Insurance Class Actions Insider -

In February, there was a new class action filed against Citizens Property Insurance Corporation, Florida’s property insurer of last resort, alleging that it was using Xactware’s 360Value software to purportedly overvalue homes and charge inflated premiums.  This week, Allstate was sued in a putative nationwide class action in Illinois federal court making claims on a similar theory, based on Allstate’s use of Marshall Swift & Boeckh (MSB) software to estimate replacement cost value of homes for purposes of setting policy limits and premiums.  I’m not yet prepared to say this is a trend, but other insurers may wish to take another look at their valuation software. 

The complaint in Diskey v Allstate Indemnity Company.pdf, Case No. 1:12-cv-03728 (N.D. Ill., filed May 15, 2012), alleges that MSB performed an analysis for Allstate in 2004 which determined that 59% of homes insured by Allstate nationwide were underinsured, with an average undervaluation of 27%.  The plaintiff claims that Allstate went too far in remedying that problem and allegedly used MSB software to unduly inflate the valuations of homes used in determining policy limits and thus unduly increase premiums.  The complaint also alleges that Allstate’s homeowners insurance policies provide for the use of a “Property Insurance Adjustment” (PIA) index to adjust policy limits at each policy anniversary, and that when the PIA indices went down, Allstate still increased policy limits and premiums.  The complaint also makes a vague, non-specific allegation that the MSB system that is used by Allstate to determine replacement cost of homes for underwriting purposes is inconsistent with the MSB system used by Allstate adjusters in valuing property damage when claims are submitted. 

The complaint seeks certification of several nationwide classes: (1) a class of policyholders whose properties were appraised using a software program, resulting in an increase in policy limits, and who “paid excessive premiums”; (2) a class of policyholders whose properties were appraised using a software program, resulting in an increase in policy limits, who do not reside in a valued policy law state, and who suffered a loss within the limitations period; and (3) a class of policyholders whose policy included Allstate’s PIA provision, and whose policy limits were increased at the same time that the PIA indices decreased, within the limitations period.  The causes of action alleged include restitution, breach of contract (including breach of the implied covenant of good faith and fair dealing), bad faith and unjust enrichment/constructive trust.

This case is similar, in part, to the Cox v. Allstate case (see my April 11, 2012 blog post) in which certification was recently denied by the Western District of Oklahoma on a claim involving Allstate’s PIA provision.  The court reasoned that determining whether Allstate inappropriately raised a policy limit would require comparing every individual policy limit with the property’s fair market value, an individualized analysis that defeated certification under Wal-Mart v. Dukes.  As the Cox decision demonstrates, this is an issue on which insurers often have strong defenses to class certification.  But given that the plaintiffs’ bar seems to be focusing a bit more on valuation and premium calculation issues, and on whether underwriting valuation methods are consistent with valuations used for loss estimating purposes, this is an area insurers may want to pay attention to in their efforts to avoid potential class action exposure.

Hurricane Katrina resulted in a slew of property insurance class actions.  While hopefully the U.S. will not see a disaster of that scale again for decades, recent years have brought a large number of smaller-scale catastrophes, most notably tornadoes, such as the ones that hit Joplin, Missouri, and Tuscaloosa, Alabama, in 2011.  Recent years have also brought a large number of wildfires, as well as Hurricane Irene.  But these events have not led to any significant number of class action filings against insurance companies.  Why is that?  Perhaps the insurance industry as a whole is doing such a fantastic job handling these claims and keeping their customers happy that plaintiffs’ lawyers have found few clients or grounds to sue.  But that seems unlikely.  I think more likely explanations are that: (1) very few of the Hurricane Katrina class actions were successful for plaintiffs; (2) Wal-Mart v. Dukes, together with the Class Action Fairness Act, have made class actions more difficult for plaintiffs to bring successfully and decreased class action filings; (3) the plaintiffs’ bar in the jurisdictions affected by the recent catastrophes might have fewer insurance lawyers and fewer class action lawyers with the right experience and interest to want to pursue these kinds of cases (in contrast to Louisiana, which was a hot bed of mass tort and class action litigation pre-Katrina); and/or (4) some plaintiffs’ lawyers tend to wait until the suit limitation period is about to expire before they sue (a number of the Katrina class actions were filed shortly before the suit limitation period was set to expire and, after the time to sue was extended, additional class actions were filed shortly before the extension expired).

The first class actions I’ve seen resulting from last year’s tornadoes were recently filed in the Circuit Court of Tuscaloosa County, Alabama:  Hallman v. Metropolitan Property and Casualty Insurance Company.pdf, Civil No. CV-2012-215-JHR and Strawbridge v. Cotton States Mutual Insurance Company.pdf, Civil No. CV-2012-214.  The complaints are largely identical and were filed by the same plaintiffs’ firms.  The complaints seek certification of Alabama statewide classes of policyholders making claims for covered property damage since January 1, 2011.  The allegations are quite broad and similar to some of the Katrina class actions.  The plaintiffs allege general low-balling of claims, failure to properly investigate and adjust claims, application of “commercially unreasonable depreciation rates,” and that the adjustment process on claims has been delayed so as to improperly inhibit insureds’ ability to complete the repairs within one year of the loss, where policy provisions require completion of repairs within that time period in order to recover the full replacement cost of the damage (as opposed to the actual cash value, which takes into account deduction for depreciation).  The complaint against Cotton States Mutual also alleges that the company is improperly informing insureds that they have one year from the date of loss to file suit, where Alabama has a six-year statute of limitations on breach of contract claims that it appears cannot be shortened by contract.  Notably, the complaints also allege that plaintiffs’ counsel is providing copies of the complaints to the Alabama Insurance Commissioner and requesting the commissioner to investigate the allegations.

These types of broad-brush class actions are rarely certified because courts have repeatedly held that, in order to determine whether property insurance claims have been properly adjusted, an intensive individual inquiry into the facts of each individual claim is required, precluding class treatment.  However, one thing to keep in mind if you are faced with defending this kind of case is that the filing of such a broad class action potentially can result in tolling of the statute of limitations or suit limitation period on the claims of the putative class members while the class action allegations remain pending.  In order to limit that potential tolling, it can be useful to try to obtain a ruling on the viability of the class allegations as soon as possible after suit is filed.  In the Katrina context, the pendency of putative class actions (which were never certified) for years, together with the Louisiana Supreme Court’s decision on class action tolling, has led to a lengthy extension of the time for policyholders to sue (for more about this, see my April 5, 2011 blog post).

Preliminary injunctions in insurance class actions are relatively rare, which is why the recent decision granting such an injunction in Yue v. Conseco Life Ins. Co., 2012 U.S. Dist. LEXIS 46565 (C.D. Cal. Apr. 2, 2012), caught my attention.  The case involves life insurance products sold by Conseco Life that apparently became a particularly bad deal for the company.  There were fewer policy terminations than projected, and the death benefits projected to be paid out would result in substantial losses to the company.  (The business lesson here may be not to rely on such an assumption that many people will not continue to hold their policies.)  The policy had the following provision allowing a change in cost of insurance (COI) charges, which the company tried to take advantage of:

Current monthly cost of insurance rates will be determined by the Company based on its expectation as to future mortality experience.  Any change in such rates will apply uniformly to all members of the same age, sex, and premium class.

Id. at *2.  Conseco first tried to impose a future rate increase starting in the 21st year of policies, which would rein in its projected losses, but not result in any profits.  The court rejected that approach in a summary judgment decision, holding that the policy provision only allowed immediate, “current” changes, not future changes in rates, and that “expectation as to future mortality experience” was limited to increases in the rate of deaths, not increases in the payment of death benefits due to lower policy termination rates.

Conseco then tried another approach in 2011, implementing immediate and substantial rate increases for the vast majority of policyholders.  If, for example, the mortality rate for a particular class of policyholders was 47.466 per 1000 policyholders, the rate would become $47.466 per $1000 of coverage.  These rate increases were implemented notwithstanding that morality rates for the vast majority of policyholders had decreased.

The court came down hard on Conseco’s second attempt to implement a rate increase.  It certified a class of those policyholders who had not surrendered their policies, finding Rule 23(b)(2) certification proper because the class was seeking only injunctive and declaratory relief preventing implementation of the rate increase.  The court concluded that “[a]ny monetary relief sought by the class, such as the return of any additional COI charges deducted after the rate increase, would be incidental to the equitable relief sought by Plaintiff.”  Id. at *27.  The court also indicated that it would consider certification of a class of policyholders who had surrendered their policies if an appropriate representative of that proposed class joined the suit. 

The court went on to grant a preliminary injunction.  It found a likelihood of success on the merits because it concluded that the policy provision quoted above likely did not allow a rate increase where it was the insurer’s expected losses, not actuarial mortality rates, that were increasing.  The court explained that “in order to ‘base’ COI rates on expected mortality rates, Conseco must consider the relationship between current and past expected mortality rates and determine how those rates have changed.”  Id. at *35.

What I found most significant was the court’s finding of imminent irreparable injury in a manner that seems to have potentially broader application:

The Court finds that without a preliminary injunction, policyholders are likely to suffer imminent irreparable harm. It is common knowledge that people purchase insurance policies for "security" and "peace of mind." See Weinberger v. Wiesenfeld, 420 U.S. 636, 642, 95 S. Ct. 1225, 43 L. Ed. 2d 514 (1975) (comparing social security benefits to insurance because they provide "security" and "peace of mind"). In the context of life insurance, the "security" being purchased is the knowledge that the policies' designated beneficiaries will be left with some degree of financial support when the insured passes away. When policyholders face large, unanticipated increases in charges, the "peace of mind" they paid for is irreparably lost — instead, they are left with stress, anxiety, and uncertainty regarding the state of their life insurance.

 . . .

If a policyholder surrenders her account while this case is pending, she may never be made whole, even if Plaintiff is ultimately successful in this case. Some surrendered policyholders may pass away without life insurance, resulting in their having suffered an emotional injury — failure to provide for their loved ones — that no monetary award could ever compensate. Others may be eligible for reinstatement but may have purchased a policy with another insurer, making it difficult to calculate damages. Still others may have invested their accumulation accounts elsewhere, making reinstatement impossible. These are but some of the irreparable injuries that may result. The Court recognizes that the aforementioned injuries are speculative, but these are not the injuries that warrant a preliminary injunction here. The immediate irreparable threat common to all class members is that without a preliminary injunction, they will be deprived of the opportunity to make an informed decision that would help them avoid the above scenarios. In other words, if Plaintiff is correct, policyholders are currently being forced to make a choice that they should not have to consider in the first place. Monetary damages cannot turn back time and return to any class member the right to be free from being compelled to make a choice that would prevent irreparable harm. It is precisely this type of situation that warrants preserving the status quo until a decision is made on the merits.

Id. at *40-43 (boldface added).

What troubles me is that, aside from bad faith claims, which the court is not dealing with here, the concept that people buy insurance for “security” and “peace of mind” is not something that the law of contracts generally finds to be relevant to judicial analysis, let alone grounds for a preliminary injunction.  There are all kinds of situations in which “security” and “peace of mind” are factors in consumer relationships with businesses.  When people put money in a bank they presumably do so because they have a sense of security that the bank is a better place than holding cash in a safe at home, and they have some sense of security in the bank they choose (and perhaps the FDIC).  When the court talks about people dying without life insurance and sustaining a non-compensable emotional injury (presumably pre-death?), again I’m wondering why that is not the kind of loss that money damages really can compensate – all the beneficiaries would be entitled to is money, i.e., the policy proceeds, and those can be paid later, with interest.  Difficulty in calculating damages also is typically not grounds for an injunction.  Preliminary injunctions are appealable as of right, and perhaps the Ninth Circuit will weigh in here.

An April 17 article by Jennifer Smith on the Wall Street Journal Law Blog is getting quite a bit of attention.  It discusses a survey by the Carlton Fields law firm, concluding that companies expect to see more class action filings in 2012, but to spend less money defending them.  She writes: 

How, might you ask? The plan — as loyal Law Blog readers may have guessed — primarily involves knuckling down on outside counsel, which accounts for about 90% of the money law departments spend on class actions.

. . .

Respondents said they planned to ratchet back spending by about 17%, to an average of $645,800 per class action compared to $776,500 last year.

. . .

To achieve the projected saving, more than half of the in-house lawyers in the Carlton Fields poll said they planned to “manage outside counsel terms and expectations,”  i.e. set budget and billing guidelines and take an active role in managing cases.

Of course no look at corporate legal spending would be complete without mentioning alternative fee arrangements, a trend WSJ examined earlier this month.

Companies said they planned to significantly boost their use of AFAs for class actions. While 23.9% used them for that purpose last year, 45.8% plan to do so in 2012, they said.

So how can companies achieve this without creating too much risk by hiring the cheapest lawyers they can reasonably find and squeezing the budget as hard as possible?  If I were, hypothetically, to become an in-house lawyer charged with this task, here are some things I think I would think about: 

• For class actions that are not “bet the company” cases, I would look outside the most expensive legal markets and consider regional and boutique firms more than global/national firms.  Unless the largest firms can truly compete on cost against firms that are typically hundreds of dollars an hour cheaper; perhaps some can.  For truly “bet the company” cases where my job would be on the line, I would probably go to the best that money can buy, but then again that decision would be made above my pay grade.
• I’d focus on looking for class action lawyers who focus their practice on the industry my company was in, rather than generalist class action gurus.  The generalists are great at knowing their way around class actions, but there would be a significant cost to teach them, or have them teach themselves, about the industry and aspects of the law unique to that industry.  I could try to write that off in reviewing bills, but that’s hard to manage and could create friction.  By the same token, in insurance for example, which I know best, there are lots of great insurance lawyers that know insurance law well, but know very little about class actions.  That could create the same kind of problem or potentially an even worse one if I were on the in-house side.
• Undoubtedly there will be jurisdictions where I could not find an industry-focused class action lawyer in that jurisdiction.  One option I’d consider would be pairing a strong local litigation firm that knows the court (but perhaps not class action law and/or the industry) with industry-focused class action lawyers from somewhere else, with appropriate division of responsibility to avoid duplication of effort.  I’d need to find people who work well in those relationships, though.  Sometimes egos get in the way.
• I might forego filing motions to dismiss in a significant number of putative class actions.  The initial gut reaction is often to file a motion to dismiss in order to try to postpone class discovery and perhaps win the case outright.  That’s great if you truly have a realistic shot at winning the whole case, but frequently the outcome is merely a partial dismissal of some claims that does not narrow the scope of class discovery, and might even make it easier for the plaintiff to obtain certification because some non-certifiable claims have been eliminated.  As the in-house lawyer, I would be stuck with a significant bill for a motion to dismiss with little real benefit to show for it other than postponing some difficult discovery work that the company likely will have to pay for in any event.
• Where motions to dismiss seem unlikely to achieve the desired benefit, I’d look carefully at a motion to strike the class allegations.  Those are gaining more traction in some courts, often cost less than a motion to dismiss if they are carefully targeted (and written by someone that has written a bunch of them before), and if granted they will end the case as a practical matter.
• I’d consider predictive coding for class discovery, if appropriate.  For more on this, see my March 9, 2012 post.  Often electronic discovery is the largest cost in these cases and that would be an area I’d focus on in trying to reduce cost.
• I’d probably use fixed fees for briefs, especially dispositive motions in trial courts, and for appeals.  When you look at billing data, there is a reasonable way to estimate those costs from experience and ensure the law firm is not using junior associates to fritter away useless hours doing research on Lexis or Westlaw.  But for other segments of a class action, costs are lot less predictable upfront, so budgets tend to make more sense, although AFAs can sometimes work.
• I’d try to manage staffing carefully but without nitpicking.  Using more senior lawyers at higher rates but working more efficiently sometimes makes more sense than the typical model of junior lawyers doing most of the work that gets revised several times.
• I’d consider urging my company to spend some money trying to anticipate class actions before they are filed and reduce exposure.  That can really pay dividends.  For more on this, see my November 21, 2011 post.

Although some readers might view these thoughts as simply a disguised attempt to try to steer people in the direction of my firm, I’ve honestly tried to put on the hat I would wear if I were in-house counsel and identify what I would focus on, and I would not always look to the firms I’ve worked at.  I certainly don’t claim to be the best at any of this, and there is plenty of competition out there even among insurance class action lawyers.  If readers have thoughts on this post or the Carlton Fields study, I’d be interested to hear them.

After Wal-Mart v. Dukes, plaintiffs’ lawyers tend to file more narrowly-tailored, single state class actions, often focusing on insurers’ compliance with state statutes or regulations.  Recent filings against GEICO and Progressive, two of the country’s largest auto insurers, are good examples of this trend: 

• Davis v GEICO Casualty Company.pdf, Case No. 2012CA005024 (Florida Circuit Court, 15^th Judicial Circuit in and for Palm Beach County, filed Mar. 22, 2012):  This case focuses on a Florida statute requiring insurers to make disclosures regarding UM/UIM coverage, and obtain a signed written consent if an insured chooses not to buy UM/UIM coverage or chooses limits lower than the bodily injury coverage limits.  See Fla. Stat. § 627.727.  After a few entertaining paragraphs about the cavemen, the gecko and “15 minutes can save 15%,” the complaint alleges that GEICO fails to comply with this Florida statute by failing to provide Florida consumers who buy their policies by phone or over the Internet in 15 minutes with the required disclosures, and failing to obtain their signatures. The complaint vaguely pleads that GEICO’s electronic signature process for Internet sales fails to comply with Florida law with respect to electronic signatures.  The complaint seeks, among other relief, reformation of the policies of putative class members such that they provide UM/UIM limits equal to the bodily injury coverage limits.  This is not unique to Florida – some other states have similar requirements for declining UM/UIM coverage or buying lower limits for such coverage. 
• Beavers v Progressive Casualty Company.pdf, No. CV 12 779206 (Ohio Court of Common Pleas, Cuyahoga County, filed Mar. 28, 2012):  This case focuses on Ohio regulations requiring that, when an insurer pays a claim for a total loss of a vehicle, it must provide notice to the claimant that sales tax will be reimbursed if a replacement vehicle is purchased within 30 days, and the insurer must provide such reimbursement if a claim for sales tax is timely submitted.  See Ohio Admin. Code § 3901-1-54(H)(7).  The complaint alleges that Progressive provides a notice that states only that “we will include applicable sales taxes and fees when required by law.”  (Complaint, ¶ 10.)  The plaintiff claims that this notice is insufficient “because it fails to provide the claimant with any information regarding when taxes and fees are ‘required by law.’”  (Id., ¶ 11.) This seems to go against the basic legal principle that people are presumed to know the law, although in reality few average citizens take the time to explore the intricacies of insurance department regulations.

Other insurers may want to pay attention to these filings because it’s common for plaintiffs’ lawyers to file class actions first against the insurers with the largest market shares and then, if they have some success, follow with suits against carriers with smaller market shares.  (Although sometimes this happens the other way around, perhaps because plaintiffs’ lawyers think the smaller insurers will have less familiarity with class actions and hire less qualified defense counsel, and will try to obtain favorable rulings they can then use against the larger carriers.)  

Insurers seeking to avoid class action exposure in the post-Wal-Mart era would be well-served to devote resources to beefing up their compliance department.  Careful compliance with state statutes and regulations should help avoid being sued in some of these types of lawsuits.