Insurance Class Action Settlement Advice

As an insurance consumer, you may have insurance policy contracts for auto insurance, home or condo insurance, life insurance and health insurance. Each policy includes terms and conditions that define when and how much the insurance company will pay you for a covered loss.

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Occasionally, you may not receive the payment you expect. And, when that "denial of coverage" extends to hundreds or thousands of consumers, some of those consumers may seek an attorney who will file a class action lawsuit.

For example, most auto insurance policies say the insurance company will pay to repair or replace your car after an accident. But, some policies state that the insurance company can use "aftermarket parts" or non-OEM parts – that is, parts that were not made by the Original Equipment Manufacturer. In the '90s there was considerable class action litigation over the issue of whether insurance companies had properly disclosed their intent to use aftermarket parts for repairs.

Class Action Suits Defined

A class action is a specific type of lawsuit that joins together a group of people who collectively choose to make a claim against one person or party. In the case of insurance class actions, the issues have often been about how much will be paid to repair a car or whether deceptive practices were involved in selling a policy. The claims are often relatively small and not worth the cost of an individual lawsuit, but when consumers join together in a national lawsuit, the law firm representing the class seeks payment for everyone in the group.

If you receive a notification that you are a potential member of a class, you usually have two choices. You can decide to let the class action attorney "represent" you, which basically means that you will be entitled to get whatever settlement is obtained for every other member of the class. Or, you can choose to "opt out" of the class and either represent yourself or hire an attorney to represent you.

Joining a Class – Or Not

Our advice about whether to join the class? It's often not worth it to hire an attorney for a small auto insurance claim, but you should read the notice carefully, to determine whether you want to be bound by the results of the class action suit. But, if you have a larger amount in dispute, such as the payment from a life insurance settlement, it's a good idea to consult an attorney before waiving your rights to proceed with your own lawsuit.

As you can imagine, insurance companies and class action litigants have a lot at stake, so most auto insurance or other insurance class action lawsuits are settled before trial. If you receive notice of a settlement, you may need to provide proof that you are actually entitled to a payment of other type of settlement. It's a good idea to keep copies of old auto insurance policies, in case you need to send a copy. And, even though life insurance is not often the subject of class action suits, be sure to keep your life insurance policies in a safe place and tell your family how to find it.

Insurance Settlement Taxes

If you receive a monetary settlement from an auto insurance lawsuit, or from a lawsuit involving your home, health or life insurance, some portion of the payment may be taxable. For example, if an insurance company did not properly pay for the damage to your car and the cars of all the class action litigants, the additional amount paid would not be taxable, because you were originally entitled to that amount under the terms of your insurance policy. But, if you also received interest on the payment or some other monetary penalty was paid, those amounts may be taxable.

How can you be sure whether to include a settlement amount on your tax forms? Wait to see if you receive a 1099 form from the insurance company that paid you. The amount shown on the tax form must be shown as income.

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