Insurance Class Actions: When Providers Don't Pay as Promised

Introduction

Insurance is meant to provide financial protection and peace of mind during difficult times. Unfortunately, insurance companies don't always fulfill their promises. When insurance providers fail to pay claims as agreed, improperly deny coverage, or engage in other unfair practices, class action lawsuits become a powerful tool for policyholders to seek justice collectively.

Insurance class actions have resulted in billions of dollars in settlements and have forced significant changes in industry practices. These lawsuits benefit not only the named plaintiffs but also thousands or even millions of policyholders who experienced similar treatment but might not have had the resources to pursue individual claims.

In this article, we'll explore common types of insurance class actions, highlight notable settlements, and explain how you can determine if you're eligible to participate in these cases and potentially recover compensation you're entitled to receive.

Wrongful Claim Denials

One of the most common issues leading to insurance class actions is the systematic denial of legitimate claims. Insurance companies have a financial incentive to minimize payouts, and some have faced legal action for implementing policies or procedures that unreasonably reject claims that should be covered under their policies.

These class actions often involve:

• Categorical denials: Automatically rejecting certain types of claims without proper investigation
• Unreasonable documentation requirements: Demanding excessive or impossible-to-obtain documentation to process claims
• Improper claim handling procedures: Using claims processing systems designed to minimize payouts rather than fairly evaluate claims
• Delayed processing: Intentionally delaying claims decisions in hopes that policyholders will abandon their claims

For example, Unum/Provident (now Unum Group) faced multiple class actions over allegations that it systematically denied disability insurance claims. The company ultimately agreed to a settlement that included reassessing previously denied claims and changing its claims handling practices, resulting in over $676 million in additional benefits paid to policyholders.

Premium Overcharges

Another common basis for insurance class actions involves allegations that insurers overcharged policyholders for coverage. These can include:

• Undisclosed fees: Charging fees not clearly disclosed in policy documents
• Improper rating factors: Using prohibited factors to set premium rates
• Force-placed insurance: Imposing excessive premiums for lender-placed insurance when homeowners let their coverage lapse
• Premium calculation errors: Systematically miscalculating premiums resulting in overcharges

A significant example is the force-placed insurance litigation against major banks and insurers. When homeowners fail to maintain required insurance coverage, mortgage servicers can purchase insurance on their behalf and charge the cost to the borrower. However, class actions have alleged that these arrangements often involved kickbacks and inflated premiums. Major settlements have been reached with Bank of America ($228 million), JPMorgan Chase ($300 million), and others.

Bad Faith Insurance Practices

Insurance companies have a duty to act in good faith when dealing with their policyholders. When they systematically fail to do so, it can give rise to class action lawsuits alleging bad faith practices, such as:

• Misrepresenting policy terms: Mischaracterizing what is covered or excluded under a policy
• Unreasonable investigation methods: Using biased or inadequate investigation procedures
• Low-ball settlement offers: Systematically offering settlements far below the actual value of claims
• Rescinding policies after claims: Retroactively canceling policies after claims are filed based on minor application errors

State Farm faced a landmark bad faith class action after Hurricane Katrina when policyholders alleged the company misclassified wind damage (which would be covered) as flood damage (which would not be covered under their homeowners policies). The case ultimately settled for $250 million, providing compensation to thousands of Gulf Coast policyholders.

Policy Misrepresentations

Some insurance class actions involve allegations that insurers misrepresented the nature or benefits of their policies during the sales process. These can include:

• Deceptive marketing: Using misleading advertising to sell policies
• Improper sales practices: Training agents to misrepresent coverage or benefits
• Hidden limitations: Failing to clearly disclose significant policy limitations
• Bait and switch tactics: Promising one type of coverage but delivering another

For example, several life insurance companies faced class actions over "vanishing premium" policies. Policyholders alleged they were told their premium payments would "vanish" after a certain period as the policy's investment returns would cover future premiums. When investment returns fell short of projections, policyholders had to continue making payments they hadn't anticipated. These cases resulted in substantial settlements, including a $2.3 billion settlement with Prudential.

Notable Insurance Settlements

Insurance class actions have resulted in some of the largest settlements in class action history:

• John Hancock ($350 million): Settled claims related to deceptive sales practices for life insurance policies
• MetLife ($1.7 billion): Resolved allegations of deceptive sales practices, including "vanishing premium" misrepresentations
• State Farm ($1.2 billion): Settled a class action over the use of non-original equipment manufacturer (non-OEM) parts in auto repairs
• AIG ($960 million): Resolved claims alleging bid-rigging and undisclosed contingent commissions
• Farmers Insurance ($225 million): Settled allegations that it failed to properly cover general contractors' overhead and profit in homeowners insurance claims

These settlements not only provided financial compensation to policyholders but often included requirements for insurers to change their business practices, benefiting future customers as well.

How to Join an Insurance Class Action

If you believe you may be entitled to participate in an insurance class action settlement, here's how to proceed:

1. Determine your eligibility: Review the class definition in settlement notices to see if you qualify. This typically includes having the relevant type of insurance policy during a specific time period.
2. Watch for notices: Insurance companies are typically required to notify potential class members about settlements. However, these notices can sometimes be overlooked or mistaken for junk mail.
3. File your claim: Submit the required claim form and any supporting documentation by the deadline. Most insurance class action settlements allow claims to be filed online.
4. Maintain records: Keep copies of all insurance-related documents, including policies, premium statements, claim documentation, and correspondence with your insurer.

Conclusion

Insurance class actions serve an essential role in holding insurers accountable and ensuring they fulfill their obligations to policyholders. These lawsuits have recovered billions of dollars for consumers and have driven significant reforms in the industry.

While individual policyholders may lack the resources to challenge powerful insurance companies on their own, class actions provide strength in numbers. By combining similar claims into a single legal action, affected policyholders can collectively seek justice and fair compensation.