Avid readers of this blog will recall that, back on August 18, 2011, I posted about Rob Herrington’s new book, Verdict For The Defense, which focuses on strategies for reducing class action and mass action exposure. I’ve now managed to find the time to read the book. It’s a good read, written in a way that is accessible to non-lawyers and helpful both to business leaders and their in-house and outside lawyers. It’s written in a generic fashion so that its guidance could apply with appropriate tailoring to any industry, although there is a significant focus on product manufacturers. Here are my thoughts on how Herrington’s recommendations could benefit insurers:
Herrington recommends that companies perform proactive internal reviews to try to identify business practices that can potentially lead to class action or mass action exposure, and then take steps to limit their exposure. He calls this a “Liability Firewall Process.” First, the company examines its processes from the perspective of a consumer and a plaintiffs’ lawyer (perhaps even hiring a plaintiffs’ lawyer to assist with this), and identifies areas of risk. Second, the company assesses the various risks that are identified, deciding which risks warrant that action be taken and which ones are the highest priorities. Third, the company decides whether to take steps to reduce or eliminate the risk, or live with it. This process would continue permanently, identifying new potential areas of risk from time to time. He suggests creating a “Liability Firewall Team” to do this work, consisting of in-house and/or outside counsel who know their way around class actions, and appropriate business people senior enough to give the team sufficient clout within the organization to achieve its goals. It is of course important to take steps to protect the team’s work under the attorney-client privilege. After issues are identified, the steps that can be taken to reduce risk will vary depending on the nature of the risk, but can include changes in business practices to eliminate potential claims, or steps to try to create what he calls “Strategic Variability.” That is, trying to ensure that there is enough variability in the way a company handles a particular issue that it will be more difficult for a plaintiffs’ attorney to obtain class certification.
Here is how I see this process applying in the insurance industry: A company could put together a team to review both underwriting and claims procedures. The team could include people that know the products, know the processes and lawyers who know their way around class actions. The review probably would be limited to personal lines since that is where the vast majority of class actions arise from (although there have been some commercial lines cases). The team would review the entire process an insured experiences, from purchasing a policy through making and settling a claim, as well as policy cancellation (voluntary or involuntary). The team would review all of the advertising materials and other sales-related materials used by the company or provided by the company to its agents. It also would review a sample of consumer complaints and/or aggregate data regarding consumer complaints if that is maintained, ideally both formal complaints and “informal” complaints posted on the Internet. The team also would review all written policies and procedures for underwriting and claims, every standard form letter that might go to insureds, and every piece of paper that gets sent to insureds enclosing their policy forms or regarding their premium payments or the cancellation of their policy. The team also would review the policy forms, identify provisions that might give rise to class actions, and discuss with senior claims people how claims are being handled. The team also might review a random sample of underwriting files and claim files, and interview the adjusters who handled claims raising issues of concern. The team also might meet with the regulatory department and review any areas where there have been significant recent insurance department inquiries or questions about whether the company’s policy forms or procedures are adequately in compliance with state statutes and regulations. (A comprehensive review of state statutes and regulations pertaining to underwriting and claim handling could also be undertaken to be completely thorough, but that by itself would be a massive project that could overwhelm the rest of the project for insurers that write in all or substantially all states.) The lawyers on the team would also review recent class action filings against the industry. The team would try to identify, as best as possible, where there might be class action exposure and then recommend steps that management could take to reduce the risk of a class action being filed or reduce the chances of a class being certified. Once these steps are taken, regular follow-up would be necessary, including review by the team of significant proposed changes in policies and procedures, advertising, significant new areas of consumer complaints, new products, etc.
This undoubtedly would be a time-consuming and expensive process, both in terms of internal resources and any outside resources that the company might retain. To the extent the process would require too many resources, it could be tailored to areas that the team and/or management believes are more likely to have more risk. In the end, this process could be well worth the effort – if it prevents even a single serious class action (or, more likely, a series of class actions on a particular issue), it will be well worth the investment. It could also have collateral business benefits as well, if the team develops solutions that not only reduce litigation risk but improve customer experience and the company’s image and reputation. In addition, as Herrington points out, the more happy customers you have, the harder it will be for plaintiffs’ lawyers to find one who is willing to be a named plaintiff in a class action. Best in class companies probably already are doing this kind of thing, but maybe not in a comprehensive, ongoing way, and maybe not with lawyers who are focusing on potential class action / mass action exposure as part of the team.