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because Padgett told her that it would cover the medical costs
that she would incur in having a child. However, United did not
pay those costs. Echols and her husband filed a joint Federal
income tax return for 1994.
B. The Lawsuits
In August 1993, Ervin, Hudson, and Echols (the plaintiffs)
each filed a lawsuit in the Circuit Court of Mobile County,
Alabama, against United and Padgett. Each complaint related to
medical, hospitalization, or life insurance policies purchased by
the plaintiffs from United through Padgett.
The plaintiffs sought an unspecified amount for punitive and
compensatory damages. They alleged: (1) United overcharged them
for the insurance coverage; (2) Padgett forged their names to
additional insurance applications; (3) United did not pay the
plaintiffs’ insurance claims; and (4) Padgett and United
wrongfully conspired against them. The plaintiffs did not claim
that United or its agents caused them to have any personal
injuries or sickness.
C. The Settlements
Petitioners were represented by counsel during the
settlement negotiations. United was represented by Kirk Cordell
Shaw (Shaw). On February 10, 1994, petitioners each settled
their cases with United for $333,333.33. Clisby Jarrard
(Jarrard), a United vice president, approved the settlements.
The settlement agreements are substantially similar. They state
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