What is an Insurance Class Action?

C. Mitchell
C. Mitchell
Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

An insurance class action is a type of lawsuit in which a group of similarly situated plaintiffs together sue an insurance company for a shared grievance. It can be very costly and time consuming for each individual who was harmed by an insurance company’s actions to file a separate lawsuit. Depending on the amount of damages at stake, suing might not even make financial sense. Insurance class action lawsuits give plaintiffs in this type of situation the opportunity to bond together and file but one collective claim on everyone’s behalf.

There are two driving goals behind class action lawsuits: efficiency and accessibility. When a number of people are bringing basically identical claims, those claims can clog up court dockets and require judges to adjudicate the same matter over and over. Also, and perhaps more importantly, they often enable parties who have been only slightly injured to recover without having to front the costs of trial.

If an insurance company was overcharging every subscriber, for instance, or was ignoring a certain subset of laws requiring coverage of certain claims, subscribers would be injured — but not necessarily injured to a degree that would justify the costs of mounting a lawsuit. From hiring a lawyer to making the right filings and paying administrative fees, going to court is rarely a cheap endeavor. Also, most jurisdictions have a prerequisite “amount in controversy” requirement for lawsuits, which requires that the total amount of damages that could be recovered meet a certain threshold. One individual harmed by an insurance company’s actions might not meet this threshold.

Insurance class action litigation allows all injured parties to pool their collective damages into one aggregate amount. In this way, all injured parties are guaranteed a chance at relief. The possibility of an insurance class action lawsuit can also serve to discourage big insurance companies from abusing their contracting and negotiating power, even when those abuses result in relatively small individual harms.

Class action litigation and practice originated in the United States, but is increasingly used in other legal systems, as well. Each jurisdiction has its own requirements on what it takes to form a class, how class action awards must be distributed, the binding nature of class decisions, and so on. Most of the time, an invitation must be extended to every potential class member before an insurance class action suit, or any other class action suit, can proceed. There is also usually a set time frame in which claims must be filed.

There are many benefits to insurance class action suits, but there can also be downsides. The majority of the time, even if the court finds in favor of the plaintiffs, any award must be shared, often equally. Depending on how many plaintiffs have joined the action, this can mean that the total take-home amount for any given plaintiff is relatively small, once the lawyers have taken their cut. Class action lawyers often work on a contingency basis, which means that no members of the class bear the burden of paying them — but if they win, the lawyers can usually take a sizable chunk of the final award.

Most jurisdictions also require that class action lawsuits represent the final word. In insurance class action lawsuits, this means that once a judge has made a decision, no more litigation is possible. The plaintiffs are prohibited from re-arguing any aspect of the case, and prospective plaintiffs who declined to join the class are barred from bringing similar litigation later on.

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      Businesswoman talking on a mobile phone