Issued by the Kansas Insurance Department, Kathleen Sebelius, Commissioner
July 1, 1997
TO: Insurers Authorized to Write Motor Vehicle Liability Insurance
SUBJECT: Unfair Claim Settlement Practice K.S.A. 40-2404(9)(f)
Kansas Insurance Department has received complaints from PIP claimants and attorneys representing such claimants about refusal of their PIP insurer to endorse settlement checks issued by an at-fault, negligent driver or his/her liability insurer to multiple payees, including the PIP insurer.
K.S.A. 40-3113a creates a lien upon claimant's recovery against the negligent driver in favor of the claimant's PIP insurer to the extent that insurer has paid PIP benefits to claimant or in claimant's behalf. A single check in settlement of the negligent driver's liability is often made payable to the claimant, his/her PIP insurer and claimant's attorney.
The complaints come to KID that PIP insurers are sometimes requiring claimants to pay the amount of their PIP lien as a precondition to endorsing the liability settlement check. This practice will be considered an unfair claims settlement practice as defined in K.S.A. 40-2404(9)(f) with the publication of this bulletin.
K.S.A. 40-2404(9)(f) provides as follows:
(9) Unfair claim settlement practices. It is an unfair claim settlement practice if any of the following or any rules and regulations pertaining thereto are: (A) Committed flagrantly and in conscious disregard of such provisions, or (B) committed with such frequency as to indicate a general business practice........ (f)not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear;
Requiring claimant to advance the amount of the PIP lien as a condition to endorsing claimant's settlement check is an unconscionable practice which places a heavy burden upon claimant. It sometimes requires claimant to borrow money to pay his/her PIP insurer and puts claimant to the expense of a short term loan. At the very least, it delays receipt of claimant's portion of his liability settlement.
Attorneys representing PIP claimants have complained that they are sometimes required to send a check in the amount of the PIP lien less attorney fees along with the settlement check to be endorsed as a precondition to the claimant's PIP insurer endorsing the settlement check. That practice also shifts the burden of advancing the money for the PIP lien to the claimant because claimant's attorney cannot advance that money from either his/her operating account, personal account or trust account.
PIP lienholders have sometimes gone so far as to file disciplinary complaints against claimant attorneys for not advancing the amount of the PIP lien less attorney fees as a condition to endorsing a settlement check. The Office of the Disciplinary Administrator of the State of Kansas responded to one such PIP insurer's complaint against a Kansas licensed attorney citing the Model Rules of Professional Conduct adopted by the Kansas Supreme Court as ethical standards of conduct for Kansas licensed attorneys:
The Model Rules of Professional Conduct (MRPC) 1. 15 sets out the procedures for how a lawyer is to handle money of a client or a third person. It is appropriate for an attorney to ask a lienholder to endorse and return a multiple payee settlement check. Under MRPC 1. 15, that check must then be endorsed by the claimant and attorney and placed in the attorney's trust account. As soon as the check clears, the money should then be distributed to the PIP lienholder, the client and the attorney, This procedure is the only way the attorney has access to the funds from which the PIP lienholder can be paid.
Prior to depositing the proceeds of the settlement check in his/her trust account, the attorney has no available funds with which to advance payment of the lien. The attorney cannot write a check on the trust account for funds not yet deposited. The attorney cannot ethically advance personal funds on behalf of the client to pay the lien debt. The burden of advancing the amount of the PIP lien to claimant's PIP insurer falls necessarily upon the claimant/insured.
This practice is an unnecessary complication created by the PIP lienholder and burdensome to the claim settlement process. Risk to the PIP lienholder is minimal in signing and returning the multi-party settlement check to the claimant's attorney. The possibility of the attorney converting the lienholder's funds is remote because (1) the attorney has already acknowledged that he/she owes the money to the lienholder; (2) misappropriation of these funds would be very easy to prove; and (3) misappropriation would almost certainly result in disbarment of the claimant's attorney.
For the above reasons, refusal by the PIP lienholder to endorse and return the settlement check to claimant's attorney will be considered an unfair claims settlement practice after the publication of this Bulletin because it places the burden on the claimant. Penalties for commission of unfair claim settlement practices are set out at K.S.A. 40-2407. They include cease and desist orders, monetary penalties of up to $1,000 per violation and suspension or revocation of license.
A copy of this bulletin is being supplied to each company authorized to issue personal auto PIP coverage to Kansas residents. All such companies must provide instruction to their claim personnel, MGA'S, outside and in-house attorneys consistent with this bulletin.
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