In several states, an insured that prevails in a coverage dispute against its insurer is entitled to statutory “penalty interest” added to the amount owed by the insurer. A June 8, 2022 decision from the United States District Court for the Western District of Michigan illustrates the importance of meeting the “proof of loss” requirements of such statutes.
In Alticor Global Holdings, Inc. v. American International Specialty Lines Insurance Co., an insured filed an action against its insurer after the insurer refused to reimburse the costs of defending and ultimately settling copyright infringement claims asserted against the insured. The District Court found that the insured was entitled to coverage under an Internet and Network Security Insurance Policy for $24 million in costs incurred in the underlying lawsuit and then considered the amount of interest that should be paid by the insurer on top of the breach of contract damages awarded to the insured.
Under Michigan Compiled Laws § 500.2006, an insurer that does not pay a claim on a timely basis is subject to a penalty of 12% interest that begins to run from the date that the insured provides “satisfactory proof of loss.” If the insurer fails to specify what constitutes satisfactory proof of loss within 30 days after receipt of the claim, this requirement is excused. Penalty interest is distinct from prejudgment interest, which, under Michigan law, begins to run from the date of the filing of a complaint against an insurer that wrongfully denies coverage and accrues at a much lower annual interest rate than the penalty interest. The accrual of both penalty interest, if available, and prejudgment interest ends when judgment is entered, at which time the prevailing insured is entitled to post-judgment interest.
In Alticor Global, the court determined that for the amount paid to settle the underlying claims, the insured met the “satisfactory proof of loss” requirement by providing the settlement agreement to the insurer shortly after the agreement was executed. With respect to the defense costs that were owed under the policy, the court found that the insured provided satisfactory proof of loss when it gave the insurer a spreadsheet listing its claimed legal fees and costs. The court rejected the insurer’s argument that actual invoices were necessary, as it had accepted the spreadsheet without further inquiry and because “materials only need to detail the costs incurred and meet the insurer’s written demand” for a detailed description of defense costs to be satisfactory proof of loss. The court held that in addition to penalty interest, the insured was entitled to mandatory prejudgment interest, but because the insured provided “satisfactory proof of loss” prior to filing the complaint, the award of prejudgment interest was subsumed in the larger penalty interest award, which also prevented a duplicative interest recovery. In total, the award of penalty interest and prejudgment interest was more than $13 million.
Michigan is not alone in awarding penalty interest. Other states, including Arizona, Colorado, Maine, New Mexico, Tennessee, Texas, Washington, and Wisconsin have statutes that in certain circumstances permit penalty interest or similar recovery for delay or unreasonable denial of claims. Insureds should be sure to familiarize themselves with the relevant state’s insurance statutory framework and, insureds asserting claims governed by state law that permits penalty interest should be sure to not only provide prompt notice of their claims, but also to substantiate their losses as soon as possible, in order to maximize any interest recovery.