This article discusses Illinois Public Act 097-0513, also known as the Insurance Mandatory Arbitration. The Act came in effect to amend The Illinois Insurance Cod in areas related to arbitration of property damage insurance claims. The papers deals with the issues that led to the adoption of the Public Act, the amendments of the Senate Bill SB0152, and the effects of the final Act on different stakeholders.
Public policy analysis and settings work is to address a particular concern or a problem that the public face. The Act came to address a conflict among auto insurers in the State of Illinois that use or refuse to use the Insurance Mandatory Agreement, and not a public problem. The proposed Bill was not meant to protect the public or a specific industry, but rather the interest of a specific segment of the Illinois auto insurance industry.
The insurance industry is governed by a number of federal and local state legislations and insurance codes to protect the interests of the different stakeholders: the public, insurers, and the insurance intermediaries or the agents. Clients and insurers who have claims against other insurers can resort to these laws to settle disputed claims. Settlements of claims can be accomplished by primary litigations (lawsuits and courts), or by arbitrations. Arbitration is a legal term which refers to “the hearing and determination of a dispute, especially an industrial dispute, by an impartial referee [individual or a group] selected or agreed upon by the parties concerned.” (The Free Dictionary, n.d.) Resorting to litigation can be costly and smaller liability claims may not be worth it to go through the litigation process. For that reason many insurance companies rely on arbitration to settle claims among each others, without the need to go to court.
Relying on the Federal Arbitration Act of 1925 and other local and federal arbitration statutes, certain US casualty insurers in the State of New York in 1943 formed the New York City Claim Managers’ Council which appointed a committee to serve as an arbitration board. Insurance company members of the Claim Managers’ Council agreed to arbitrate only certain auto physical damage subrogation claim disputes arising among member insurers. By the early 1950s, the success of the New York experience prompted insurance companies on the national level to adopt a similar agreement called the Nationwide Inter-Company Arbitration Agreement, or the NICA. The Agreement was handled by The Committee on Insurance Arbitration which was incorporated in 1981 under the name of Insurance Arbitration Forums (IAF), a non for profit organization. In 1986 the word “Insurance” was deleted from the name and became the Arbitration Forum (AF); to reflect the expansion of AF’s programs to include situations outside the insurance industry.
Currently, the AF “is a service-oriented company with a roster of nearly 5,900 highly skilled and objective arbitrators, many of whom the member companies provide. Annually, these professionals hear and decide over 477,000 cases involving more than $2.3 billion in claims.” (Guide to Arbitration, 2011). Insurance experts estimate that about 4,000 insurers are signatories of the agreements. Signatory insurers become obligated to settle disputed claims based on finding of arbitrators. Non signatory members are not obligated to abide by arbitrators.
SIGNATORY VS. NONSIGNATORY MEMEBERS OF NICA
Not all auto insurers are signatories to the agreement. Settling claims according to the NICA process among participating (signatory) insurers rely on each insurer submitting every fact they have to the arbitrators, and then wait for the final decision. If a particular insurer is not happy for paying a particular claim because the insurer thinks it is the other person’s fault, then the claim adjusters of both insurers will file the certain supportive documents and paperwork including statements, photos, estimates, bills, etc. to the independent arbitrators and to the opposing insurer. Strict rules and timetables are used in the process of filing the documents.
The NICA arbitration was never appealing to certain insurers who refused to sign it, mostly nonstandard carriers, based on the belief that the Agreement is not fair. Nonstandard insurers’ clients are less firm in obtaining as much data as possible at the time of automobile crashes, information that their insurers need to substantiate their arguments and support their claims to win cases. Sneneh (2011) cited the following reasons why nonstandard carriers, preferring court litigation processes, fought the original Bill citing several reasons including:
- Questioning witnesses and other motorists are not allowed in the NICA.
- Live experts are not allowed in the NICA arrangement.
- Neither the insured persons nor their companies are allowed to be present in arbitration sessions.
- No one can contest the capability of arbitrators in their experience or judgment.
- The decisions are mechanical, usually for 100% of the claim.
- No meaningful way to appeal the arbitration decision.
Pros and Cons of the Agreement
Insurers that operate in the nonstandard markets are less likely to agree with this Agreement because their clients are less likely to cooperate at the time of auto crashes or to provide information that clients of standard carriers provide to their standard insurers. For that reason, nonstandard companies could have suffered if the proposed bill was passed as originated. Also, if the original bill was passed, nonstandard auto insurance clients would have to pay more for the same insurance while the quality of service may or may not be improved. Increasing auto insurance premiums will leave more people driving uninsured.
Subrogation occurs when “one party has the right to ‘step into the shoes’ of another party for the purposes of bringing a claim for damages. Not all types of claims may be subrogated. The most common type that can be subrogated is property damage claims.” (What is Subrogation, 2000.) For example, if Person A suffers automobile property damages because of negligent act of Person B, and Person A uses his/her own insurance company to pay for the damages, then the insurance company of the same Person A will pay the claim after a particular deductible (typically $500.00), but will go after the third party (Person B and/ or the insurer of Person B) under a clause known as Subrogation Clause. If and when Person B or his/her insurer pays, Person A gets reimbursed the deductible paid initially.
ILLINOIS SENATE BILL SB0152
On February 8, 2011, Illinois Senate Bill SB0152 was filed with Senator William R. Haine. It was believed that one of the major standard insurers was behind the proposed Bill. The synopsis of the Bill as introduced included amendments to the Illinois Insurance Code. The Bill also provided that insurers shall arbitrate and settle “all disputed claims made for automobile physical damage between them in accordance with the terms of and rules adopted pursuant to the Nationwide Inter-Company Arbitration Agreement unless the parties agree to use another forum.” Further more, the Bill included provisions that “mandatory arbitration shall be limited solely to the issues of liability and damages [and] that every insurer licensed to issue a policy of automobile insurance shall be a signatory of the Nationwide Inter-Company Arbitration Agreement or any successor thereto.” (Illinois General Assembly, n.d.)
The Bills was later amended in the Senate Floor, proposing that the settlement amount not to exceed $10,000 instead of “all amounts”, and restricting the nature of damages to automotive physical damage liability and automotive physical damages, instead of the more general of liability and damages phrases used in the original proposal. The Bill passed on the Senate Third Reading and was passed to the Illinois House.
The Illinois House, however, made certain amendments to the Bill providing that the Bill applies with respect to physical damage subrogation claims arising from auto damages incurred on or after January 1, 2012. Furthermore, the Bill included statement that insurers shall arbitrate and settle such claims where the amount in controversy, exclusive of the costs of the arbitration, is less than $2,500. Finally, the amended version provided that the arbitration shall be in accordance with the terms of and rules adopted pursuant to the NICA. Despite the fact that the amendment included provisions concerning alternate forums and mandatory arbitration it declared that the Bill is not to requiring non signatory members (nonstandard insurers) to accept or sign the NICA.
Standard vs. Non Standard (Substandard) Insurers in Illinois
Most nonstandard (aka substandard) insurers in Illinois are non signatory members; hence they are not obligated by any arbitration results. In the majority of cases nonstandard insurers prefer to go to court to settle disputed claims. Nonstandard insurers have lenient underwriting (policy issue) rules and low auto insurance rates. Nonstandard insures felt that the proposed Bill was meant against them, to force them to settle claims according to methods set by larger standard insurers.
Most standard automobile insurance companies operating in Illinois (if not all) are signatory members of the NICA, agreeing to settlement of automobile physical damages loss under $100,000 based on arbitrators’ findings. Standard insurance companies” are the “preferred” carriers that use stringent policy issue guidelines (underwriting guidelines) but are quick in settling claims. Naturally standard insurers are the preferred choice of clients and they have much higher customer satisfaction rates when compared with nonstandard insurers.
The Illinois Department of Insurance report on Private Passenger Automobile by Complaint Ratio indicates that for 2012, the average of complaint per $1 million in “direct written premiums” was 2.00. Almost all substandard companies were around or significantly above that average. Standard carriers, on the other hand, had significantly lower than the average complaint ratios. (Illinois Department of Insurance, n.d.)
The public is not a direct stakeholder in the matter as the parties involved in the arbitration are the insurers, not clients. However, the cost of unfair settlement of claims is normally picked by certain classes of clients. Here, the standard insurers felt that their clients are paying the price. According to some sources, “the average claim settlement cycle time for claims with a Non-standard carrier is 249 days, compared to 72 days for a standard carrier.” (Runkel, 2010, n.p.) This means that Standard insurers pay for damages their clients cause to clients of nonstandard insurers or their carrier within 72 days to settle an auto insurance claim. Alternatively, nonstandard insurers whose clients cause property damage to others take as long as 249 to settle claim. The difference in time works against standard insurers. During that time, customers may unnecessarily lose time. Furthermore if claims are not paid, clients stand to lose financially.
Insurance Agencies Agents
Agencies and agents also are not a direct stakeholder in the matter either. Some “captive agents” are direct employees of companies while “independent agents” are considered independent contractors, working for multiple companies.
PUBLIC ACT 97-0513
Illinois House approved the SB0125 in all Readings and on 8/24/2011 the Bill was signed by Illinois Governor making it a State policy that was scheduled to be effective January 1, 2012. The final wording of the Act states:
AN ACT concerning insurance.
Be it enacted by the People of the State of Illinois,
represented in the General Assembly:
Section 5. The Illinois Insurance Code is amended by adding Section 143.24d as follows:
(215 ILCS 5/143.24d new)
Sec. 143.24d. Arbitration of physical damage subrogation claims between insurers in certain cases.
(a) With respect to physical damage subrogation claims arising from auto damages incurred on or after January 1, 2012, insurers shall arbitrate and settle such claims where the amount in controversy, exclusive of the costs of the arbitration, is less than $2,500. Such arbitration shall be in accordance with the terms of and rules adopted pursuant to the Nationwide Inter-Company Arbitration Agreement, or any successor thereto, as adopted and from time to time amended by its members, unless the parties on a case-by-case basis mutually agree to use another forum; the alternate forum may include a court of competent jurisdiction, in which case the claim shall be arbitrated or tried in that alternate forum. Mandatory arbitration of disputed claims shall be limited solely to the issues of liability and damages.
(b) Nothing in this Section shall be interpreted to require an insurer to become a member of any organization or to sign the Nationwide Inter-Company Arbitration Agreement.
Section 99. Effective date. This Act takes effect January 1, 2012 .
Bolman and Deal (2008) assert that “alliances form because members have interests in common… To accomplish their aims, they need power” (p. 201.) Nonstandard insurers waged a campaign with the support of some of their agents and members of the public against the initial Bill. Press releases, email, phone calls and blogs were initiated to contact legislators to express disapproval of the proposed changes.
There were two remarkable changes that took place on the original Bill before its passage. These changes include:
- The original version was requiring all claims to be settled. The final version set a limit to claims of auto physical damage nature with a limit of $2,500 or less.
- The original version was requiring all auto insurance companies to sign up with the Nationwide Inter-Company Arbitration. The final version of the Act clearly states that insurance companies are not required to sign the agreement.
A VICTORY TO THE NONSTANDARD INSURERS
Was there a need for this Bill or Act? How would the public benefit from forcing nonstandard insurers to sign on the Agreement? Will signing the Agreement benefit the economy or the insurance industry at large? The answer to all of those questions is “No.” The refusal of the nonstandard carriers to sign the Agreement did not constitute any danger to the public or the industry. Perhaps it constituted a challenge to the standard insurers who found themselves compelled to utilize lawyers to settle claims. But this is a basic right for the nonstandard insurers too. The fact that certain businesses organizations do not like a specific model to do business should not entitle them to resort to government to enact laws to protect their business models on the expense of others.
But this is Illinois, a State that is notorious of being on the top of the list of political corruption. According to State Integrity Investigation, Illinois has an overall grade of C with regard to integrity. Only 25 percent of participants provided positive answer to the question: “Are regulations governing conflicts of interest by members of the state legislature effective?” (Illinois Legislative Accountability, n.d.)
Fowler (2013) stresses that “Public policy is the dynamic and the value-laden process through which a political system handles a public problem.” (p. 5.) Although the Bill was introduced as and intended by some legislators to be enacted as a public policy, the problem was too far from being a public problem. Simply, the problem was a struggle among insurers to improve their financial gains. The public, generally speaking, has no gains or loss from the enactment of the policy.
The Bill was originally proposed by standard carriers to combat refusal on nonstandard carriers to settle subrogated claims except by costly litigation. However, setting limits of $2,500, which is what standard insurers may pay for a small fender bender crash, was a clear victory for the nonstandard carriers. Further, the Act did not make it even mandatory for nonstandard insurers to sign the NICA.
Bolman, L. G. and Deal, T. E. (2008). Reframing Organizations: Artistry, choices, and leadership. San Francisco, CA: Jossey-Bass.
Folwer, F. C. (2013). Policy studies for educational leaders: An introduction, (4th ed.). Upper Saddle River, NJ: Pearson.
Guide to Arbitration Forums’ Agreements and Rules. (2011). Arbitration Forums, Inc.
Illinois Department of Insurance. (n.d.). Private passenger automobile by complaint ratio.
Illinois General Assembly. (n.d.) Bill status of SB0152 97th General Assembly.
Illinois Legislative Accountability (n.d.). State Integrity Investigation.
Sneneh, E. (2011.) Nationwide Inter-Company Arbitration And Illinois SB0125, Insurance Navy.
The Free Dictionary. (n.d.)
What Is Subrogation … and Why Is My Contract Waiving It? (2000.) IRMI.