How Insurance Companies Defraud Their Policyholders : What Courts and Legislators Should Do About It

Abstract: Insurance companies have legitimate reasons for denying claims, but sometimes denials or significant delays are the result of unfair practices or even fraud. Such actions may be systemic or undertaken by an individual. What rights do policyholders have? What can they do to combat illegitimate denials? What are the barriers individuals face when they are wrongfully denied coverage? Should there be a private right of action under the Unfair Trade Practices Act? Should policyholders’ attorneys’ fees be covered? What should courts and legislatures do to protect insurance consumers? In this article the authors answer these questions and more.

The insurance industry devotes substantial resources to a lobbying campaign against insurance fraud. These efforts have borne fruit, and rightly so. Insurance fraud, though, is a two-way street. It is now time to address the fraud and wrongful practices that the insurance industry perpetrates on policyholders.

Over the past 20 years, state courts and regulators have found on several occasions that major insurance companies had procedures in place that systemically denied or underpaid policyholders’ legitimate claims. In other cases, courts have found that misrepresentations or other dishonest behavior on the part of insurance company personnel have wrongfully denied claims. Below, we overview illustrative cases, as well as various forms of recourse provided by state law to policyholders who have been wrongfully denied or outright cheated out of coverage.

It Is Judicially Established That Insurance Companies Defraud Their Policyholders

In Campbell v. State Farm, ¹ a driver made a dangerous maneuver that caused two cars to collide. The driver was insured by State Farm, which investigated the accident and produced a report that stated there was evidence of fault on behalf of its policyholder. Despite this evidence, and despite that it seemed likely there could be an excess judgment in the resulting litigation against its policyholder, State Farm rejected offers to settle and “never departed from its ‘no settlement stance.’” Instead, State Farm’s superintendent and divisional superintendent rejected their own claim investigator’s report and ordered the claim investigator to alter the facts and analysis of liability that indicated exposure for its policyholder and the potential of a high settlement value. The superintendent also demanded that the claim investigator return a letter proving the superintendent had agreed with the claim investigator’s initial analysis, whereafter the claims investigator’s involvement was discontinued in the case.

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