Michigan policyholders are entitled to timely payment of property insurance benefits. Many insurers take extraordinary measures to delay, deny, and underpay claims leaving policyholders in vulnerable positions. An insurance company’s statutory responsibility to pay interest on delayed claim payments incentivizes insurers to promptly settle viable property insurance claims.
Mich. Comp. Laws § 500.2006 states, in relevant part, as follows:
(1) A person must pay on a timely basis to its insured, a person directly entitled to benefits under its insured’s insurance contract . . . the benefits provided under the terms of its policy, or, in the alternative, the person must pay to its insured, a person directly entitled to benefits under its insured’s insurance contract . . . 12% interest, as provided in subsection (4), on claims not paid on a timely basis. 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.
. . . .
(4) If benefits are not paid on a timely basis, the benefits paid bear simple interest from a date 60 days after satisfactory proof of loss was received by the insurer at the rate of 12% per annum, if the claimant is the insured or a person directly entitled to benefits under the insured’s insurance contract. . . The interest must be paid in addition to and at the time of payment of the loss.
Insurance companies must provide policyholders with materials constituting a satisfactory proof of loss within 30 days from the date the insured reports the claim.1
The 12% interest rate set forth in Mich. Comp. Laws § 5006.2006(4), is a penalty assessed against insurers for procrastinated payment of owed policy benefits.
A claim reasonably in dispute still prompts Michigan’s Prejudgment Interest Statute, which mandates payment of prejudgment interest on delayed payment of claims in litigation. Prejudgment interest begins to accrue from the date of filing the lawsuit.
In Denham v. Bedford,2 the Michigan Supreme Court held the insurance company liable for payment of prejudgment interest in excess of policy limits based on the intent of the Michigan Legislature and public policy considerations. The court noted that costs and prejudgment interest are recoverable to place an insured in a pre-loss condition after delayed payment of money damages.3 The court also highlighted that many insurance law commentators criticize attempts of insurers to evade responsibility for payment of prejudgment interest.
One such commentator appropriately remarked,
Courts as a matter of public policy should strike down any provision barring the insurer from being liable for prejudgment interest. Any other result allows the insurer to engage, with impunity, in delaying tactics at the expense of its insured.4
The Denham court explained:
Payment of prejudgment interest not only compensates the prevailing party but also liability for prejudgment interest may act as an incentive to the insurer to promptly settle a meritorious claim. Without such an incentive, the insurer may refuse to settle a meritorious claim in hopes of forcing plaintiff to settle for less than the claim’s true value. The insurer risks nothing. Even if protracted litigation results, the insurer will only be liable for its policy limits all the while reaping a tidy sum from its investment of the policy limits.
Failure to hold insurers accountable to its insureds for delay tactics in payment of policy benefits would subvert public policy and the very purpose of allowing interest, i.e., as compensation to the prevailing party for delayed payment.5
1 Mich. Comp. Laws § 500.2006(3).
2 Denham v. Bedford, 287 N.W.2d 168, (Mich. 1980).
3 Id. at 173.
4 Id. at 175.
5 Denham, 287 N.W.2d at 174 n. 10.