Could Plaintiffs Have Received Greater Damages had they Not Settled with Farmer Insurance?

In late 2011, Farmers Insurance Company settled a nationwide class action lawsuit arising from failure to pay reasonable medical expenses for personal injury claims made following auto accidents. According to a Los Angeles, California spokesman for the company, Farmers is pleased to have resolved the matter, although court documents indicate that Farmers settled without admitting guilt but instead chose to settle to avoid the expense of a trial.

A lawyer explores whether settling with the insurer was in the plaintiffs’ best interest.

Farmers Insurance Class Action

Farmers Insurance is the third largest auto insurer in the United States, insuring families throughout California and the remainder of the country. The major insurer recently faced allegations by a class of plaintiffs who claimed it had failed to pay reasonable personal injury-related medical expenses that should have been covered under the plaintiffs’ Medical Payments (Med-Pay) and Personal Injury Protection (PIP) coverage, explains a lawyer.

Personal injury protection and Med-Pay are insurance policies designed to cover the costs of medical treatment after a car accident. In some states, such policies are required. The purpose of the policies is to ensure that car accident victims get the medical care required, regardless of who is actually at fault for the car accident.

When administering these policies, Farmers allegedly had procedures in place that adjusted claims downward. The adjustments occurred between January 1, 2001 and February 9, 2009 based on recommendations from Zurich Services Corporation (ZSC), the parent company that owns Farmers. Under the policies in place set by the Zurich system, Farmers submitted bills as unreasonable if the bills exceeded the 80th percentile for chargers in the geographic region. Farmers also paid claims at lower than the billed amount or set limits on payments below the coverage limits defined in the insurance policies.

The Settlement

According to Market Watch, Farmers settled the case out of court, but did not admit wrongdoing as part of the settlement. The settlement terms stipulate that those who had a claim adjusted downward improperly during the relevant time period would be paid 60 percent of the difference between the amount paid by Farmers and the amount of the bills submitted. Eligible class members were required to postmark their claim forms no later than December 29, 2011 to receive compensation.

Insurance Bad Faith

Farmers claims to have settled the case to avoid the cost of a trial as well as the potential cost of an appeal. It is not the first class action settled by the company during the course of the year, as the Los Angeles Times reported in March of 2011 that the company also settled another dispute related to excess fees. According to the Times, consumer watchdog groups indicated that this March settlement was very favorable to the insurance company.

In this case, the settlement may have been advantageous to Farmers as well, as the amount paid to individual plaintiffs will be restricted to the difference in the fees that should have been paid out and the fees that were paid out. By settling, plaintiffs will give up their right to bring an independent lawsuit, which could have potentially taken the form of a bad faith action.

Under California law, when an insurance company breaches its contract with its insured, such as by wrongfully denying a legitimate personal injury claim, it may be liable for the tort of bad faith, explains a lawyer. A lawsuit against an insurer for bad faith can result in an award for punitive and compensatory damages, so the plaintiff may receive considerably more in damages than if the lawsuit was for a breach of contract.

If the plaintiffs were able to prove that Farmers had acted in bad faith by their improper refusal to pay as required in the PIP and Med-Pay policies, they could potentially have been entitled to a larger damage award.

By settling the class action, however, plaintiffs will be giving up their rights to sue and will be able to take no further action nor collect any further damages. An argument, therefore, could be made that Farmers has once again made an advantageous choice in settling, just as they did in the earlier California case that settled in March.



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