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Pay auto insurance claims or pay refunds?

December 18, 2014 by Steven M. Gursten

Under HB 5528, Detroit lawmaker proposes a ‘money-back’ guarantee – an idea that originated with Michigan Auto Law in 2012 – requiring MI auto insurers to pay refunds if 80% of insureds’ premiums are not used to pay claims


Imagine if auto insurance companies in Michigan actually did what they’re legally supposed to do. That is, pay valid and legitimate auto accident PIP claims promptly to their insured customers. Guarantees now exist in almost every industry. But not in Michigan’s auto insurance industry.

Rep. Thomas F. Stallworth III (D-Detroit) hopes to change that with his “pay claims or pay refunds” bill, House Bill 5528.

Significantly, as I will discuss in greater detail below, Michigan Auto Law was the first to propose the “money-back guarantee” idea in 2012 when, in a blog post, I called for changing Michigan law to require the state’s No-Fault auto insurance companies to either spend most of their insureds’ premium dollars on their No Fault benefits or refund their unused premium dollars in the form of rebates.

Why should auto insurance companies be exempt from providing what they actually promise to cash-strapped Michigan auto insurance consumers who have valid auto accident claims?

Rep. Stallworth doesn’t think they should. And as an attorney who practices in this area of law, I would tend to agree with Rep. Stallworth.

In fact, Rep. Stallworth believes now is the perfect time to bring Michigan’s auto insurance industry into line with the same consumer practices that have been long-time fixtures in other consumer industries.

That’s why he has introduced HB 5528, which proposes the following “money-back guarantee” for Michigan auto insurers:

“[I]f an insurer that writes automobile insurance policies … pays less than 80% of the money it collects as premiums for the policies in a calendar year to pay claims made under the policies in the year, the insurer shall refund the difference between the amount actually paid for claims and the amount that would have equaled 80% to the holders of the policies for the year on a pro rata basis.”

I applaud Rep. Stallworth for this proposal.

If enacted, Rep. Stallworth’s “money-back” guarantee (or “pay claims or pay refunds” rule) will provide a powerful incentive for auto insurance companies to both keep prices low and refrain from greedily denying and/or cutting-off auto no fault insurance benefits that they know are legitimately owed to their insured customers.

I first backed this type of “money-back” guarantee when I made a proposed a similar “pay claims or pay refunds” rule in my November 22, 2012, blog post, “Michigan needs an ‘Affordable No-Fault Act’ to prevent price gouging by auto insurance companies.”

Taking inspiration from the federal “Affordable Care Act”’s (Obamacare) “80/20 rule” or “Medical Loss Ratio Rule,” I suggested that Michigan No Fault needs the following dynamic to ensure auto insurance consumers were getting maximum value for their premium dollars:

“To bring about … ‘affordability’ and put an end to Michigan’s persistently high auto insurance prices, the Michigan Legislature and Gov. Rick Snyder need only do the following:

Require Michigan’s No-Fault auto insurance companies to spend most of their insureds’ premium dollars on their insureds’ No Fault benefits.


Require Michigan’s No-Fault auto insurance companies to refund their insureds’ premium dollars in the form of rebates.”

Later, I brought the issue up again in my January 23, 2013, “Open letter to Gov. Snyder regarding Michigan No Fault reform,” where I stated:

  • “Michigan’s auto insurance companies [should be required to] provide value or refunds by enacting a No Fault 80/20 loss ratio rule.”
  • “To ensure that Michigan No Fault auto insurance is affordable for all Michigan drivers, the No Fault Law should be amended to demand two things of the auto insurers who provide the auto insurance mandated by Michigan’s No Fault Law: Require Michigan’s No Fault auto insurance companies to spend no less than 80% of their insureds’ premium dollars on their insureds’ No Fault benefits or require non-compliant Michigan’s No-Fault auto insurance companies to refund money to their insureds in the form of rebates.”

Below are a couple other instances where I have discussed my proposed “pay claims or pay refunds” rule:

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