Mind the Gap: Keeping an Eye Out for Litigation Involving Increasingly Popular Gap Coverage

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So-called “gap” insurance policies – policies that provide critical-illness, hospital-indemnity and specified-disease coverage – have been on the rise due to a number of factors, including the frequency of high-deductible health plans, increasing availability of voluntary coverage through employment, the rise of chronic diseases, and an aging population. (See Critical Illness Insurance Market Size to Grow by USD 541.4 Bn by 2032 | Cancer Disease Segment to Hold 34% Share.) 

Under critical-illness and specified-disease policies, coverage is provided for specified conditions, whereas hospital-indemnity insurance has been described as covering “a much broader set of situations.” (See Hospital Indemnity Is Surging: Why Now?  *free account signup required.*) Selling points for these policies often include no waiting period, and these policies can also serve as an affordable form of income protection for people who are not eligible for disability insurance. (See Is Critical Illness Insurance Worth the Cost?).  Such coverage may make sense for those with a family history of certain serious conditions, like heart disease, but these policies will not cover pre-existing conditions.  Id.

Despite the increasing popularity of gap policies, as of mid-2025, there are virtually no court decisions involving gap-coverage claims.  Claimant’s attorneys are nonetheless suggesting that they have achieved favorable results. E.g., Critical Illness Claim Denial of $200,000 Won.

One of the few available decisions is the case of Drees v. Philadelphia Am. Life Ins. Co., 2023 WL 25381 (S.D. Tex. Jan. 3, 2023).  In Drees, the parties agreed that the insurer’s denial of a claim for surgical supplies under a hospital-indemnity policy was not a breach of contract. Rather, the plaintiff, who sought to represent a class, alleged misrepresentations in the sale of the policy.

The policy in Drees provided facility-fee and professional-services benefits, the latter of which paid a daily surgery-indemnity benefit for services at three times the “resource based relative value system” or RBRVS (a methodology for paying benefits under Medicare). The policy defined RBRVS, and the definition pertained to the reimbursement for physician services.

The plaintiff, who fell off a horse and incurred about $70,000 in fees for surgical screws and plates alone, contended that (1) references to “supplies” in both the policy’s definitions and exclusions misled her into believing supplies would be covered as part of her surgical benefit, and (2) by referencing a methodology used by Medicare, the insurer had misled her regarding coverage for supplies.

The court summarily rejected the plaintiff’s arguments. First, the court noted that the benefits schedule and the benefits provision section (i.e., the insuring clause) did not mention the word “supplies,” and further held that “no reasonable person could believe [language in the definitions] establishes coverage.”  Id. at *5.  Similarly, the court rejected the plaintiff’s argument that the absence of an exclusion for supplies conferred coverage, stating “supplies were not specifically excluded … ‘because they would not otherwise be included.’”  Id. at 6.  Second, the court found the plaintiff’s belief that reference to “Medicare methodology” meant the policy provided coverage for supplies was unreasonable in the face of the plain language of the RBRVS definition.  Id.

Until more cases involving these types of coverage are litigated, the Drees decision provides helpful arguments in both breach-of-contract and misrepresentation cases.  Meanwhile, insurers and defense attorneys should “mind the gap” and be on the lookout for court decisions in this area, as litigation is likely to expand given the increasing market share of such products.