6.3 Enforcing Fair Claim Handling: Commissioner Proceedings, Complaint Records, Bad Faith & Attorney's Fees

6.3 Enforcing Fair Claim Handling: Commissioner Proceedings, Complaint Records, Bad Faith & Attorney's Fees

Section 6.1 listed the unfair claim settlement practices, and 6.2 the deadlines. This section answers the next question: what happens when they are violated? Hawaii uses two separate enforcement tracks: an administrative track run by the Insurance Commissioner, and a civil track in the courts.

Track 1: Commissioner Enforcement Under Article 13

Investigation and Hearing

• The commissioner may examine and investigate the affairs of every person engaged in the business of insurance in Hawaii to decide whether it has engaged in an unfair practice (HRS § 431:13-105).
• If the commissioner has reason to believe a person has engaged in an unfair method of competition or unfair or deceptive act — whether or not it is specifically defined in § 431:13-103 — and a proceeding would be in the public interest, the commissioner serves a statement of charges and a notice of hearing. The hearing must be set not less than 15 days after service (§ 431:13-106(a)).
• At the hearing, the person may be heard and show cause why a cease and desist order should not issue. Procedure follows chapter 91 (§ 431:13-106(b), (c)).

Orders and Penalties

The commissioner may adopt rules identifying specific prohibited practices, but the rules may not enlarge §§ 431:13-103 or 13-104 (§ 431:13-203). These powers are in addition to any other enforcement power under law (§ 431:13-204). For general code violations, § 431:2-203 separately allows fines of $100 to $10,000 per violation (5.1).

No Private Right of Action Under Article 13

All remedies, penalties and proceedings in article 13 are to be invoked solely and exclusively by the commissioner (§ 431:13-107). Hawaii courts have repeatedly held that the article does not authorize a private lawsuit. In one case, a workers' compensation insurer won summary judgment against an employee who sued for violating it. A claimant therefore cannot sue simply for "violating § 431:13-103." The same conduct can, however, be evidence in a bad faith case (Track 2).

Complaint Records and the Complaint Process

The Insurer's Complaint Register (§ 431:13-103(a)(12))

Failing to maintain complaint handling procedures is itself an unfair practice. Every insurer must keep a complete record of all complaints received since its last examination under § 431:2-302. The record must show:

1. the total number of complaints;
2. their classification by line of insurance;
3. the nature of each complaint;
4. the disposition of each complaint; and
5. the time it took to process each complaint.

A complaint means any written communication primarily expressing a grievance. Examiners review the register during market conduct examinations.

How a Consumer Complaint Moves

1. The consumer files a complaint with the Insurance Division (online, by mail, or in person).
2. The commissioner notifies the insurer's designated agent of the complaint by certified mail (§ 431:13-103(b)) and sends a written inquiry.
3. The insurer or licensee answers in writing within 15 working days, addressing the concerns rather than merely acknowledging receipt (§ 431:13-103(f)).
4. The division reviews the file. Three or more written complaints in any 12 months charging separate violations raise a presumption of a general business practice (6.1).
5. The commissioner may resolve the complaint, examine the insurer, or begin a hearing under § 431:13-106.

For the adjuster, the practical rule is to write every claim file as if an examiner will read it. Include dated diary notes, copies of every response, the reasons for each decision, and proof that each deadline was met.

Track 2: Civil Remedies in Court

First-Party Bad Faith: Best Place v. Penn America (1996)

In Best Place, Inc. v. Penn America Insurance Co., 82 Haw. 120, 920 P.2d 334 (1996), the Hawaii Supreme Court held that:

• every insurance contract contains an implied covenant of good faith and fair dealing;
• an insurer's breach of that covenant in handling a first-party claim gives rise to an independent tort action, separate from breach of contract;
• the test is objective: whether the insurer acted unreasonably in handling the claim. Malice or conscious wrongdoing is not required, but an honest mistake by itself is not bad faith — the decision must be unreasonable; and
• article 13's administrative remedies are not exclusive, so an insured may bring the bad faith tort despite § 431:13-107.

Damages in a successful bad faith case can include the contract benefits, consequential economic losses, and emotional distress damages.

Third-Party (Liability) Claims

In liability insurance, the insurer's good faith duties run to its insured. An insurer that unreasonably refuses a reasonable settlement offer within limits may be liable to its insured for the resulting excess judgment. An injured third-party claimant generally has no bad faith claim of its own against the defendant's insurer. In one case, the Hawaii Supreme Court rejected a third-party claimant's bad faith claim against a self-insured rental car company because there was no insurance contract from which the duty could arise (2004).

Attorney's Fees (§ 431:10-242)

When an insurer has contested its liability under a policy and is ordered by the courts to pay benefits, the policyholder, the beneficiary, or a person who acquired their rights shall be awarded reasonable attorney's fees and costs of suit, in addition to the benefits. In motor vehicle PIP disputes, the insurer pays the attorney's fees and costs needed to collect benefits found due, separately from the benefits (§ 431:10C-304(5)).

Punitive Damages

Punitive damages are not awarded for ordinary mistakes. Under Hawaii law, they require clear and convincing evidence that the defendant acted wantonly, oppressively, with malice, or with such willful misconduct or entire want of care as to raise a presumption of conscious indifference to consequences. HIGA never pays punitive damages assessed against an insolvent insurer (5.6).

Unfair or Deceptive Acts Under Chapter 480

Federal courts applying Hawaii law have held that article 13 does not prevent consumers from bringing unfair or deceptive trade practice claims under HRS § 480-2. One example is the lava-zone surplus lines cases noted in 5.2.

Claim Handling Habits That Prevent Both Tracks