Causes of Action
When an insurance company denies a claim, after utilizing internal appeals and grievance procedures the insured can sue in a court of law under a variety of legal theories. The two primary legal remedies available in most cases include breach of contract and breach of the implied covenant of good faith and fair dealing (bad faith).
Breach of Contract
In a breach of contract suit, the plaintiff can recover the value of the denied benefit and any incidental damages. Under a breach of contract claim, the plaintiff asserts that the insurer did not "live up to its end of the bargain." A breach of contract suit requires a showing that the plaintiff suffered a disability, as defined by the particular Disability Insurance (DI) policy, and that the insurer failed to fulfill its obligations under that same policy by refusing to pay the benefit. These types of suits often focus on the language of the DI policy to determine what obligations each party had, and whether the parties fulfilled those obligations.
Though insurance companies may have the advantage in that they draft the language of the policy, courts have remedied this unfair bargaining power through the development of "rules of construction." These rules of construction require that courts interpret ambiguous language in an insurance policy in the manner most favorable to the insured. This reduces an insurance companies advantage in a breach of contract claim.
A breach of implied covenant of good faith and fair dealing, otherwise referred to as bad faith, requires a claim that the insurance company unreasonably denied a claim under the DI policy. All insurance policies require that the insurer act in good faith when reviewing a claim for payment of benefits. This obligation of good faith obligates an insurance company to fully investigate and consider all the circumstances supporting a claim. An insurance company cannot simply look for reasons not to pay the claim.
If an insurance company denies a claim that it should pay, either knowingly or as a result of inadequate investigation, or attempts to settle a claim for less than it is worth, the insured may have a viable bad faith claim. A successful bad faith claim may allow recovery for benefit owed under the contract, interest on out-of-pocket losses, foreseeable, consequential damages, and attorney's fees.
It is important to note that the law controlling bad faith claims varies from state to state. In New York, for example, the law does not recognize a legal action for bad faith denial of a claim. In New Jersey, where bad faith is a valid claim, punitive damages are generally not available even when a plaintiff establishes bad faith.
Infliction of Emotional Distress and Fraud
Infliction of emotional distress and fraud claims require that a plaintiff first establish a bad faith claim. Neither emotional distress nor fraud can be maintained under a simple breach of contract claim. Once these claims are established, however, a court may award a plaintiff punitive or exemplary damages, which can exceed the actual amount owed under the contract.
Though the elements of emotional distress vary from state to state, the claim basically requires: (1) extreme and outrageous conduct by defendants; (2) intent to cause, or disregard of substantial probability of causing, severe emotional distress; (3) causal connection between conduct and injury; and (4) severe emotional distress.
In its general sense, fraud is anything calculated to deceive, including all acts, omissions, and concealments involving a breach of legal duty, trust, or confidence, resulting in damage to the insured. The essential elements required to sustain an action for fraud are: (1) that a representation was made as a statement of fact, which was untrue and known to be untrue by the insurer or its agent, or else recklessly made; (2) that it was made with an intent to deceive and for the purpose of inducing the other party to act upon it; and (3) that the other party did in fact rely on it and was induced thereby to act to his or her injury or damage. The representation must have been of such a nature that it was reasonably calculated to deceive the insured and to induce the insured to purchase the policy. In effect, under a claim of fraud, the insured asserts that the insurance company made a claim that it would pay a benefit if the insured became disabled, but the company, through bad faith practices, never intended to pay any benefits to the insured.
Statutes of Limitation
As with most civil actions, claims against insurance companies for breach of contract, bad faith, emotional distress and fraud, must be filed within a certain period after the insurance companies final denial of a claim. This period, called the Statute of Limitations, varies from state to state. Once the statute of limitations has expired, it may be difficult or impossible for an aggrieved individual to vindicate his or her rights.
If you believe that an insurance company has wrongfully denied
your disability insurance claim you should contact a qualified
attorney as soon as possible, to ensure that all of your rights