Author: Alan Alop, Legal Assistance Foundation of Metropolitan Chicago
Last updated: April 2007

Introduction

Insurance companies have waged a long battle against insurance fraud. But many companies have now over-reacted 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.

This document is designed to aid an attorney in litigating a first-party insurance claim — that is, a claim of an insured person against his/her 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 law suit 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 of its insured. Or the insurance company may offer 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 has not cooperated with the company, or has concealed or misrepresented 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. Gonzalez v. State Farm Mutual Ins. Co., 242 Ill. App. 3d 758, 762 (2d Dist. 1993). 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.” §524 Insurance, Illinois Law and Practice, Vol. 22A 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).

Insurance Code

215 ILCS 5/155 (the Illinois Insurance Code) provides the insured, where the insurance company’s delay or failure to pay has been vexatious and unreasonable, the right to recover attorney fees and a statutory penalty. The statutory penalty is the lesser of : (a) 25% of actual damages; (b) $25,000; 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. Whether an insurance company’s conduct is “vexatious and unreasonable” must be determined by the court after examining “the totality of circumstances.” Buais v. Safeway Insur. Co., 275 Ill. App.3d 587 (1st Dist. 1995). In Buais, the insurance company refused to discuss, evaluate or investigate a claim where there was no legitimate dispute re coverage; the appellate court reversed the trial court’s dismissal of the Section 155 claim. See also Green v. International Insurance Co., 238 Ill. App. 3d 929 (2d 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 insure to litigate. The court ruled the insured’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

There have been numerous instances where an insurance company’s conduct has been held to estop it from denying a claim. For example, 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 company within 60 days of the vehicle’s repair. The insured in Tucker did give timely notice but the company denied the claim when the repaired vehicle was damaged in an accident. But the court held that the insured’s reliance on the statement of the agent might operate as an estoppel to preclude the company’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 an 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 Insur. Co. v. Adams, 334 Ill.App.3d 1083 (4th Dist. 2002) an insurance agent interviewed an applicant for renter’s insurance over the phone to complete the application. The agent did not ask the question whether the insured owned an animal. He then sent the renter the application to sign, having inserted “no” as the animal question. The insured did not notice the question and answer re 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 the misinformation in the application, she argued that the agent’s conduct estopped the denial. The appellate court reversed the trial court’s entry of summary judgment for the company. See also Meier v. Aetna Life & Casualty Standard Fire Insur. Co., 149 Ill. App. 3d 932 (2d 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 the Insurance Code provision discussed in (2) above. But the Court 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. 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). Cf. 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. Increasingly many insurance companies, not just the sub-standard ones, are using aggressive means to deny claims. For example, some auto insurance companies now use the “declaration under oath”. The insured is required to go to the office of the insurance company’s counsel and answer questions under oath. If the insured gives answers which vary even in the slightest detail from previously provided information, the claim may be denied.
 
Many auto insurance claims will be paid if a law suit is filed. A Complaint and discovery is set out below in a case where a company denied a routine auto theft claim.

Health Insurance Claims:

Private Health Insurance Plan

Most health insurance is now provided by employers as part of the employment benefit. See A2 below. But individuals who purchase health insurance on their own can sue the insurance company under the theories discussed above 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 section §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 had been a controversy 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 Company v. Bruch, 489 U.S.101 (1989), held that the "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. But many plans now have incorporated this magic language. See, for example, Duhon v. Texaco, Inc., 15 F.3d 1302 (5th Cir. 1994).
 
Note:  (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. However, in Perkins, 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 Corp., 2002 WL 1348910 at *4-5 (N.D. Ill. 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 her remedies under the health plan before bringing suit. Zhou v. Guardian Life Ins. Co. of America, 295 F.3d 677 (7th Cir. 2002).  However, the decision as to whether or not to dismiss a complaint on exhaustion grounds 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. But the health insurance benefit plan may include a provision setting a deadline for the filing of a lawsuit.

(4) Sometimes your client has a health plan at work that should have covered a hospitalization but did not because the employer had wrongfully failed to make premium payments at a relevant time or because of some other wrongful action of the employer. Under these circumstances your cause of action will be against the employer rather than the insurance carrier.

(5) 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 is uncertain. See discussion in Pine v. Crow, 2001 WL 722087 (S.D. Ind. 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.

Sample Complaint and Discovery Examples

Sample Plaintiff Complaint for Breach of Contract and Violation of Insurance Code
Sample Request for Production of Documents and First Set of Interrogatories
Sample Plaintiff Complaint Against Defendant Insurance Company
Sample Plaintiff Complaint Against Defendant Health Benefit Plan