The Cost of a Wrongly Denied Insurance Claim- Hayseeds Damages
When an insurance company doesn’t honor its obligation to provide benefits for which a policyholder has paid, the cost goes beyond just the amount of the benefits themselves. Whether the insured has been hurt in a car crash, suffered damage to a home, or has been sued by someone else, handling the problem without the insurance company’s help can involve financial costs, and of course stress and worry. What happens when a policyholder has to hire a lawyer to get an insurer to make good on its contract?
In West Virginia, if a policyholder has to pursue legal action against an insurer in order to obtain benefits that the insurer should have paid under an insurance policy, he or she has rights beyond just collecting the value of the insurance benefits that have been denied. If a policyholder substantially prevails in such a situation, he or she can recover the losses caused by the denial, or “consequential damages,” which can include attorney fees and other costs of taking action. These damages are sometimes called “Hayseeds damages,” after the famous 1986 West Virginia Supreme Court of Appeals case that established the rule, Hayseeds v. State Farm Fire & Cas., 177 W. Va. 323, 352 S.E.2d 73 (1986).
In the Hayseeds opinion, the Court emphasized that “when an insured purchases a contract of insurance, he buys insurance–not a lot of vexatious, time-consuming, expensive litigation with his insurer.” Hayseeds made clear that an insurance company need not act in bad faith in order to be liable for consequential damages when it breaches an insurance contract by wrongfully denying benefits to its insured. Under those circumstances, as the Court observed, the insurance company “guessed wrong as to its duty, and should be compelled to bear the consequences thereof.”
In addition to attorney fees, these consequences can include what the Hayseeds opinion described as “aggravation and inconvenience.” Hayseeds also established a presumption that the reasonable attorney fees for recovery of insurance benefits is one-third of the amount of benefits available. For instance, if an insured successfully brings suit to recover $50,000 in insurance coverage benefits, he or she may also recover $16,666.67 in fees. However, the Hayseeds Court recognized that circumstances may dictate a different fee amount, such as where the coverage amount is very small or very large.
Since Hayseeds, West Virginia courts have decided a number of cases that offer guidance on reasonable fee amounts, as well as other aspects of the doctrine such as what constitutes “substantially prevailing” and at what point an insurer’s conduct justifies consequential damages. Almost 40 years after Hayseeds, courts continue to develop the details of how the case’s principles are applied, but its lesson remains sound: “To impose upon the insured the cost of compelling his insurer to honor its contractual obligation is effectively to deny him the benefit of his bargain.”
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