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PLUP Fiction: Bad Faith Insurance

There are many types of fraud, including cases most notably related to salespeople and investment advisors. However, insurance fraud is just as possible—and we’re not talking about faking an injury to get money from an insurance policy. Today, we’re talking about insurance bad faith, in which an insurance company deceives or misleads the insured to hoard profits.

Anyone can initiate bad faith claims, whether an individual or a major corporation. If a plaintiff can prove that an insurance company was deliberately acting in bad faith, the insurer will have to pay.

In 2019, Southwest Airlines sued Liberty Insurance Underwriters Inc., citing bad faith in the insurance company’s handling of a $10 million claim related to a 2016 power outage. In that instance, the airline failed to prove its claim and lost the case. In 2022, a $200 million settlement was awarded to the surviving family of a policyholder who successfully proved that an insurance company wrongfully denied a preauthorization request for lifesaving cancer treatment.

Bad faith can include actions such as denying a claim without reason, failing to conduct a proper investigation related to a claim, “lowballing” a claim amount, and even failing to disclose coverage.

Let’s take a look at one couple’s experience with bad-faith insurance fraud and what we can learn from the case.

A Tragic Accident Leads to Litigation

In January 2018, the Indiana Court of Appeals found that a plaintiff named Kimberly Earl could pursue claims against her insurance company based on the insurance company’s allegedly deceptive concealment of a $2 million insurance policy.

The underlying facts are straightforward: Kimberly’s husband was hurt when a semi-trailer hit his motorcycle. The truck driver did not have insurance. Kimberly and her husband sued their insurance company for uninsured motorist coverage, and after they rejected a lowball settlement offer, they won a jury verdict of $250,000. This was the maximum amount of coverage allowed under their uninsured motorist insurance policy.

Sadly, Kimberly’s husband passed away from causes unrelated to his accident before this verdict.

After that trial, the insurance company revealed, for the first time, that Kimberly and her husband were also covered by a personal liability umbrella policy (“PLUP”)–additional coverage over and above their standard policy.

The PLUP provided an additional $2 million in coverage for the accident. The insurance company admitted that it should have disclosed the PLUP to Kimberly and her husband before the trial but failed to do so. Following this disclosure, Kimberly sued the insurance company for, among other things, fraud and insurance bad faith claims and sought compensatory and punitive damages.

She alleged that the insurance company lawyer either knowingly or recklessly deceived her about the existence and scope of the PLUP. She also alleged that because she had a prior relationship with the insurance company, the insurance company could not remain silent about the PLUP and was legally obligated to disclose that policy to her.

Can You Rely on What is Said or Only on What is Read?

The insurance company argued that Kimberly could not have reasonably relied on its representations regarding the scope of her coverage because she had an obligation to read the underlying insurance policy and to understand it enough to figure out the difference between what the insurance company said and the language of her insurance policy. In particular, the insurance company argued that the PLUP was disclosed in the declarations listed on the first page of the policy.

The Indiana Court of Appeals rejected this argument. The Court said that Kimberly could argue to a jury that she reasonably relied on what the insurance company representative said to her without cross-referencing the insurance policy. This ruling was based on, in part, the complexity of the policy.

The Court also emphasized that its holding likely would have differed if Kimberly and her insurance company had been “dealing at arm’s length.” In that situation, if she had disregarded a written document in favor of what she’d been told, she would have been “closing her eyes to the truth” and taking “a chance” that things would work out in her favor. However, because her insurance company insured her, she “had every right to rely” on its “fraudulent misrepresentation of complex insurance coverage.”

Fraud and Bad Faith Claims Aren’t Always Different

Kimberly also brought a “bad faith” insurance claim, which is yet another flavor of fraud. Under Indiana law, insurance companies have the obligation of “good faith and fair dealing,” which can be breached if they refuse, without basis, to pay out on a claim and deceive their insured about that denial. Such deception is called “bad faith.”

This is precisely what Kimberly alleged happened to her. The appellate court found that she had a viable claim. In particular, Kimberly alleged that the insurance company was chattering internally about her PLUP coverage during and immediately after her first trial but did not disclose the policy to her. Internal documents appeared to support this allegation, and the Court found that a jury should decide whether the insurance company acted in bad faith.

What Can We Learn About Insurance Bad Faith Law?

There are two key takeaways from Kimberly Earl’s story:

  • If an insurance policy is particularly complex, then the insured can rely on the insurance company’s interpretation of the insurance policy.
  • An insurance company must disclose all information regarding authorized coverage for injury.

As you can see, fraudulent behavior doesn’t always come in the form of a sales scam or stolen credit card information. Insurance bad faith is another one of many types of fraud. Do an annual insurance audit with your agent to understand the details of your policy, and reach out to a trusted professional if you need support during the claims process.

We think you’ll also like:

  1. How Important Is Timing With Your Fraud Statute of Limitations? Turns Out, Very
  2. Blame Games: Understanding the Contributory Negligence Defense in Fraud Cases 
  3. This Lawsuit Goes to 11: Fraud Claims and the Economic Loss Rule 

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

  1. Credit Insurance 101 
  2. Best Practices Regarding Technology 
  3. Things to Consider Before You File 

This is an updated version of an article originally published on February 26, 2018, and updated on October 2, 2019.]

©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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About Adam N. Hirsch

Adam is Of Counsel with ROETZEL, Chicago, and focuses his practice on commercial and business litigation, representing a wide variety of clients ranging from individuals to small business owners to large corporations. He has a particular focus on investment disputes and business fraud claims and has represented investors and investment companies as plaintiffs and defendants…

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