A recent editorial in the New Jersey Law Journal (7/13/09) reignited a fire in us about how insurance companies play hard ball with their policyholders because litigation wears down the hardest claimant and leads to settlements totally advantageous to the insurance company.
As a result of this hard ball policy, insurers get another advantage – policyholders usually have to pay their own attorney’s fees and legal costs (many times, considerable) even when the courts find their claim was absolutely justified.
The genesis of the problem is the “American Rule” which requires each party in a contract action to bear his or her own legal expenses. This rule is the law in most States, except where they have been modified by statute or court rule.
In New Jersey, R. 4:42-9(a)(6) permits the award of attorney fees to a litigant for being forced to pursue a third-party claim against their insurer. The New Jersey Law Journal editorial decried the distinction made by the court rule which allows policyholders to collect their legal fees from the insurer if the company wrongfully refuses to defend them against third parties, but not if their insurer wrongfully refuses to pay the policyholder in a direct claim, under an individual disability policy, for example.
From years and years of practice in pursuing disability income insurance carriers, both ERISA and private, we have come to understand that with many insurance companies, obfuscation and delay are primary strategies because these companies know that many litigants will become discouraged and either drop their claims or accept a lot less than they deserve under the terms of their policies, simply because they cannot afford the enormous cost of litigation.
The worst part is that because of the American Rule, there is no downside for insurance companies. Under the Rule they do not have to pay the policyholder’s legal fees and costs, even when they are wrong, so the insurers “song and dance” their way through litigation, all to their benefit and to the heartache and loss of their policyholders.
On the policyholder’s side, there is a definite downside to the insurer’s recalcitrance. If the insurer pushes the “NO” button, even on an open and shut claim, when the policyholder wins, the policyholder still loses because the attorney fees and legal costs, which must be paid by the policyholder, substantially reduce the net value of the judgment won.
When an industry uses the American Rule as a defensive tactic to impair the rights of policyholders who have been paying premiums for years, it is time the Rule is held not to apply to insurance companies.
If insurers decide to dispute a claim, they are much less likely to do so when the claimant is likely to prevail, if they are required to pay attorney fees and costs when they lose. Such a rule would give them pause in many cases in which they have no real defense , but defend anyway to see if they can discourage the claimant and because they have nothing to lose. The entire burden of such defense is put on the insured.
Effectively, contrary to the very idea of insurance itself, this Rule allows the insurer to shift a substantial (and in many cases, crippling) part of the risk of loss back to the insured, even though the insurer has been collecting premiums for years, to assume the entire risk.
With nothing to lose, insurance companies use denials without fear (and, in many cases, without conscience) all to the detriment of the policy buying public.
This injustice should end now.
