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Get Your Claim Paid: What States Say About Insurance Lawsuits

In the late 1970s, California was at the forefront in expanding the rights of individuals to recover against insurance companies for alleged wrongdoing in claims settlement. In the landmark 1979 Royal Globe case, the California Supreme Court held that a single violation of the state's Unfair Claims Settlement Statute, which was knowingly committed, was sufficient to bring about a private cause of action for a third party claimant under the statute.

In that case, a third party claimant alleged that Royal Globe failed to attempt in good faith a prompt, fair and equitable settlement of a slip and fall claim -- and, so, was in violation of the statute. The verdict for the claimant did two things: First, it allowed a private party to recover damages for a single violation of the California Unfair Claims statute; second, it extended this right to third party claimants.

The decision created a serious conflict of interest for companies, because they had a duty to protect their own policyholders from liability judgments, while also protecting the opposing interests of the third party claimants. The decision led to a dramatic increase in claims litigation in California -- and across the country.

Recognizing that the decision went too far, the California Supreme Court reversed itself in 1988 in Moradi-Shalal v. Fireman's Fund, stating "developments occurring subsequent to our Royal Globe decision convince us that it was incorrectly decided, and that it has generated and will continue to produce inequitable results, costly multiple litigation, and unnecessary confusion unless we overrule it." A rare admission. But the rush of lawsuits had begun.

The Texas Supreme Court tried to slow the rush in its decision Allstate v. Watson. The court held that third parties have no private right to sue under the Texas Unfair Competition and Unfair Practices Act. Reasoning that since "a third party claimant has no contract with the insurer or the insured, has not paid any premiums, and has no basis on which to expect or demand the benefit of the con-tract," to allow a private cause of action under the statute for third parties would likely expose companies to suits from policyholders.

Insurance companies still have an exposure in Texas, however. Texas Insurance Code explicitly authorizes a private cause of action by "any person who has sustained actual damages caused by another's engaging in an act or practice declared in...this article to be unfair."

The Florida Unfair Claims Statute also explicitly allows for a private cause of action to be brought by any person injured by any of the listed unfair claims settlement practices; but unlike Texas, both first and third parties are eligible to seek recovery of damages, court costs and attorney fees.

Punitive damages may also be awarded under the statute, but only if the person suing can show reckless disregard or willful, wanton or malicious behavior, and that the violation was committed with such frequency as to constitute a general business practice. Before proceeding with the suit, the claimant must first give written notice of the violation to the company and the state insurance department, and may not pursue the claim if the matter is resolved within 60 days.

Another method for providing private rights indirectly is by referring to provisions of general unfair trade practices statutes. For example, the Kentucky Unfair Claims Settlement Practices Act is silent as to the availability of a private cause of action. However, Kentucky has a general statute which provides that, unless otherwise provided by another statute, "a person injured by the violation of any statute may recover from the offender such damages as he sustained." Since the unfair claims act is silent on the matter, this very broad language allows private actions by both first and third parties.

While Connecticut's Unfair Insurance Practices Act does not expressly authorize a private cause of action, courts have held that violations of the Act can form the basis for a civil action under the Unfair Trade Practices Act. The state's highest court held that a claimant must show more than a single violation of the Unfair Claims Settlement Practices Act to meet the requirement of showing a general business practice.

Similarly, while North Carolina's Unfair Claims Settlement Practices Act does not authorize a private cause of action, the North Carolina Supreme Court has held that a violation of the Act constitutes as a matter of law an unfair or deceptive trade practice in violation of its Unfair or Deceptive Trade Practices Act, and is thus enforceable by private action.

However, the person suing does have to show a pattern of general business practice.

Likewise, the state of Washington, in Industrial Indemnity Co. of the Northwest, Inc. v. Kallevig, held that a single violation of the Unfair Claims Settlement Practices Act may constitute a per se violation of the state Unfair Trade Practices Act, and permits a private cause of action.

New Hampshire provides for enforcement of its Unfair Claims Act only through the insurance commissioner. However, when an insurance company is found to be in violation by the commissioner, the act authorizes a civil action by any consumer injured as a result of that violation. Therefore, both first and third parties have rights to sue for damages under the statute.

Specifically, New Hampshire statute provides: When a supplier, in any action or proceeding brought by the insurance commissioner, has been found to be in violation of this chapter or has been ordered to cease and desist, and said finding or order has become final, any consumer claiming to be adversely affected by the act or practice giving rise to such finding or order may bring suit against said supplier to recover any damages or loss suffered because of such action or practice.

Massachusetts state law, which defines unacceptable claims acts, is silent on the existence of a private cause of action, but the general Unfair Trade Practices Act, does specifically allow a private suit for a repeated pattern of violations.

However, recent cases have found that no private right exists under the Unfair Claims Settlement statute. For example, in 1993, the courts in Thorpe v. Mutual of Omaha and Pariseau v. Albany International, stated that statutes prohibiting unfair insurance practices provided no private cause of action and were enforceable only by the insurance commissioner.

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