Of General Interest
Insurance Code § 2006(4) Interest on Delinquently Paid Claims: Recognizing the § 2006(1) Optical Illusion and Reconsidering the
*Mr. McDermott acknowledges with appreciation the editing contributions of David A. Kotzian, Esq., of the Southfield firm of Sommers, Schwartz, Silver & Schwartz, PC, and law student Benjamin Shelton.
The Michigan Supreme Court in May 1998, demonstrated the ability to think clearly in three dimensions in avoiding what has been to the Michigan Court of Appeals and the federal courts an optical illusion contained in § 2006 of the Michigan Insurance Code, MCL 500.2006; MSA 24.12006 (please see statute for relevant subsections , , and ). In Yaldo v North Pointe Ins Co, 457 Mich 341; 578 NW2d 274 (1998), the Supreme Court addressed the insurance industry’s liability to "directly entitled" contract claimants (as opposed to "third-party tort claimant[s]") for interest on delinquently paid claims (claims not paid within 60 days of the insurer’s receipt of satisfactory proof of loss) and accurately interrupted the plain wording of subsection (4) without being distracted or deceived by the optical illusion that is the last sentence of subsection (1).
Defendant’s claim that our holding would negate the "reasonably in dispute" language of MCL 500.2006(4); MSA 24.12006(4) is based on a misreading of the statute. Its express terms indicate that the language applies only to third-party tort claimants. Where the action is based solely on contract, the insurance company can be penalized with twelve percent interest, even if the claim is reasonably in dispute. Yaldo, supra, at p 348, n 4.
The last sentence of subsection (1), like subsection (2), is a definition of "unfair trade practice" that does not alter or affect the interest accrual mandates of subsection (4). The sentence does, however, create an optical illusion because it can be, and has been, so easily misread as excusing an insurer’s subsection (4) interest liability, even
to a contract claimant, when a claim is "reasonably in dispute." Read accurately in context, the sentence simply exposes the insurer to jeopardy beyond its interest liability by declaring a violation of subsection (4) to be an "unfair trade practice unless the claim is reasonably in dispute." As explained below, being guilty of a series of unfair trade practices can jeopardize an insurer’s certificate of authority in the same way that speeding points jeopardize a driver’s license.
The prior misreadings by the Court of Appeals had been manifest but tangential and had not previously gone beyond harmless error, although the federal courts have been sent completely off track by the Court of Appeals’ misanalyses. Remarkably, in an unlikely and unfortunate development in December of 1998, the Court of Appeals in Arco Industries Corporation v American Motorists Insurance Company, 233 Mich App 143; 594 NW2d 74 (1998), after first heeding the Supreme Court’s interpretation of the statute as entitling a "directly entitled" contract claimant to interest regardless of whether its claim was "reasonably in dispute", changed its position on rehearing by concluding that the relevant language of Yaldo was dictum, and for the first time denied subsection (4) interest to a contractual claimant solely on the basis of its misreading of the optical illusion in subsection (1).
Chapter 20 of the Insurance Code, MCL 500.2001 et seq.; MSA 24.12001 et seq., is the Uniform Trade Practices Act (UTPA) enacted as PA 1976, No 273 § 1, effective April 1, 1977. That legislation was designed to bring Michigan’s Trade Practices Act into general conformity with the model act approved by the National Association of Insurance Commissioners in the early 1970s.
The purpose of the UTPA is to define and prohibit unfair trade practices in the insurance business. MCL 500.2002; MSA 24.12002. Unfair trade practices are generally described as unfair methods of competition or unfair or deceptive acts, MCL 500.2003(1); MSA 24.12003(1), and are specifically defined throughout Chapter 20. The Insurance Commissioner is authorized, upon administrative finding of unfair trade practices, to order fines, refund of any overcharges, and ultimately, in a situation of knowing and persistent violation, suspension or revocation of the violator’s license or certificate of authority. Insurance Code § 2038(1); MCL 500.2038(1); MSA 24.12038(1).
In other words, Chapter 20 is a "do not" list addressed to insurers and their agents that is backed by a penalty system, which includes at the ultimate, a commercial death penalty, i.e., revocation of certificate of authority or license.
Insurance Code § 2006; UTPA § 6; MCL 500.2006; MSA 24.12006, contrasts with other provisions of Chapter 20 in that it places affirmative duties upon insurers rather than simply stating prohibitions. Subsection (1) mandates timely payment of benefits and imposes an interest obligation "as provided in subsection (4)" when payment is not timely.
The final sentence of subsection (1) has been an optical illusion to some eyes. "Failure to pay claims on a timely basis or to pay interest on claims as provided in subsection (4) is an unfair trade practice unless the claim is reasonably in dispute." Beginning with the Court of Appeals in Siller v Employers of Wausau, 123 Mich App 140; 333 NW2d 197 (1983), this sentence has been misread as expanding the applicability of the "reasonably in dispute" exception to interest liability from its limited scope under subsection (4) ("third-party tort claimant[s]" only) to all claims including contract claims. Yaldo has now corrected the error of applying the "reasonably in dispute" exception beyond the limitation specified in subsection (4).
A careful reading of the last sentence of subsection (1) with awareness of its context in the UTPA clarifies the optical illusion. The sentence expressly reinforces by incorporation the full integrity of, and clearly does not affect (reduce), the obligations for interest payment imposed in subsection (4), but is, in effect, another definition of an unfair trade practice giving rise to potential insurer jeopardy under § 2038(1).
Taking the proper construction of § 2006(4) expressed in Yaldo and applying the true meaning of § 2006(1), the statute mandates that, in the event of failure to pay a claim within 60 days of receipt of satisfactory proof of loss, an insurer is:
•With respect to a "directly entitled" (contractual) claimant, unconditionally liable for 12 percent simple interest; but not guilty of an unfair trade practice if the claim is reasonably in dispute.
•With respect to "a third-party tort claimant," not liable for 12 percent interest if the claim is reasonably in dispute and not guilty of an unfair trade practice if the claim is reasonably in dispute.
CASE LAW UNDER § 2006(4)
Fletcher v Aetna Casualty Company, 80 Mich App 439; 264 NW2d 19 (1978), provides the first judicial treatment of § 2006(4). The issue before the Fletcher court was whether the statute should be applied retroactively. The Fletcher court labeled the interest provision a "penalty" in deciding against retroactivity on the basis of the rule of law that punitive statutes are never given retroactive effect. This writer finds nothing in the legislative history that would give rise for the court’s characterization of § 2006(4) interest as a penalty. The "penalty" label is now patently inapt with Yaldo having clarified that interest is payable to a contractual claimant even when the insurer is reasonably disputing the claim.
OJ Enterprises, Inc v Insurance Company of North America, 96 Mich App 271; 292 NW2d 207 (1980), involved a contractual claimant under a property insurance policy. The issue before the court was whether § 2006(4) entitled the claimant to 12 percent interest on the trial court judgment of $88,796. The Court of Appeals ruled that the interest obligation was never triggered because the proof of loss originally submitted was not "satisfactory" as § 2006(4) requires as a condition precedent to interest accrual.
In Siller, supra, the insurer denied a contractual claim for motor vehicle no-fault personal protection benefits on the basis of a coordination of benefits provision contained in its policy. The provision was ruled invalid for failure to comply with the explicit statutorily required language for coordination of benefits clauses, and was therefore not a reasonable basis for disputing the claim. The Siller court quoted the last sentence of subsection (1) and the first sentence of subsection (4). Obviously deceived by the optical illusion contained in subsection (1), the court stated that the insurer’s interest obligation to this "directly entitled" contract claimant would be relieved if the claim was "reasonably in dispute." While this is clearly the genesis of all subsequent misreliance by the courts on the optical illusion, the confusion proved harmless in this case because the court found that the claim was not reasonably in dispute and, therefore, that 12 percent interest was payable.
Medley v Canady, 126 Mich App 739; 337 NW2d 909 (1983), involved a third-party tort claimant by virtue of a motor vehicle accident. The issue before the court was interest entitlement under subsection (4). The court ultimately found no entitlement because the claim was "reasonably in dispute." Consistent with my above-stated disagreement with the Fletcher court’s application of the "penalty" label to this statute, I believe Judge Bronson’s dissenting opinion in Medley expresses the better view.
First, I do not share the majority’s view that § 6 must be characterized as a penalty provision. Interest under § 6 is intended to compensate the claimant for the value which she is deprived of while the insurer withholds money due her. Its purpose is essentially the same as that of pre-judgment interest statutes and rules allowing precomplaint interest as an element of damages. The fact that interest paid pursuant to § 6 must be offset by interest paid by the insurer pursuant to an award convinces me that the § 6 interest is primarily compensatory, not punitive. Medley, at 126 Mich App 749-750.
Young v Michigan Mutual Insurance Company, 139 Mich App 600; 362 NW2d 844 (1984), stands for the simple proposition that there is no implied private cause of action in tort for violation of § 2006.
In Senderholm v Michigan Mutual Insurance Company, 142 Mich App 372; 370 NW2d 357 (1985), the Court of Appeals relied on the characterization of subsection (4) as a penalty to be assessed against insurers for dilatory practices in settling meritorious claims in determining that the insurer’s conduct was not sufficiently egregious to warrant imposition of a penalty. Fletcher was cited regarding the "penalty" characterization of § 2006(4).
Commercial Union Insurance Company v Liberty Mutual Insurance Company, 426 Mich 127; 393 NW2d 161 (1986), arises from a third-party tort claim. In footnote 5, the Michigan Supreme Court cites Fletcher for the proposition that § 2006(4) imposes a statutory penalty intended to penalize recalcitrant insurers who, in bad faith, are dilatory in paying claims.
In McCahill v Commercial Union Insurance Company, 179 Mich App 761; 446 NW2d 579 (1989), the plaintiff was the owner of a building insured by the defendant and destroyed by fire. The plaintiff, as contractual claimant, prevailed and was awarded interest by the trial court under MCL 600.6013; MSA 27A.6013, as well as interest under § 2006. The court cited Commercial Union and Medley for the proposition that § 2006 is a penalty provision in ruling that an award of penalty interest is to be offset by any other award of interest that is payable by an insurer pursuant to the award. It should be noted that the same result could have been reached on the basis of the final sentence of § 2006(4), which controls regardless of whether the penalty label is applied to the subsection.
The U.S. Court of Appeals for the Sixth Circuit focused on the optical illusion contained in the last sentence of § 2006(1) to the exclusion of § 2006(4) in the case of a contractually entitled claimant in All American Life & Casualty Company v Oceana Trade Alliance Counsel International, 756 F2d 474 (CA 6, 1985). The claimant’s arguments and the court’s analysis were constrained to § 2006(1) and away from § 2006(4) by OJ Enterprises and Siller.
The plaintiff in Board of Trustees of Michigan State University v Continental Casualty Company, 730 F Supp 1408 (WD Mich 1990), a contractual claimant, espoused the interpretation of § 2006(4) ultimately validated by the Michigan Supreme Court in Yaldo. The federal district court followed the Sixth Circuit’s precedent in All American Life even though the plaintiff accurately identified the flaw of relying on the optical illusion in § 2006(1) to diminish the express requirements of § 2006(4). Understandably misdirected by Michigan case law, the federal district court dismissed this argument, saying there was no support in case law or legislative history.
Norgan v American Way Life Insurance Company, 188 Mich App 158; 469 NW2d 23 (1991), is another case where the Court of Appeals mistakenly applied the "reasonably in dispute" analysis to a claim brought by a contractual claimant. Plaintiff obtained a judgment in the trial court that included an award of 12 percent under § 2006(4). The Court of Appeals harmlessly misapplied the "reasonably in dispute" analysis by concluding that there was no reasonable dispute and therefore that the claimant was entitled to interest.
The federal court again misapplied the "reasonably in dispute" test to a case involving a contractual claimant in Jones v Jackson National Life Insurance Co, 819 F Supp 1372 (WD Mich 1993), aff’d 27 F3d 566 (CA 6, 1994). The court cited All American Life and Board of Trustees of Michigan State.
The Michigan Supreme Court has signaled in Yaldo that it recognizes the plain meaning of § 2006(4). The Supreme Court granted leave in Arco after this article was submitted for publication, and an opinion is expected before or soon after this article is published. Expect the Supreme Court to grant leave in Arco and ultimately reverse with an accurate construction of the last sentence of subsection (1), thereby permanently clarifying and eliminating the optical illusion. It is to be hoped that the Supreme Court will also consider addressing and perhaps removing the "penalty interest" label, although not necessary to a ruling in Arco.