Introduction

Insurance companies have waged a long battle against insurance fraud. Many companies over-react to the threat of insurance fraud and are routinely denying valid insurance claims, particularly claims involving the theft of automobiles. The Department of Insurance will ordinarily not come to the aid of an insured where an insurance company has wrongfully denied a claim. Often times the only remedy of an insured whose claim has been denied is a lawsuit against the insurance company.

Source of law

There are two primary sources of law in litigating insurance claims: contract common law and the Illinois Insurance Code, 215 ILCS 5/1 et seq.

Limitation periods

While the statute of limitations on a written contract (like insurance policies) is ten years, most insurance companies dramatically shorten the period in which a suit may be filed by inserting a “suit limitation clause” in the policy to accomplish this goal. Policy provisions which shorten the time to file a lawsuit are upheld by courts so long as the time period is reasonable. Steel City Nat’l Bank of Chicago v. Aetna Ins. Co., 116 Ill. App. 3d 7 (1st Dist. 1983); see also Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 530 (1996). Carefully check the policy for the applicable period in which suit may be filed. The time period may begin to run from the date of the loss or the date the claim is denied, depending on what the policy provides.

Types of cases

The most typical case against an insurance company concerns the failure of the company to pay a claim or the insurance company's attempts to pay an amount insufficient to cover the loss.

In automobile theft cases, the insurance company may claim that the insured failed to keep the vehicle locked or that the insured was involved in the theft. In health insurance cases, the company may assert that coverage was not in effect on the date services were provided; that the insured did not cooperate with the company; or that the insured concealed or misrepresented his or her health condition. In each of these instances the court will need to determine whether the parties adhered to the provisions of the insurance policy.

Causes of action

Breach of contract

The most common cause of action against an insurance company that fails to pay a claim is for breach of contract. Insurance policies are contracts and therefore governed by contract law. "An insurance policy is a contract, and the general rules governing the interpretation of other types of contracts also govern the interpretation of insurance policies.” Hobbs v. Hartford Insurance Co. of the Midwest, 214 Ill. 2d 11, 17 (2005).

Where the insurance company fails to perform its obligations under the policy, a right of action exists. “The complaint must show a valid contract of insurance...against loss, that the contract was...in force at the time of the loss...that the plaintiff is covered by the terms of the policy, and must allege a loss from the happening of the event or peril insured against.” 22A Illinois Law and Practice Insurance §524 at 293-94 (1999).

Recognizing the inherent inequity in bargaining power between the insurer and the insured, Illinois courts have held that if an ambiguity exists in an insurance contract, it will be construed most favorably to the insured. See Squire v. Economy Fire & Casualty Co., 69 Ill. 2d 167 (1977); Bruder v. Country Mutual Insurance Co., 156 Ill. 2d 179, 185 (1993).

Insurance code

Section 155 of the Illinois Insurance Code, (“Section 155”) provides that, where the insurance company’s delay or failure to pay has been “vexatious and unreasonable”, the insured has the right to recover reasonable attorney fees, other costs, and an amount not to exceed: (a) 60% of actual damages; (b) $60,000; or (c) the excess of the amount which the court or jury finds the insured is entitled to recover over the amount which the company offered to pay. 215 ILCS 5/155.

The court alone will have discretion in deciding awards regarding matters falling under Section 155 of the Insurance Code. Smith v. State Farm Insurance Companies, Inc., 369 Ill.App.3d 478 (1st Dist. 2006). 

In Smith, the insured was struck and injured by a hit and run driver, and the insured held a $100,000 insurance policy for uninsured motorist with State Farm. State Farm refused to pay the face value of the policy, and after failed attempts to settle the claim, the insured requested arbitration. At the conclusion of arbitration, the insured filed a complaint against State Farm under Section 155 of the Insurance Code for willful and vexatious refusal to properly evaluate and settle her uninsured motorist claims. The trial court granted State Farm’s motion to dismiss, holding that the arbitration agreement barred the insured’s Section 155 claim. The insured appealed. The appellate court held that a Section 155 action is not covered under arbitration ”for two reasons: (1) section 143a(1) defines the scope of arbitration hearings on uninsured motorists to disputes covering covered claims; and (2) Section 155 itself vests the court with discretion to determine the award.” Smith v. State Farm Insurance Companies, Inc., 369 Ill.App.3d 478 (1st Dist. 2006). The appellate court reversed the trial court's decision and sent the case back to the trial court for further proceedings. Id.  

Whether an insurance company’s conduct is “vexatious and unreasonable” must be determined by the court after examining “the totality of circumstances, including the insurer’s attitude.” Buais v. Safeway Insurance Company, 275 Ill.App.3d 587, 593 (1st Dist. 1995); McGee v. State Farm Fire and Casualty Company, 315 Ill. App.3d 673 (2nd Dist. 2000); Norman v. American National Fire Insurance Co., 198 Ill. App 3d 269 (5th Dist. 1990).

In Buais v. Safeway Insurance Company, 275 Ill. App.3d 587 (1st Dist. 1995), the insured was struck by an uninsured driver; the insurance company refused to discuss, evaluate or investigate a claim where there was no legitimate dispute regarding coverage. Instead, the insurer waited 30 months from when the accident took place to when the arbitrator made its decision to pay the claim. The insured filed a claim asserting bad faith behavior by the insurer under Section 155 of the Insurance Code, which the trial court dismissed. The insured appealed. The appellate court held that when there is not a dispute regarding coverage and an insurance company refuses to evaluate, investigate, or talk about a claim, and the attitude of the insurance company toward its insured is vexing, irritating, exasperating and provoking, the insured has the right to file a claim under Section 155 for relief. The appellate court reversed the decision and sent the Section 155 claim back to the trial court for further proceedings. See also Young v. Allstate Insurance Co., 351 Ill. App.3d 151 (1st Dist. 2004); Millers Mutual Insurance Ass’n of Illinois v. House, 286 Ill. App. 3d 378 (5th Dist. 1997); Green v. International Insurance Co., 238 Ill. App. 3d 929 (2nd Dist. 1992).

In Millers Mutual Insurance Ass’n of Illinois v. House, 286 Ill. App. 3d 378 (5th Dist. 1997), the court allowed a claim under Section 155 where the insurer failed to tender a $40,000 undisputed portion of a claim in order to force the insured to litigate. The court ruled that the insurer’s failure to tender the undisputed part of the claim was vexatious and unreasonable. But see Young v. Allstate Insurance Co., 351 Ill. App.3d 151 (1st Dist. 2004).

Estoppel for agent’s misrepresentation of coverage

Estoppel refers to reliance on the words or conduct of another such that the person relying on the words or conduct of another changes his or her position and suffers harm as a result. Allstate Insurance Co. v. Tucker, 178 Ill. App. 3d 809 (1st Dist. 1989). In order to establish estoppel in an insurance context, the insured must show: (1) that he or she was misled by the acts or statements of the insurer or its agent; (2) that there was reliance by the insurer on those representations; (3) that such reliance was reasonable; and (4) that the detriment or prejudice suffered by the insured was based on the reliance. Id at 811; and Chatham Corporation v. Dann Insurance, 351 Ill. App. 3d 353 (1st Dist. 2004); quoting Dumenric v. Union Oil Company of California, 238 Ill. App. 3d 208 (1st Dist. 1992).

There have been numerous instances where an insurance company’s conduct has been held to estop it from denying a claim. See Lumbermen’s Mutual Casualty Company v. Sykes, 384 Ill. App. 3d 207 (1st Dist. 2008); Chatham Corporation v. Dann Insurance, 351 Ill. App 3d 353 (1st Dist. 2004); Dumenric v. Union Oil Company of California, 238 Ill. App.3d 208 (1st Dist. 1992); Pekin Insurance Company v. Adams, 343 Ill. App.3d 272 (4th Dist. 2003); Allstate Insurance Co. v. Tucker 178 Ill. App 3d 809 (1th Dist. 1989); Meier v. Aetna Life & Casualty Standard Fire Insurance. Co., 149 Ill. App. 3d 932 (2nd Dist. 1986); Winston v. Trustees of Hotel & Restaurant Employees & Bartenders International Union Welfare Fund, 110 Ill. App. 3d 163 (1st Dist. 1982). 

In Allstate Insurance Co. v. Tucker, 178 Ill. App. 3d 809 (1st Dist. 1989), the insured asserted that the insurance agent promised that a non-operational vehicle would be covered under the policy if the insured notified the insurer within 60 days of the vehicle becoming operational. The insured in Tucker gave timely notice, but the insurer denied the claim when the repaired vehicle was then damaged in an accident. The court held that the insured’s reliance on the statement of the agent might operate as an estoppel to preclude the insurer’s denial of coverage. 

In Winston v. Trustees of Hotel & Restaurant Employees & Bartenders International Union Welfare Fund, 110 Ill. App. 3d 163 (1st Dist.1982), the court held that the insurer was estopped from denying extended medical and disability benefits that were clearly set forth in a booklet distributed to employees that described the plan's provisions.

In Pekin Insurance Company. v. Adams, 334 Ill. App.3d 272, 280 (4th Dist. 2003), an insurance agent interviewed an applicant for renter’s insurance over the phone to complete the application.  The agent did not ask whether the insured owned an animal, and filled out the application for the insured indicating that the insured did not own an animal. The agent then highlighted areas that the insured needed to complete and mailed the application to the insured to sign. The insured did not notice the question and answer regarding animals when she signed the application and returned it to the company. When her dog bit a child, and the company refused the claim based on misinformation in the application, she argued that the agent’s conduct estopped the denial. The appellate court found that, “when an agent fills out an application for insurance without inquiry, merely presenting the application to the insured for his signature, the answers to the questions in the application will not be warranties.” Id. at 280. It also found that if an agent disregards information from the applicant or does not seek information from the applicant, the agent (on behalf of the Insurer) manifests an indifference to the information. Id. The appellate court reversed the trial court’s entry of summary judgment for the company and sent it back to the trial court for further proceedings. See also Meier v. Aetna Life & Casualty Standard Fire Insur. Co., 149 Ill. App. 3d 932 (2nd Dist. 1986) (insurance agents’ offer to sell $5,000 stated value policy estopped insurance company from paying less than $5,000); and Young v. Allstate Insurance Co., 351 Ill. App.3d 151 (1st Dist. 2004) (court rules against estoppel claim).

Other causes of action

In Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 530 (1996), the Illinois Supreme Court held that there is no right of action in Illinois for an insurer’s bad faith conduct, other than under the Illinois Insurance Code. The court in Cramer did state that an insurer’s conduct “may give rise to . . . a separate and independent tort action” where more is alleged than mere allegations of bad faith and unreasonable conduct. Id at 528. This leaves open the possibility of common law fraud actions or Consumer Fraud Act claims against insurance companies. See, eg., Elder v. Coronet Insurance Co., 201 Ill. App. 3d 733 (1st Dist. 1990). Young v. Allstate Insurance Co., 351 Ill. App.3d 151 (1st Dist. 2004) (court rules against allowing a Consumer Fraud Act claim). 

Automobile insurance claims

The automobile insurance industry is plagued by a large number of so-called “sub-standard” insurers who target high-risk auto owners. These companies charge high premiums and frequently refuse to pay claims that should be honored. Many insurance companies, not just the sub-standard ones, are using aggressive means to deny claims. For example, some auto insurance companies require the insured to give a “declaration under oath” where he or she goes to the office of the insurance company’s counsel and answers questions under oath. If the insured gives answers that vary even in the slightest detail from previously provided information, the claim may be denied. However, many auto insurance claims will be paid if a lawsuit is filed. 

Health insurance claims

Private health insurance plan

Individuals who purchase health insurance on their own, and not under an employer benefit plan, can sue the insurance company under the theories discussed here under “Causes of Action.”

Employment health insurance plans

If your client was covered by a health plan at their place of employment, any claim you may wish to assert against the health plan falls under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §1001 et seq. In enacting ERISA Congress preempted state claims against employee health plans. Instead, a claim for non-payment against an employee health plan must be pleaded as an ERISA claim; a private right of action is provided at 29 U.S.C. §1132(a)(1)(B), while §1132(g)(1) allows attorney fees to the prevailing party. The Supreme Court has held that Congress intended ERISA to be the exclusive vehicle for actions asserting improper processing or denials of ERISA-plan benefits. Pilot Life Insurance Company v. Dedeaux, 481 U.S. 41 (1987).

There has been some controversy in the past regarding the standard of review to be used by the trial court in reviewing a decision of an ERISA health plan to deny coverage. Some courts used a tough standard requiring the consumer to show that the health plan administrator’s denial was arbitrary and capricious, or an abuse of discretion; other courts used a “de novo” standard. The Supreme Court, in Firestone Tire & Rubber Co. v. Bruch, 489 U.S.101 (1989), held that a "de novo" standard will apply unless the health plan gives the administrator discretionary authority to determine administrative eligibility for benefits or to construe the terms of the plan. The Supreme Court, in Metropolitan Life Insurance v. Glen, 554 U.S. 105 (2008), further clarified the standards set in Firestone Tire and also addressed conflicts of interest where the plan administrator is both evaluator and payer of the benefit claims. Many plans now incorporate the holding in Firestone Tire as magic language. See Duhon v. Texaco, Inc., 15 F.3d 1302 (5th Cir. 1994).

Notes

(1) While it is clear that a claim for breach of contract must be pleaded under ERISA, a state law-based claim of misrepresentation against a health plan is preempted by ERISA. Both the Seventh Circuit in Pohl v. Natl. Benefits Consultants, 956 F.2d 126 (7th Cir. 1992) and the Fifth Circuit in Perkins v. Time Insurance Co., 898 F2d 470 (5th Cir. 1990) have conclusively established this point. In Perkins, however, the Fifth Circuit held that ERISA would not preempt a legal action seeking to hold an insurance agent personally liable for damages stemming from his own misrepresentations. Claims against insurance companies under the Insurance Code (215 ILCS 5/155) have also been ruled as preempted by ERISA. Dobner v. Health Care Service Corporation, No. 01 C 7968, 2002 WL 1348910 at *4-5 (N.D. Ill. June 19, 2002).

(2) ERISA, at 29 U.S.C. §1133, establishes minimum procedural requirements when a health plan administrator denies a claim. Seventh Circuit cases hold that an employee generally must exhaust his and/or her remedies under the health plan before bringing suit and in order to qualify for an exception under the exhaustion requirement, an employee must show that further appeal is futile and the claim will be denied on appeal. Zhou v. Guardian Life Ins. Co. of America, 295 F.3d 677 (7th Cir. 2002). The decision as to whether or not exhaustion will be required is within the discretion of the trial court. Gallegos v. Mt. Sinai Medical Center, 210 F.3d 803 (7th Cir. 2000).

(3) There is no statute of limitations in ERISA, so courts would look to the most appropriate state limitations period. The health insurance benefit plan, however, may include a provision setting a deadline for the filing of a lawsuit.

(4) Sometimes your client has an employer sponsored health plan that should cover hospitalization, but because the employer wrongfully failed to make premium payments on time or as contractually obligated or because of some other wrongful action of the employer, the hospitalization is not covered. Under these circumstances, the cause of action will be against the employer rather than the insurance carrier.

(5) The courts have disagreed on whether workers insured under employee health plans are entitled to a jury trial on an ERISA claim for improper denial of a health insurance claim (“Section 510 claim”). For further details and a comparison of differing opinions, see discussion in Pine v. Crow, No. TH 00-0048-C-T/H, 2001 WL 722087 (S.D. Ind. May 10, 2001) (holding no right to a jury trial). In Pine, the court noted that because ERISA provides no statutory right to a trial by jury, the 7th Amendment – specifically, whether the remedies sought are of a legal or equitable character – will control.