq. Michigan Insurance Coalition 55

57 No-Fault Automobile Insurance Michigan Insurance Coalition 57

58 No-Fault Automobile Insurance DISCUSSION Michigan is a no-fault state. If you buy a Michigan auto insurance policy, your own insurance company pays for medical expenses and wage loss that result from injuries sustained in an auto accident, regardless of who is at fault you don t sue the other guy to recover. No-fault is designed to eliminate the delays and costs that come from having to sue an at-fault driver, while ensuring prompt payment of benefits to injured persons. While several states have no-fault auto insurance, Michigan is the only state in which medical and rehabilitation benefits are unlimited in both time and amount. (The next-highest no-fault state mandates up to $50,000 in benefits.) And, unlike other no-fault states that offer consumers choices in benefit levels, Michigan drivers have no choice but to buy the unlimited policy. If you are injured in an auto-accident, your no-fault policy will pay all of your medical costs. It will also pay up to 85% of the income you would have earned if you had not been hurt, for up to three years. In addition, you are entitled to up to $20 per day in replacement services. A no-fault policy covers all family members living in the same house. Personal injury protection (PIP) benefits will be paid even when a family member is a passenger in another person s car or is a pedestrian when an auto accident takes place. 58 Legislators Guide to Michigan s Insurance Issues

59 The PIP coverage of your no-fault policy also covers anyone who does not have a policy and is hurt as a passenger or pedestrian in an accident involving your car. It will also cover a motorcyclist who is hurt in an accident involving your car. To balance the no-fault system, there are strict limitations on the ability to sue. Pain and suffering suits are generally prohibited unless the injured person has injuries considered serious enough to meet a statutory threshold. This is known as the verbal threshold. MIC s POSITION Michigan s no-fault system, in its current form, is unsustainable. Without meaningful reform and cost controls, auto insurance costs will continue to rise until it is unaffordable. MIC supports reasonable reform and cost controls. The underlying basis for MIC s past support of the current system has been the strength of the verbal threshold. The latest Supreme Court decision has significantly changed the threshold to allow for more lawsuits. This has disrupted the balance, increased costs and caused an increase in premiums. Related References/Resources Chapter 31 of the Insurance Code, MCL et seq. Michigan Insurance Coalition 59

61 The Verbal Threshold Michigan Insurance Coalition 61

62 The Verbal Threshold DISCUSSION In exchange for the most generous economic benefits unlimited lifetime medical and rehabilitation benefits in the country, Michigan residents are subject to a strong limitation on the ability to sue for noneconomic (or pain-andsuffering) damages as a result of an auto accident. The ability to sue is reserved only on behalf of those who have suffered death, permanent serious disfigurement, and serious impairment of body function. Some no-fault systems have a dollar threshold, but Michigan chose a definition-style tort threshold called the verbal threshold. Establishing a strong tort threshold the verbal threshold to pain-and-suffering suits provides important balance. This balance is critical to establishing equilibrium between the unlimited medical care and the pain-and-suffering recoveries afforded under Michigan s auto no-fault system. If the verbal threshold permitted virtually anyone to sue for personal injury in an automobile accident, the system would impose costs on consumers for both unlimited lifetime medical benefits and unlimited pain and suffering tort claims a system that would quickly go broke. The verbal threshold has been subject to interpretation since the inception of no-fault. In 2004, in Kreiner v Fischer, the Michigan Supreme Court set forth criteria for determining whether someone has met the threshold, including a nonexhaustive list of objective factors that must 62 Legislators Guide to Michigan s Insurance Issues

63 be considered by the court. Following the Kreiner decision, plaintiffs attorneys argued that decision made it much more difficult to prove serious impairment of body function. It wasn t until the composition of the Supreme Court changed that Kreiner was overturned by the McCormick v Carrier decision in July of The McCormick Court effectively weakened the threshold again and thereby continued the legal uncertainty over Michigan s verbal threshold. MIC s POSITION MIC supports a strong verbal threshold in order to maintain the appropriate balance in our nofault system. The McCormick case has resulted in more pain and suffering lawsuits and higher auto insurance premiums. By interpreting the same statutory language differently, the Court has made the statute even more difficult to administer. However, the current statute properly construed strikes the appropriate balance. Changing the language of the statute should only be undertaken with the proper balance in mind, and with a healthy concern for discouraging pain-andsuffering lawsuits that add unnecessary expense to the system. Related References/Resources Kreiner v. Fischer 471 Mich 109; 683 NW2d 611 (2004) McCormick v. Carrier, 487 Mich 180 (2010) No-fault Chapter of the Insurance Code, MCL Michigan Insurance Coalition 63

65 Surplus Lines Michigan Insurance Coalition 65

66 Surplus Lines DISCUSSION State regulations, including Michigan s, generally require consumers to purchase their insurance from admitted and authorized insurers insurers who have been granted a certificate of authority are admitted and authorized insurers subject to the full gambit of insurance regulation in the admitting state including financial oversight, filing requirements, and market conduct regulation. States also generally permit certain insurance to be purchased by unauthorized companies that are subject to minimal or no solvency and conduct regulation. Unauthorized insurers fill an important role in the insurance marketplace by providing hard-to-find coverage that is not available through authorized/ admitted insurers. The various types of coverage written by unauthorized insurers are referred to as surplus lines coverages. Surplus lines coverage may insure high risk (explosive manufacturing), nonstandard, high-limit, or specialty (one day events and unique situations) exposures. In order to protect the marketplace, the states generally prohibit the purchase of insurance from a surplus lines carrier unless the full amount or type of insurance cannot be obtained from insurers who are admitted/authorized. Accordingly, a purchaser must be able to demonstrate that coverage is not available through an authorized/ admitted carrier and that there is an eligible surplus lines insurer willing to provide coverage. Michigan law contains a unique provision that permits individuals to purchase insurance from an ineligible surplus lines insurer even if 66 Legislators Guide to Michigan s Insurance Issues

67 coverage is available fromauthorized/a dmitted insurers or from an eligible surplus lines insurer. Accordingly, Michigan permits the purchase of insurance from: 1) authorized/admitted; 2) eligible unauthorized; and 3) ineligible unauthorized insurers. Ineligible surplus lines insurers have no license and are subject to no solvency regulation. The accompanying chart illustrates the choices and varying protections for each. MIC s POSITION Under the existing Michigan statute, the protections from unregulated insurers not subject to minimum solvency standards can be side-stepped if a purchaser insists that the insurance be placed with an unauthorized insurer which is not recognized by the commissioner as eligible.... This loophole encourages undercapitalized, unregulated players into the Michigan market. That loophole is bad public policy because it neutralizes the benefits of solvency regulation, eliminates other important consumer protections applicable to surplus lines insurers, confounds the already difficult job of policing surplus lines tax remittances, and provides a competitive disadvantage to companies who maintain proper capitalization and are subject to state regulation. Related References/Resources MCL et seq. Surplus Lines chapter of Insurance Code MCL Surplus Lines Loophole To determine if an insurance carrier is an admitted insurer, call OFIR or use the search feature on the OFIR website at: srch/ins_comp/insurance_company_criteria.asp Michigan Insurance Coalition 67

68 CONSUMER PROTECTION COMPARISON The following chart compares the level of consumer protection offered by three types of insurers operating in Michigan. ADMITTED INSURERS IMPORTANT PROTECTION CONSIDERATIONS: Admitted/Authorized An insurer that is authorized to sell standard lines of insurance in Michigan and is regulated by MI DIFS. 1 Is the company required to meet minimum capital/surplus requirements to ensure a financial safety net? Is the company required to file its rates and forms with the MI DIFS1? Is the company licensed to transact the business of insurance in Michigan? Is the company required to invest all qualifying assets in high-grade investments to guarantee their ability to pay claims? Does the company have to meet MI DIFS s1 risk based capital requirements to ensure assets and liabilities mature simultaneously? Is the company required to provide annual financial reports to the MI DIFS1? Is the company s financial status regularly audited by the MI DIFS1? Are policyholders of the company protected by Michigan s Guaranty Association in the event the company is unable to pay claims? YES Must raise $7.5 million in capital to start-up and maintain a $7.5 million surplus. YES YES YES YES YES YES YES 68 Legislators Guide to Michigan s Insurance Issues

69 EXCESS & SURPLUS LINES INSURERS 2 Tiers Tier 1 Eligible Unauthorized An insurer that is not authorized to sell standard lines of insurance in Michigan, but may write surplus lines. Minimal MI DIFS 1 oversight. YES Must raise $7.5 million in capital to start-up and maintain a $7.5 million surplus. NO 2 Tier 2 Ineligible Unauthorized An insurer that is not authorized to sell insurance in Michigan and is NOT regulated by MI DIFS. 1 NO NO NO NO NO NO NO NO NO NO NO NO NO NO Source: Michigan Insurance Coalition 1 Michigan Department of Insurance Regulation 2 A license is not required for regulated/unauthorized insurers to transact surplus lines insurance in Michigan. These insurers must simply be recognized as a surplus lines insurer upon showing that they have met minimum capital and surplus requirements. Michigan Insurance Coalition 69

71 CONTACT INFORMATION MEMBERS ACE Group Michael B. Stern Vice President State Government & Industry Affairs ACE Group 525 West Monroe, Suite 700 Chicago, IL Phone: Cell: Amerisure Companies Kurt Gallinger Vice President & Counsel Government Relations Amerisure Mutual Insurance Company Halsted Road Farmington Hills, MI Office: Cell: Auto-Owners Bill Woodbury First Vice President, Secretary and General Counsel Auto-Owners Insurance Company 6101 Anacapri Blvd. Lansing, MI Office: Eric Musser Senior Attorney Auto-Owners Insurance Company 6101 Anacapri Blvd. Lansing, MI Office: Michigan Insurance Coalition 71

72 Citizens Amy Mass Vice President & Counsel Citizens Insurance, The Hanover Insurance Group 808 N. Highlander Way Howell, MI Phone: Cell: CNA Karen E. Melchert Assistant Vice President, State Government Relations CNA 333 S. Wabash Avenue 43rd Floor Chicago, IL Office: Cell: FCCI Insurance Group Rachel Smith Attorney, Corporate and Government Affairs 6300 University Parkway Sarasota, FL Phone: Liberty Mutual Charles Burhan Assistant Vice President & Regional Director of Public Affairs Liberty Mutual Group Corporate Legal Suite Forbs Avenue Hoffman Estates, IL Phone: Ext Office: Ext Legislators Guide to Michigan s Insurance Issues

73 National Association of Mutual Insurance Companies (NAMIC) Erin Collins State Affairs Manager Mid Atlantic National Association of Mutual Insurance Companies (NAMIC) Office: Cell: The Doctor s Company Nathan L. Medina Government Relations Specialist The Doctors Company 1301 N. Hagadorn Rd. East Lansing, MI ext The Hartford Meggan K. Conner Assistant Vice President Government Affairs One Hartford Plaza Hartford, CT Office Phone: Cell phone: [email protected] Michigan Insurance Coalition 73

74 CONTRACT LOBBYIST McAlvey Merchant & Associates 120 Ottawa St. Lansing, Michigan Phone: Fax: Jeff McAlvey Cell: Rusty Merchant Cell: Bill Jackson Cell: Maureen Watson-Bolger Cell: Bob Emerson Cell: COMMUNICATIONS Marketing Resource Group 225 S. Washington Sq. Lansing, MI Phone: Fax: Tom Shields Cell: Legislators Guide to Michigan s Insurance Issues

75 Michigan Insurance Coalition 75

76 120 Ottawa St. Lansing, Michigan Phone: Fax: Find us on Facebook: MICHIGAN INSURANCE COALITION Follow us on MICCOALITION Legislators Guide to Michigan s Insurance Issues