Header graphic for print

Insurance Class Actions Insider

The Local Action Doctrine: Potentially Relevant to Property Insurance Cases?

Posted in Property Insurance

Have you ever heard of the local action doctrine?  The distinction between local and transitory actions?  If you’re a lawyer, you might have heard something about this in law school.  But perhaps not since then.  The Supreme Court has not addressed it since 1912.  But the Ninth Circuit held last week that the local action doctrine required dismissal of a putative class action for lack of jurisdiction.  Eldee-K Rental Properties, LLC v. DIRECTV, Inc., No. 11-17994, 2014 U.S. App. LEXIS 6510 (9th Cir. Apr. 9, 2014).  If the Ninth Circuit is correct that this doctrine remains valid and is a jurisdictional requirement, could it potentially apply to property insurance cases in some jurisdictions?  Determining the answer to that, based on the Ninth Circuit’s method of analysis, could require extensive research of state law in the applicable jurisdiction, delving back many years.  However, the doctrine, to the extent applicable, would only apply where a property insurance lawsuit is brought outside of the federal district where the property is located.

In Eldee-K Rental Properties, the plaintiff, which owns an apartment building in Hartford, Connecticut, brought a putative nationwide class action lawsuit against DIRECTV.  The suit sought to challenge a practice whereby DIRECTV will install a satellite dish on an apartment building if the tenant signs a form stating that the landlord verbally approved the installation, or that approval is not required under the rental agreement.  I’m guessing that the plaintiff’s theory was that many tenants either do not bother to read the form, or sign the form without actually having permission from their landlord.  One might argue that the landlord benefits from having satellite TV available.  But apparently this landlord did not want the dish.  A bunch of these dishes on one apartment building can sometimes be an eyesore.  But that was not what the Ninth Circuit was dealing with.  The issue was whether this lawsuit could properly be brought all the way across the country in the Northern District of California, given that the plaintiff’s apartment building was in Connecticut.  (Plaintiff sought to apply California law to a nationwide putative class.)  DIRECTV argued that, under the local action doctrine, because the claims in essence involved trespass on real property, there was no federal jurisdiction in California.  And the Ninth Circuit agreed.

The Ninth Circuit’s opinion traces the origins of the local action doctrine to pre-15th century England.  At that time, jurors relied on their personal knowledge to decide disputes, with no witness testimony, and thus suits had to be brought locally where people would have heard of whatever the dispute was.  Deciding cases based on local rumors and hearsay was eventually, and wisely, eliminated.  But a remaining vestige of this ancient practice was that at least some cases involving real estate had to be brought only where the real estate was located.  An early decision by Chief Justice John Marshall, sitting as a circuit judge, adopted this local action rule as a matter of federal common law.  The Supreme Court confirmed its continued existence in the late 19th century, and the Ninth Circuit concluded last week that the Supreme Court’s 19th century precedent was still binding today (even though it is not embodied in any of the federal jurisdictional statutes).

According to the Ninth Circuit opinion, state law governs the issue of whether an action is local or transitory in nature.  The opinion held that, under California law, claims for violation of the California Unfair Competition Law and for negligence were “local” in nature because they arose from injury to real property, i.e., an unauthorized installation of a satellite dish.  The suit therefore could only be brought where the property was located.  (Ironically, the “local” satellite dish downloads television programming from around the world via a massive device that orbits the Earth, and that neither a 15th century juror nor Chief Justice Marshall could ever have imagined.)

So what does all of this have to do with property insurance, or with class actions involving property insurance?  Well, here are some questions this decision raises in my mind:  Is there any state in which a “local” action (based on the old distinction between “local” and “transitory” actions) would encompass a property insurance dispute, in which the issues focus on damage to real property?  Or is a contract dispute universally considered a transitory suit even if it involves real property?  What if the suit is brought against both a tortfeasor who caused property damage as well as a property insurer (if both can properly be sued in the same lawsuit)?  How does the local action doctrine interact with the Class Action Fairness Act (an issue not addressed in Eldee-K)?  Would state law differences in defining local vs. transitory actions be another basis for defendants to argue that class treatment is improper in multistate or nationwide class actions?  Perhaps these are just ruminations most appropriate for a law school final exam question.  But maybe not.

Supreme Court To Decide Whether Evidence Must Be Submitted With Notice of Removal: Dart Cherokee Basin v. Owens

Posted in Class Action Fairness Act

Earlier this week, the U.S. Supreme Court granted certiorari in Dart Cherokee Basin Operating Co., LLC v. Owens, No. 13-719 (docket).  The question presented is:

Whether a defendant seeking removal to federal court is required to include evidence supporting federal jurisdiction in the notice of removal, or is alleging the required “short and plain statement of the grounds for removal” enough?

This is a Class Action Fairness Act (“CAFA”) case in which the district court refused to consider evidence concerning the amount in controversy, when the evidence was presented in an opposition to a motion to remand, because the evidence had not been attached to the defendant’s notice of removal.  A panel of the Tenth Circuit denied permission to appeal under CAFA, and an equally-divided panel of the Tenth Circuit denied rehearing en banc.

As I covered in my October 11, 2013 blog post, Judge Hartz wrote a persuasive dissent from the denial of rehearing en banc, in which he relied on 28 U.S.C. 1446(a), which requires a notice of removal “containing a short and plain statement of the grounds for removal, together with a copy of all process, pleadings, and orders served upon such defendant or defendants in such action.”  The removal statute does not require that evidence be attached to a notice of removal.  Judge Hartz also cited Fed. R. Civ. P. 8(a)(1), which provides that a pleading contain “a short and plain statement of the grounds for the court’s jurisdiction   . . . .” 

I could turn out to be wrong, but given my recent luck in picking 3 of the 4 Final Four teams in the NCAA men’s basketball tournament, I’m going to venture a prediction on this case:  a 9-0 decision agreeing with Judge Hartz.  Congress seems to have clearly answered this question in the removal statute, and it appears from the petition for certiorari that all of the circuits that have addressed the question have agreed with Judge Hartz.

Class Action on Use of Staff Counsel: Dismissal Affirmed By Seventh Circuit

Posted in Auto Insurance

A while back I wrote a blog post on a district court ruling that an insurer did not have an obligation to disclose in its insurance policy that it would use staff counsel to defend the insured.  The Seventh Circuit recently affirmed the district court’s decision granting the insurer’s motion to dismiss. 

In Golden v. State Farm Mutual Automobile Insurance Company, No. 12-3901, 2014 U.S. App. LEXIS 4531 (7th Cir. Mar. 11, 2014), the court focused on the Indiana Supreme Court’s decision in Cincinnati Ins. Co. v. Willis, 717 N.E.2d 151 (Ind. 1999), finding that Willis concluded that the disclosure requirement was a matter for the state insurance commissioner to decide.  The insurer had adequately disclosed staff counsel’s employment by the insurer at the time that staff counsel was engaged to defend the plaintiff.  Given that the insurance commissioner had not issued any new regulation since Willis was decided in 1999, the court held that there was no obligation to disclose the use of staff counsel in the insurance policy itself.  The court also noted that the plaintiff did not allege that her representation by staff counsel was detrimental to her in any way.  She did not object to the representation, and the insurer paid the small judgment that was entered against her.  It seemed to me that the plaintiff also had no standing to sue here, although the court did not frame its decision on standing grounds.  The court declined to certify the question to the Indiana Supreme Court because it found the existing precedent sufficiently clear.

The use of staff counsel was hotly contested years ago, but has not been the subject of much litigation in recent years.  The theory alleged here was creative but, particularly in light of the outcome here, it seems unlikely we’ll see a lot of class action filings on this issue.

Use of a Settlement Offer or Offer of Judgment on the Named Plaintiff’s Claim to Defeat a Class Action: New Seventh Circuit Decision

Posted in Defense Strategy

Commentators have questioned whether, after the Supreme Court’s decision last year in Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523 (2013), a defendant could, by making a settlement offer or offer of judgment on a named plaintiff’s claim, render the case moot and prevent the certification of a class.  The Seventh Circuit has now addressed that question, although only in part, and in the context of a case with an unusual procedural history.  The Seventh Circuit reversed a trial court’s dismissal on mootness grounds, but appeared to retain its existing rule that a settlement offer or offer of judgment can potentially render a case moot if the offer is made before a motion for class certification is filed. 

In McMahon v. LVNV Funding, LLC, Nos. 12-3504, 13-2030, 2014 U.S. App. LEXIS 4592 (7th Cir. Mar. 11, 2014), the district court initially dismissed the class claims on substantive grounds and later denied reconsideration.  Its ruling on reconsideration, however, granted the plaintiff leave to amend to allege narrower class claims.  Shortly after that ruling, the defendant made a settlement offer on the plaintiff’s individual claims, which was rejected.  The district court found that the offer was for complete relief, rendered the case moot, and dismissed the case.  The Seventh Circuit reversed.

In Genesis Healthcare, the named plaintiff sought to bring a collective action under the Fair Labor Standards Act.  The Supreme Court assumed, without deciding (because the issue had not been challenged below, or raised in a cross-petition for certiorari), that the named plaintiff’s individual claim had been mooted by an offer of judgment on her individual claims.  The Supreme Court then held that the plaintiff, whose individual claim was moot, could not seek collective action treatment (this is roughly similar to an opt-in class action).  In reaching this result, the Court distinguished several of its previous precedents on mootness in class actions, including a case that had held that a named plaintiff could still pursue an appeal of the denial of class certification after the plaintiff’s own claim had become moot.

In McMahon, the Seventh Circuit acknowledged, and did not revisit, its pre-Genesis Healthcare precedent under which an unaccepted offer of judgment made before a motion for class certification is filed can render a named plaintiff’s claim moot.  This effectively requires a named plaintiff to file a motion for class certification together with the complaint.  (The court noted that some other circuits have disagreed on this point, and found it unnecessary to revisit the issue.) 

On the facts of McMahon, the court applied by analogy the Supreme Court’s prior precedent in the context of mootness after a denial of certification.  The court reasoned that: “Had McMahon tried to appeal from the original denial of class certification, even assuming [defendant’s] offer was comprehensive enough to moot his case, he would have been in exactly the same position as the Roper plaintiff.  We conclude, therefore, that McMahon’s decision to reject [defendant’s] settlement offer did not moot his interest in the case for purposes of his ability to serve as a class representative.”  Id. at *22.

The court did not address the more critical question of whether the majority’s reasoning in Genesis Healthcare means that an offer of judgment or settlement offer for full relief on a named plaintiff’s claim renders a case moot.  The following excerpt from Genesis Healthcare, for example, potentially can be used by defendants to make an argument that there is no exception to mootness applicable in class actions prior to certification of a class:

Nor can a defendant’s attempt to obtain settlement [on the named plaintiff’s claim] insulate such a claim from review, for a full settlement offer addresses plaintiff’s alleged harm by making the plaintiff whole. While settlement may have the collateral effect of foreclosing unjoined claimants from having their rights vindicated in respondent’s suit, such putative plaintiffs remain free to vindicate their rights in their own suits. They are no less able to have their claims settled or adjudicated following respondent’s suit than if her suit had never been filed at all.

Genesis Healthcare, 133 S. Ct. at 1531.

Insurance Class Action on Polybutylene (PB) Piping: Magistrate Judge Recommends Denial of Motion to Decertify Class

Posted in Property Insurance

I’ve written before (see my February 1, 2012 blog post) on a class action pending in the District of Arizona involving repair or replacement of polybutylene (PB) piping on property insurance claims.  The policy language at issue provides that “If loss to covered property is caused by water or steam not otherwise excluded, we will cover the cost of tearing out and replacing any part of the building necessary to repair the system or appliance.”  The plaintiff has an expert who opines essentially that, whenever a PB piping system is damaged, all of the PB plumbing in the home or building must be replaced.  The District of Arizona has previously granted partial summary judgment in favor of the plaintiff on coverage, and certified a class.  The magistrate judge has denied a Daubert motion to exclude the plaintiff’s expert (which is pending before the district court for review). 

The magistrate judge’s most recent ruling, Guadiana v. State Farm Fire & Cas. Co., 2014 U.S. Dist. LEXIS 33460 (Mar. 13, 2014), recommends denial of the insurer’s motion to decertify the class.  The court discusses at some length the Supreme Court’s decisions in Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend, both of which were decided after the class was initially certified.  With respect to Wal-Mart’s requirement of a common question that will generate a common answer, the magistrate judge concluded that commonality was satisfied because:  “At trial, the trier of fact will be asked to resolve the following question:  If a PB plumbing system leaks, must it always be replaced in its entirety?  This is a question that is common to all members of the class and one that can be answered once and for all for all class members.”  Id. at *11.  The magistrate judge further concluded that, although State Farm cited various factual differences in possible failures of PB piping, on the plaintiff’s theory “[i]t does not matter what avenue of failure caused the leak, all PB systems must be replaced in their entirety.”  Id. at *16. 

But what about coverage?  Not every claim for a plumbing leak is covered.  Some are excluded because they were caused by faulty workmanship or wear and tear, or failure to maintain heat in a building, etc.  It appears the plaintiff tried to take coverage out of this case by limiting the class to people who sustained what the insurer “acknowledged” was a covered loss.  But how do you determine that without an intensive file review, and how is the insurer barred from contesting coverage when sued simply because coverage might have been “acknowledged” in some unspecified fashion at some earlier point?  What about other defenses the insurer would have to individual claims, such as where the insured failed to preserve the piping for examination by the insurer, or failed to make a timely claim?

With respect to Comcast, the magistrate judge seemed to sidestep that decision, stating simply that the fact “[t]hat the tear-out cost could and would vary from house to house is something the court considered when the class was originally certified.”  Id. at *19.  The court did not really grapple with the application of Comcast to the prior analysis.  Deciding how much it would cost to replace piping in numerous structures would seem to be quite an undertaking for the court.  The court appeared to acknowledge that the law would not allow damages to be determined by extrapolation from a sample of claims.

It is relatively rare these days that a federal court certifies a class action in an insurance claims-related case.  This is a case worth watching as it continues.  Stay tuned.

Amount in Controversy for Declaratory Judgment Claims and “Late” Removal Based on Standard Fire v. Knowles Addressed By New Class Action Fairness Act (CAFA) Appellate Decisions

Posted in Class Action Fairness Act

Two recent federal court of appeals decisions on the Class Action Fairness Act (CAFA) address the measurement of the amount in controversy on a declaratory judgment claim, and a “late” removal based on the Supreme Court’s decision in Standard Fire Ins. Co. v. Knowles.  Both decisions are favorable to defendants.  The Eleventh Circuit’s opinion on declaratory relief claims reaffirms that those claims can be critical in determining the amount in controversy under CAFA, and should not be overlooked when a complaint is close to the $5 million threshold.  The Ninth Circuit’s opinion on “late” removals holds that a case that was remanded because of a stipulation by the named plaintiff, which was later invalidated by the Supreme Court’s decision in Knowles, can be removed again.  This puts another quiver in defendants’ arsenals where a change in the law makes removal proper, at least in some circumstances.

Amount in Controversy for Declaratory Judgment Claims

In South Florida Wellness, Inc. v. Allstate Ins. Co., No. 14-10001, 2014 U.S. App. LEXIS 2787 (11th Cir. Feb. 14, 2014), the plaintiff attempted to avoid federal jurisdiction by pleading only a declaratory judgment claim, and no claim for damages.  The suit alleged that Allstate, in paying claims for personal injury protection (PIP) benefits in Florida, improperly limited payments based on a statutory medical fee schedule.  The plaintiff alleged that the insurance policy failed to contain a provision specifying that the statutory fee schedule would be used, which the plaintiff contended was required by a recent Florida Supreme Court decision.  Id. at *2-4.  (With numerous legislative changes, PIP coverage in Florida continues to be the subject of extensive litigation, including class actions.)  Allstate removed the case to federal court, and filed an affidavit demonstrating that the value of the additional benefits that potentially could be due to the putative class if the fee schedule could not be used to limit payments would exceed $68 million.  Id. at *4-5.  The district court remanded the case, concluding that the value of the declaratory judgment was “speculative” because the requested declaratory judgment would not necessarily result in money being paid to the plaintiffs.  Id. at *6.

The Eleventh Circuit reversed the order of remand.  Applying its general rule that the value of a declaratory relief claim for amount in controversy purposes is measured from the plaintiff’s perspective, the court found Allstate’s evidence more than sufficient.  The court explained that:

Although the putative class members might have to take an extra step or two after obtaining declaratory relief from Allstate, that does not mean that determining that the amount in controversy exceeds $5 million is too speculative of a task.  Estimating the amount in controversy is not nuclear science; it does not demand decimal-point precision.  And the undertaking is not to be defeated by unrealistic assumptions that run counter to common sense.  Given the large number of medical bills at issue and the significant amount of money at stake, we find it unlikely that most insureds and medical care providers, who may be collectively owed $68,176,817.69, would leave the vast majority of that money on the table if a federal court declared that they were entitled to it.

Id. at *11-12 (emphasis added; citation omitted).  The court also noted that, the higher the defendant’s calculation of the amount in controversy, “the easier it is to be confident that collection contingencies should not count for much.”  Id. at *12.  (This language is particularly helpful for cases where precision in the calculation is difficult, but a less precise calculation is high enough that quibbles about the method should not make a difference.)

This result does not surprise me at all here.   Declaratory relief claims have long been included in the amount in controversy.  These claims can be particularly important in an insurance class action where the complaint seeks both money damages for breach of contract and declaratory relief, and the breach of contract claim alone might not reach the $5 million threshold.  The declaratory relief claim should not be overlooked as duplicative of the breach of contract claim – in many instances, it will add additional value (at least with respect to future claims) that potentially can defeat a motion to remand.

“Late” Removal Based on Standard Fire v. Knowles

In my July 9, 2013 blog post, I noted that Roth v. CHA Hollywood Med. Ctr., L.P., 720 F.3d 1121 (9th Cir. 2013), allowing a “late” removal of a class action (more than 30 days after service), might allow a case to be removed where it had not previously been removed because of binding precedent in the circuit that was contrary to Standard Fire Ins. Co. v. Knowles (blog post).   In Knowles, the Supreme Court held that a named plaintiff’s attempt to stipulate to an amount in controversy below $5 million could not defeat federal jurisdiction  under CAFA.  Prior to that decision, however, some circuits had enforced these stipulations, and numerous defendants had lost motions to remand (or had not bothered to remove cases) based on these stipulations.

In Rea v. Michaels Stores, Inc., No. 14-55008, 2014 U.S. App. LEXIS 2928 (9th Cir. Feb. 18, 2014), the Ninth Circuit confirmed that my prediction in my blog post about Roth was correct.  Rea was initially remanded by the district court based on a stipulation by the named plaintiff that was consistent with Ninth Circuit law, but later invalidated by Knowles.  Shortly after Knowles came down, Rea was removed a second time.  The Ninth Circuit upheld the second removal, reiterating that “as long as the complaint or ‘an amended pleading, motion, order or other paper’ does not reveal that the case is removable, the 30-day time period never starts to run and the defendant may remove at any time.”  Id. at *6.  The Ninth Circuit further concluded that the district court could reconsider its prior ruling because CAFA allows review of remand orders, and because the Supreme Court’s decision in Knowles was a change in circumstances justifying reconsideration.  Id. at *7-8.  It made no difference that, in the meantime, a class had been certified in state court and the certified class was smaller, because jurisdiction had to be determined as of the time of removal, and could not be impacted by subsequent events.  Id. at *4.

So if you think it’s too late to remove, or that you can’t remove a case again based on a change in the law, think again.  Maybe you can.

Mississippi ex. rel. Hood v. AU Optronics Corp.: Supreme Court Decides What Constitutes a “Mass Action” Under the Class Action Fairness Act

Posted in Class Action Fairness Act

Today, the U.S. Supreme Court issued its second decision construing the Class Action Fairness Act of 2005 (“CAFA”) in Mississippi ex. rel. Hood v. AU Optronics Corp., No. 12-1036 (slip opinion).  In a unanimous opinion authored by Justice Sotomayor (for whom I was a law student intern years ago when she was on the Second Circuit), the Court resolved a circuit split between the Fifth Circuit and several other circuits.  The Court held that a suit filed by the Mississippi attorney general, in the name of the State, was not a “mass action” under CAFA because it included a claim for restitution based on injuries suffered by numerous Mississippi citizens who were not parties to the case.  The Court held essentially that the “mass action” provision applies only to suits involving 100 or more named plaintiffs (as opposed to unnamed parties with an interest).  The Court rejected the Fifth Circuit’s view that “mass action” jurisdiction should depend on who are the real parties in interest. 

This decision is likely to largely shift the playing field involving CAFA jurisdiction in suits filed by state attorneys’ general to disputes over whether the suit qualifies as a “class action” because it is brought under a state statute or rule that is sufficiently similar to Federal Rule 23 to qualify as a “class action” under CAFA.  The Court noted that “if Congress had wanted representative actions brought by States as sole plaintiffs to be removable under CAFA on the theory that they are in substance no different from class actions, it would have done so through the class action provision, not the one governing mass actions.”  (Slip op. at 11.)  The Court did not construe the “class action” definition at all in this case (see footnote 2), so that is likely to be the subject of more litigation in the future.  In some cases the defendant(s) can argue that a state attorney general suit should be treated as a “class action” under CAFA, while in other cases that argument may not be available. 

Overall, I would not expect this decision to have a substantial impact on the insurance industry, but it likely will have an impact in some state attorney general suits that follow a catastrophe, such as the litigation brought by the Louisiana attorney general against the insurance industry following Hurricanes Katrina and Rita.  The decision also might result in increased litigation by state attorneys’ general to the extent that it might enable them to more easily avoid federal jurisdiction.

For readers interested in further detail on the Court’s reasoning, Justice Sotomayor’s unanimous opinion was essentially a thorough refutation of various arguments made by the Fifth Circuit below and by the defendant for treating the AU Optronics case as a “mass action.”  The Court concluded that:

  1. CAFA’s plain text made clear that the “100 or more persons” referred to named plaintiffs, not unnamed parties in interest; 
  2. reading the word “plaintiffs” to include unnamed parties would create an “administrative nightmare” in applying the provision requiring that, in a mass action, individual claims for less than $75,000 be returned to state court;  
  3. the provision of CAFA providing that a “mass action” that has been removed cannot be transferred unless a majority of plaintiffs request a transfer would be unworkable if “plaintiffs” included unnamed real parties in interest; and 
  4. an inquiry into who are the real parties in interest was not intended by Congress in this circumstance, based on the statutory text and context.

Declaratory Relief in Insurance Class Actions: Certification Denied Because Putative Class Members Lacked Standing

Posted in Class Certification Standards

A recent trend in insurance class actions (and class actions generally) has been for plaintiffs to bring cases seeking primarily or exclusively declaratory relief.  This is because of a perception that Rule 23(b)(2) classes (seeking declaratory or injunctive relief) are easier to certify than Rule 23(b)(3) classes, which require predominance of common issues of law or fact.  One argument that insurers often can make in opposing class certification under Rule 23(b)(2), as demonstrated by a recent Western District of Washington decision, is that some of the putative class members would have no standing to seek the declaratory relief being requested.

In Bunch v. Nationwide Mut. Ins. Co., Case No. C12-1238JLR, 2013 U.S. Dist. LEXIS 177057 (W.D. Wash. Dec. 17, 2013), the plaintiff sought class certification solely for the purpose of seeking a declaratory judgment on a homeowners’ insurance coverage issue.  The issue raised was that the insurance policy language at issue was purportedly ambiguous because of a purported conflict between an exception in one exclusion and another exclusion.  The policy excluded loss caused by continuous or repeated seepage or leakage of water over a period of time from within a household system or appliance.  The policy also excluded loss caused by wear and tear, but with an exception where wear and tear caused water to escape from household appliances.  The plaintiff contended that this created an ambiguity.  (Although the court was not presented with the merits of the insurance coverage issue, if I were representing the insurer, I might argue that there is no ambiguity because the exclusions must be read separately, and the exception to the wear and tear exclusion would still have force where the leakage is not continuous or repeated, but rather temporary and quickly identified and fixed.)

The proposed class, as reframed by the court, consisted of policyholders who made a non-weather related water damage claim, and the claim was denied.  Id. at *9.  The court denied certification because, under Ninth Circuit law, a class cannot be certified if some of the putative class members lack standing, and in this case some of them would not have standing.  The court explained that:

For some proposed class members, a favorable interpretation of the policy would simply make no difference: for example, an individual would get no redress if her claims had originally been (or could have been) denied because of unpaid premiums, because some other exclusion operated to deny coverage, or because their deductible exceeded the claim value. Also concerning is the fact that, for many proposed class members, it may be too late to make an accurate coverage determination. If the water damage has already been repaired, it may be impossible to make a post hoc coverage decision that takes into account, for example, whether the challenged ambiguity would even apply to the individual requesting relief.  For others, it may be impossible to unscramble the egg to determine precisely why coverage was denied in the first place, presenting additional obstacles to the court’s ability to redress injury. Fundamentally, each coverage determination involves different facts. Even setting aside concerns about commonality, see Fed. R. Civ. P. 23(a), many of the unique facts pertaining to some class members (but not others) would likely preclude standing to seek declaratory relief.

Id. at *12-13 (citation omitted).

The types of factual scenarios relied upon by the court here can typically be developed in an insurance class action involving a coverage issue.  The requirement that all members of the putative class must have standing (if the relevant circuit has adopted it, or it can be argued that it should be the law of that circuit) is thus a particularly powerful point that insurers can use in defending against a class action seeking declaratory relief. 

Local Controversy Exception to Class Action Fairness Act Addressed By Fourth Circuit

Posted in Class Action Fairness Act

One of the exceptions to federal jurisdiction under the Class Action Fairness Act (“CAFA”) is known as the “local controversy exception.”  It requires a federal district court to decline to exercise jurisdiction where more than two-thirds of the proposed class members are citizens of the state where suit was filed, the principal injuries occurred in that state, and at least one defendant is a citizen of that state, and is a defendant from whom members of the class are seeking “significant relief,” and whose alleged conduct “forms a significant basis” for the proposed class’s claims.  In addition, the exception applies only if no other similar class action was filed against any of the defendants in the past three years. 

This exception is rarely a point of contention in insurance class actions.  If the insurer is sued in its home state in a statewide class action, CAFA jurisdiction generally does not exist.  The “local controversy” exception tends to come into play when multiple insurers are sued in one case, or where other in-state defendants (such as insurance agents or insurance adjusters) are added to a suit against an out-of-state insurer.  A new Fourth Circuit case presents one more potential area where the “local controversy” exception is likely to be litigated – where the plaintiff sues a defendant class of individuals, as well as a corporate defendant.

In Quicken Loans Inc. v. Alig, No. 12-342, 2013 U.S. App. LEXIS 25224 (4th Cir. Dec. 19, 2013), the plaintiffs alleged that Quicken Loans originated unlawful loans in West Virginia.  Suit was brought in a West Virginia state court, on behalf of a putative statewide class of West Virginia citizens, against Quicken Loans (an out-of-state defendant), as well as a defendant class of real estate appraisers who are citizens of West Virginia and performed appraisals for the loans at issue.  The district court granted the plaintiffs’ motion to remand based on the “local controversy” exception.  The Fourth Circuit granted interlocutory review, and vacated the remand order.

The only dispute was over whether there was at least one in-state defendant from which “significant relief” was sought, and whose alleged conduct formed a “significant basis” for the putative class claims.  The key issue the Fourth Circuit focused on was whether the putative class of defendant appraisers could be aggregated to determine whether the “local controversy” exception applied.  The Fourth Circuit held that no such aggregation was proper because the members of the uncertified defendant class were not parties:

[I]t was proper for the district court to aggregate the named defendant appraisers for purposes of the local controversy exception. But, the district court went further than that: it also combined the absent members of the putative class. Therein lies the problem. An unnamed member of a proposed but uncertified class is not a party to the litigation. Smith v. Bayer Corp., 131 S. Ct. 2368, 2379 (2011). Consequently, because the class of unnamed defendant appraisers is not a party to this lawsuit, it was improper for the district court to consider them in deciding whether Plaintiffs had satisfied the “at least 1 defendant” requisite of the local controversy exception.

As such, we are left with the question as to whether the named defendant appraisers—Appraisals Unlimited, Inc., Dewey V. Guida, and Richard Hyett—meet the “at least 1 defendant” portion of the local controversy exception. But, we are unable to make that determination on the record before us. Accordingly, we remand this action to the district court to make that decision.

Id. at *13.

So what does this mean for insurance class actions, where plaintiffs’ counsel attempts to invoke the “local controversy” exception by suing insurance agents, adjusters or auto appraisers as well as the company?  I see this decision as generally a good development for those types of cases, in addition to other arguments of fraudulent joinder that the insurer often has when there is no proper cause of action against the insurance agents or adjusters.

Using Appraisal to Defend Against a Class Action on Property Insurance or Auto Insurance

Posted in Arbitration/Appraisal

In industries other than insurance, arbitration provisions have become a key technique used to defend against class actions. The U.S. Supreme Court has made it quite clear over the last few years that it will enforce the use of an arbitration provision that requires arbitration of individual claims and essentially bars the filing of class actions. (See my June 25 blog post for more thoughts on this.) While insurers, based on current policy provisions, do not have the arbitration option in defending many class actions, there are some cases that do offer a similar option, based on the appraisal provisions in property and auto insurance policies. These provisions typically allow either the insurer or the insured to insist that a dispute over the value of damage to a building or automobile be resolved by an informal, alternative dispute resolution mechanism called appraisal. Somewhat similar to arbitration, a three-member panel of appraisers will decide the value of the damaged property, but they do not have the authority to make legal determinations, such as interpreting an insurance policy coverage provision. In the right kind of class action (one premised on valuation), appraisal can sometimes be invoked by the insurer on the claim(s) of the named plaintiff(s). Once the dispute is resolved by appraisal, that should end the case because the named plaintiff’s own claim becomes moot, and the named plaintiff no longer has standing to proceed with the case.

A recent decision on this issued by a Nevada federal court is Herrera v. Allstate Fire & Casualty Company, Case No. 2:13-cv-00908-MMD-PAL (D. Nev. Dec. 6, 2013). The plaintiff’s vehicle sustained a total loss in an automobile accident. She alleged that Allstate miscalculated the fair market value of her vehicle, in violation of a Nevada regulation. After being sued, Allstate invoked the appraisal provision, moved to compel appraisal, and sought to stay or dismiss the case pending completion of the appraisal. The court granted the motion to compel appraisal and stayed the lawsuit. It explained that “[t]he Policy requires ‘full compliance’ with its terms before commencement of litigation. Because Defendants have initiated the appraisal process under the Policy, Plaintiff is contractually required to submit to the appraisal process before bringing suit.” Id. at *4-5.