Insurance Class Actions Insider -

Back in May of 2011, I wrote on this blog about a new class action in California against Farmers involving claims of improper application of depreciation on property insurance claims, allegedly in violation of a California statute and regulation that govern application of depreciation (see my May 17, 2011 blog post).  In a similar case against State Farm, a California Superior Court judge has now certified a class.  This class certification ruling potentially could result in the filing of additional class action lawsuits on this issue, and insurers may want to review their practices with respect to the issue presented.

In Doan v State Farm General Insurance Company, Case No. 1-08-CV-129264 (Cal. Superior Ct., Santa Clara County, Mar. 18, 2013), the plaintiffs allege that State Farm failed to comply with a California statute and regulation with respect to adjustment of personal property (contents) claims, by failing to take into account the actual condition of contents items in calculating depreciation.  The plaintiffs allege that State Farm adjusters use a depreciation guide that measures depreciation based on age alone, without taking into account condition or even asking insureds about the condition of their items. 

The California statute and regulation at issue provide as follows:

In case of a partial loss to the structure, or loss to its contents, [actual cash value is] the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less. In case of a partial loss to the structure, a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.

Cal. Ins. Code § 2051(b) (emphasis added).

When the amount claimed is adjusted because of betterment, depreciation, or salvage, all justification for the adjustment shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment, depreciation, or salvage. Any adjustments for betterment or depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property. The basis for any adjustment shall be fully explained to the claimant in writing.

10 C.C.R. § 2695.9(f) (emphasis added).

In its ruling on class certification, the California Superior Court found that certification of an injunctive relief class was appropriate because “Defendant does not adequately address Plaintiffs’ showing that insureds are not provided with a written explanation of how Defendant calculates depreciations for purposes of § 2695.9(f), which requires that the basis for any depreciation adjustment ‘be fully explained to the claimant in writing.’”  (Slip op. at 13.)  With respect to the proposed damages class, the court found that State Farm did not make an attempt to seek information about the physical condition of contents items.  The court found it significant that, based on a small sample of claim files, the plaintiff’s expert concluded that somewhere between 65% to 92% of claim files would have some items that were depreciated solely based on the depreciation guide.  (Id. at 14.)  The court rejected State Farm’s argument that individualized inquiries would be necessary in determining the appropriate depreciation on individual items, on the theory that the plaintiffs could seek to recover only for items that were depreciated solely based on the depreciation guide (and if this turned out to be not doable, the class could be decertified later).  The court also certified a bad faith claim, explaining only that “[a]ssuming commonality on the use of the Depreciation Guide, the issue of bad faith would flow from it.”  (Id.)   The court further concluded that State Farm had failed to present specific evidence that individualized defenses would predominate.  (Id.)

While I expect this decision will be appealed, insurers writing property policies in California might want to pay close attention to this case.  Insurers may also wish to review how they are handling depreciation in California in light of the issues raised in this case.

A recent column by Ron Lieber in the New York Times, “After the Storm: Your Homeowner’s Claim,” predicts that it will take years to settle many insurance claims arising from Superstorm Sandy.  But does it have to be that way?  I was heavily involved in the litigation arising from Katrina, and see some important lessons from the Katrina experience which could be applied to Sandy.

Lieber writes:

There is a sort of honeymoon period that occurs after a big storm like Hurricane Sandy, when insurance executives appear on the local news offering reassuring words. Their brightly painted vans pull into residential neighborhoods amid the standing water and debris. Everyone is hopeful. Handshakes and back-patting all around.

That period is about to end. Prices for roofers and construction materials will rise, disadvantageous parsing of policy language will commence and gangs of class-action lawyers will round up aggrieved clients who still have months of homelessness ahead of them. Many claims will take years to settle.

It happens every time, and so it will with this storm. That’s not to say that a majority of people with insurance claims won’t be satisfied with the check they receive or won’t get one quickly. 

What lessons can be learned from Katrina to try to achieve more efficient resolution of disputes?  Here are a few:

1. Mediations can help avoid lawsuits or resolve them early:  For any readers who are unfamiliar with mediation, it is a process whereby a neutral person, typically a lawyer, judge, or former judge, meets with the parties (and their lawyers if they have hired lawyers) and tries to help them resolve their dispute.  The mediation can offer the parties an opportunity to air their views in a confidential setting, receive a neutral opinion on the strengths and weaknesses of their position from a disinterested, neutral mediator, and attempt to resolve the dispute.  The Louisiana Department of Insurance established a mediation program for Katrina and Rita claims.  Florida has a similar program for mediations to resolve property insurance claims, as provided for by statute and rule (also see the brochure used by the Florida Department of Financial Services, which regulates insurance companies).  It does not appear that either New York or New Jersey currently have this type of program specific to insurance claims, but they might establish them, or courts can provide for early mediation once lawsuits are filed.  Insurers also can implement mediation programs on their own and sometimes did that in the Katrina and Rita context.    
2. Appraisal potentially can achieve faster resolution of disputes over valuation.  Homeowners’ policies generally contain an appraisal provision under which, if there is a dispute over how much it costs to repair covered damage, this kind of dispute can be resolved informally at either party’s request.  The party requesting appraisal appoints an appraiser, the other party also appoints an appraiser, and the two appraisers attempt to reach agreement.  They choose an umpire to resolve any issues they cannot agree upon (and if they cannot agree on an umpire, a court can appoint one).  This process, however, cannot be used (except by special agreement of the parties) to decide disputes over coverage, such as the interpretation of the insurance policy.  Courts have taken different approaches on the question of whether appraisers can decide whether particular items of damage were caused by a covered cause of loss (such as flood) or an excluded cause of loss (such as wind), or whether that is an issue that must be resolved in court.    
3. Class action suits are likely to waste time and money on both sides.  I say this as a lawyer who is paid to defend these suits, but the reality is that almost none of the Katrina and Rita insurance class actions were certified, so they did not achieve any efficiency.  This is because courts concluded that these claims have to be resolved on a case-by-case, claim-by-claim basis.  So the class action device is unlikely to achieve efficiency in resolving these disputes, but that does not mean plaintiffs’ lawyers will not file them.     
4. Resolving the key issues in court early, and in a consolidated fashion, can speed up dispute resolution.  In the Katrina litigation, there were two major issues which required resolution:  (1) whether the word “flood,” as used in flood exclusions, was limited to purely natural events (the insureds’ argument being that the inundation of New Orleans was “man made” due to the failure of levees and floodwalls); and (2) whether a Louisiana statute known as the valued policy law required an insurer to pay the total policy limit where a structure was a total loss as a result of a combination of covered wind damage and excluded flood damage.  Both of these issues were resolved in a consolidated fashion, and relatively early in the litigation, in the U.S. District Court for the Eastern District of Louisiana and then the U.S. Court of Appeals for the Fifth Circuit.  The early resolution of these issues helped speed up the settlement of individual cases.  By consolidating cases implicating these two critical issues, the Eastern District of Louisiana was able to avoid the possibility of various judges having to decide the same issue and potentially reaching conflicting results.  Neither of these particular issues will be implicated by Sandy, but a similar process potentially could be used to resolve key issues that arise. 

Some readers have asked for an update on the status of Boynton v. Alacrity Services, LLC, a putative class action filed in July involving a preferred contractor program, which was mentioned in my July 16, 2012 blog post.  The case was removed to the U.S. District Court for the Northern District of Ohio.  In September, both Alacrity and Allstate filed motions to dismiss. 

Alacrity's motion to dismiss brief argues that:  (1) under the terms of the insurance policy, Allstate could choose to repair the property rather than paying for damaged property, and therefore no money paid by Allstate to Alacrity could be owed to the plaintiffs; and (2) the plaintiffs’ claims are time-barred under the contractual suit limitation provision in their Allstate policy.  Alacrity further argues that the plaintiffs lack standing, and that any payment made to Alacrity could not have impaired the plaintiffs’ rights under the Allstate policy, which they can pursue to the extent they have any such contractual rights.  Alacrity cites the decision in Smith v. Alacrity Services, LLC, 778 F. Supp. 2d 606 (D. Md. 2011), in which a similar putative class action against Alacrity was dismissed.  In that case, the judge wrote that the plaintiff’s claim “that whatever Allstate paid third parties for repairs to her house was her money, rests on pure imagination.”

Allstate's motion to dismiss brief argues that: (1) the plaintiffs’ claims are time-barred under the one-year contractual suit limitation provision in their policy; (2) there is no legal basis for plaintiffs to recover amounts paid to Alacrity; and (3) if there is a dispute over the cost of repair, it must be resolved by n appraisal under the policy’s appraisal provision.  Allstate also argues, in the alternative, that if any claim survives dismissal, the class allegations with respect to non-Ohio putative class members should be dismissed or stricken.

The plaintiffs’ opposition briefs are a bit rambling and difficult to summarize, but if you want to read through them, here is the opposition to Alacrity's motion to dismiss and opposition to Allstate's motion to dismiss.

At this point I don’t know when a decision might be issued on these motions.  Stay tuned.

Some insurance companies have preferred contractor programs under which the insurer, or a party they contract with, develops a network of contractors who are available to repair property damage for insureds.  The insurer typically subjects contractors to a background check of some kind before they are included in the network, and may require contractors in the network to adhere to certain pricing requirements.  In some jurisdictions, statutes or regulations allow insurers only to make a list of preferred contractors available to insureds, whereas in other jurisdictions insurers can offer an incentive for insureds to use preferred contractors, such as by receiving a reduction in their deductible or receiving some kind of guarantee with respect to the repairs (either from the insurer or the contractor).  The goal of these programs is to improve the quality of repairs and keep costs down, thereby benefitting both insureds and insurers. 

A recent class action filing in Ohio state court against Allstate Indemnity Company and Alacrity Services, LLC alleges that Allstate’s preferred contractor program is purportedly in violation of Ohio law.  In Boynton v. Alacrity Services, LLC.pdf, CV 12 786626 (Ohio Ct. Cm. Pleas July 9, 2012), the plaintiffs allege that Allstate required them to use one of the contractors in its preferred contractor program, and that the work was performed poorly.  They allege that Allstate has a relationship with Alacrity whereby Alacrity manages the network of preferred contractors, Allstate makes claim payments directly to Alacrity, and Alacrity retains a percentage of the claim proceeds (allegedly 2.8%) for its services in managing the network.  Plaintiffs claim that by allowing Alacrity to deduct this 2.8%, Allstate is wrongfully passing on the cost of Alacrity’s services to insureds, and that this procedure was not properly disclosed to them.  The complaint seeks certification of an Ohio statewide class and “potentially” a nationwide class.  The complaint pleads various theories of relief, including breach of contract, conversion, restitution, constructive trust, declaratory relief and unjust enrichment.

It’s too early to tell whether this case will gain any traction.  It seems to me that, assuming the facts pleaded are true, the 2.8% withholding could be properly characterized as compensation from the contractor to Alacrity. 

The Georgia Supreme Court recently held that diminution in value of real property is potentially covered under a property insurance policy in addition to the cost of repairs.  See Royal Capital Development LLC v. Maryland Casualty Company, No. S12Q0209, 2012 Ga. LEXIS 501 (Ga. May 29, 2012).  This type of diminution in value potentially could result if a property is worth less because of “stigma” because it has suffered a loss.  It seems somewhat counterintuitive that such a loss would be sustained because in many instances a property that has been repaired with newer, more modern materials is going to be worth more to a buyer.  Most buyers of homes or office buildings would rather have a property that was recently renovated than one that was last updated 10 or 20 or more years ago.  But there may be some concern, in some instances, that a property that was damaged and repaired might have some underlying problem that might reemerge later, and in some instances that might result in a decrease in market value.  Most courts, however, have not recognized this as a recoverable loss under property insurance policies.

In Royal Capital, the Georgia Supreme Court answered a certified question from the Eleventh Circuit.  The court extended its prior decision in State Farm Mut. Auto. Ins. Co. v. Mabry, 274 Ga. 498 (2001), which held that diminution in value was covered under an auto insurance policy, to the realm of property insurance.  (Some courts in other jurisdictions have rejected the recoverability of diminution in value damages in the context of auto insurance, but State Farm did not ask the court to consider overruling Mabry.)  In Royal Capital, the court held that “our ruling in Mabry is not limited by the type of property insured, but rather speaks generally to the measure of damages an insurer is obligated to pay.”  The court further explained that “under Georgia law, cost of repair and diminution in value can be alternative, although often interchangeable, measures of damages with respect to real property.”  The court, however, appeared not to answer the ultimate question of whether the policy at issue covered diminution in value, explaining that “whether damages for diminution of value are recoverable under Royal Capital’s contract depends on the specific language of the contract itself and can be resolved through application of the general rules of contract construction.”  It appears that the application of the Georgia Supreme Court’s decision to the policy language will be left for the federal courts to resolve.

The Mabry decision led to the filing of a series of class actions against auto insurers in Georgia (as well as other states) regarding coverage for diminution in value.  For example, see my blog post from January 2012 about a Washington Supreme Court decision in an auto insurance diminution in value class action.  It is possible that Royal Capital may spawn some similar class action filings against homeowners’ insurance companies.  Now is the time for insurers to focus on how best to apply the decision in Royal Capital and how to do so in a manner that seeks to protect against potential class action exposure. 

 Royal Capital raises a number of issues that insurers may need to answer, such as: 

• How does the Royal Capital decision apply to our company’s policy language? 
• Should our policy language be changed in any respect?
• If Royal Capital applies to my company’s policies, how can an adjuster determine whether there will be diminution in value of a property after repairs are completed?  What factors should be considered in making that determination?  When can (or must) that determination be made?
• How can the extent of any diminution in value be calculated? Under what circumstances should guidance of a real estate appraiser be sought in determining whether there is diminution in value or calculating the amount thereof?
• If the policy provides for payment on an ACV basis until repairs are completed, does the potential for diminution in value need to be considered at the actual cash value (ACV) stage of the adjustment process?  If so, how can that be done?  Should it be treated differently at the replacement cost value (RCV) stage?
• Are there any other jurisdictions in which the courts have found coverage for diminution in value under property policies?  Should any new procedures adopted in Georgia also apply to any other jurisdictions?

In addressing these kinds of questions, it is important to think about how best to avoid class action exposure.  I discussed strategies for reducing class action exposure in my November 21, 2011 blog post.  Strategies to reduce class action exposure often involve avoiding the use of strict, bright-line rules for front-line claim professionals and handling each claim separately, on its merits, with discretion.  This can be somewhat counterintuitive because company management wants to ensure they are treating their customers fairly and treating similarly-situated customers in a similar fashion.  Front-line claim professionals also sometimes like bright-line rules because they think it makes it easier for them to do their jobs or avoid criticism from their managers.  But treating all insureds who fit into a particular category in the exactly same way is precisely what plaintiffs’ lawyers are going to pounce on when they are trying to certify a class action, because that makes it easier for them to argue that the court can decide all of the proposed class members’ claims in one trial.  When company policy requires decisions to be made in a more nuanced and case-by-case manner, without bright line rules, it is much harder for classes to be certified.  This can also potentially achieve a greater degree of fairness for a company’s customers because each claim is considered separately on its merits and factors can be considered that might not be thought of in developing “rules.”  It’s the same kind of debate that has occurred over sentencing guidelines in criminal cases, with some legislators promoting the use of hard-and-fast rules so that people who commit the “same” crime receive the same sentence.  Many judges do not like these rules because they feel they result in unduly harsh sentences for some defendants who do not warrant such harsh punishment, and they feel that individual case-by-case sentencing is preferable.

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).

This week there has been some buzz in the insurance industry media and Florida media about a new class action filing against Citizens Property Insurance Corporation, the state-sponsored property insurer of last resort in Florida, and Xactware Solutions, Inc.  The case, Freitas v. Citizens Property Insurance Corporation, was filed in the Circuit Court of the 6th Judicial District, in Pasco County, Florida (Case No. 512012CA0799WS).  The Freitas v Citizens Property complaint.pdf alleges that Citizens purchased the 360Value software from Xactware, and purportedly manipulated the software to inflate the replacement cost value of homes, thereby inflating the premiums charged.  The proposed class is all Citizens policyholders who purchased a policy where Value360 was used to determine replacement cost.  The sole claim alleged in the complaint is for violation of Fla. Stat. § 627.351(6)(a)(1), which sets forth the legislative purpose for the creation of Citizens, including that Citizens “shall strive to increase the availability of affordable property insurance in this state . . . .”  The case also seeks injunctive relief requiring Citizens to stop using 360Value or modify its use so that determinations of replacement cost are more accurate. 

According to Tampa Bay’s Channel 10, Citizens apparently has changed its practices in response to the lawsuit and is now allowing insureds to use their own estimates of replacement cost.  Channel 10 also reports that the plaintiffs’ lawyers who filed this suit are planning to sue other insurance companies (not yet identified, except that Universal Property Insurance is mentioned in an article). 

A couple thoughts: 

• The Florida statute that is cited as the sole basis for the complaint against Citizens and Xactware appears to be a hortatory statute regarding the general purpose and intent behind the creation of Citizens as a state-created entity.  Does this statute really create an enforceable legal obligation, let alone a private right of action that insureds can bring suit under?  How does it create any basis for a suit against Xactware?  How could it be the basis of a claim against a private insurer other than Citizens? 
• Given that Florida has a valued policy law, assuming the allegations were true, why would an insurer encourage (or require) overinsurance?  In the event of a covered total loss, a valued policy law requires payment of the full policy limit, and in that respect is intended to create a strong incentive for insurers not to allow overinsurance (and the moral hazard it creates).  If Citizens is charging much more than appropriate for premiums, it also will be paying out much more for total losses.   

In any event, given the attention this new filing is getting, insurers that use Xactware’s 360Value or other similar software should take a careful look at how they are using it in light of these allegations.

The hot topic in the insurance class action world this week is the Louisiana Supreme Court’s decision, by a 4-3 vote, to reinstate a $92 million verdict against Louisiana Citizens Property Insurance Corporation, the state-sponsored insurer of last resort, in a bad faith class action.  Remarkably, Louisiana Insurance Commissioner Jim Donelon (who was just recently re-elected) has spoken out strongly against the state supreme court’s decision, issuing a press release criticizing the decision.  He points out that every Louisiana policyholder will have to pay for this with assessments on their premiums because Louisiana Citizens is the state-sponsored insurer of last resort.  An article in Insurance Journal reports that this verdict is over $100 million with interest.  Louisiana Citizens has only $140 million in cash on hand according to the insurance commissioner.  An article in PropertyCasualty360 says that Donelon stated the exposure could reach $200 million if more policyholders are added to the case.  An article on nola.com says that Donelon will file papers with the court in support of a rehearing. 

Oubre v. Louisiana Citizens Fair Plan, No. 2011-C-0097, 2011 La. LEXIS 3014 (La. Dec. 16, 2011) involved a Louisiana statute that provides that an insurer must initiate loss adjustment within 30 days after notice of a catastrophic loss (and 14 days for non-catastrophe claims).  The penalty for failing to comply with this requirement is “an amount not to exceed two times the damages sustained or five thousand dollars, whichever is greater.”  La. Rev. Stat. 22:1220(C) (later recodified as section 22:1973).  The case law under this statute says that initiation of loss adjustment can be simply calling the insured and scheduling an inspection.  The plaintiffs claimed, and were ultimately able to prove through records obtained from Louisiana Citizens, that it did not even call the insured to schedule an inspection on many thousands of claims within 30 days after Hurricanes Katrina and Rita.  (There were areas that adjusters could not access within 30 days, but it appears that all they would have had to do to comply with the statute was schedule an inspection for some later date.)  The trial court certified the class, granted summary judgment in favor of the plaintiffs and awarded a penalty of $5,000 each on over 18,000 claims, totaling over $92 million before interest.  The intermediate appellate court reversed, ruling that a showing of bad faith conduct on each individual claim was required to prove a statutory violation.  But the Louisiana Supreme Court reversed the appellate court and reinstated the verdict. 

The Louisiana Supreme Court majority concluded that this statute on its face provides for an automatic, mandatory penalty for failure to initiate loss adjustment within the 30 days.  No showing of bad faith conduct was required (the three dissenters would have required such a showing).  The court held that insureds did not need to prove that they were harmed by not getting a call from an adjuster until say the 31st  or 35th or 40th day after they gave notice of a claim.  The fact that Louisiana Citizens had issued checks to its insureds for $1,500 for additional living expenses (ALE) immediately after the storms did not constitute initiation of loss adjustment, according to the court, because the company required insureds to sign a document stating that this was an advance and would have to be paid back if the claim was denied.  The court also held that $5,000 was the cap on the penalty for each  individual violation where no actual damages were proven.  The trial court has discretion to award less, but the supreme court ruled, without any explanation, that the trial court did not err in awarding $5,000 on each individual putative class members’ claim. 

This decision should be a wake up call for the industry.  These kinds of automatic statutory penalties for technical violations can potentially result in very large exposure in a class action context, as this case highlights.  (And, as the U.S. Supreme Court held last year in Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 130 S. Ct. 1431 (2010), even if a state statute does not permit a class action for a particular statutory violation, Federal Rule 23 may allow a class action in federal court because the federal rules control.)  Although it is understandable that Louisiana Citizens had never seen anything like Hurricane Katrina and had difficulty staffing the massive amount of claims it received, it would not have taken very much for it to avoid this exposure if it had mobilized more quickly.  Even if Louisiana Citizens had issued the ALE payments without reserving the right to get the money back (are they really going to pursue their insureds for $1,500?), the court suggests they may have avoided this result. 

I would not bet on the state supreme court overturning this on rehearing.  The justices must have known the impact this would have on the state, given that every policyholder in the state pays a surcharge on their premium when Louisiana Citizens has a deficit.  I doubt the insurance commissioner will change a justice’s mind at this juncture.  I’m pretty familiar with the Louisiana Supreme Court from my Katrina work.  This is a surprising result given that the court has been middle-of-the-road and ruled in favor of the insurance industry on the flood exclusion, Valued Policy Law and other issues.  It looks like Justice Clark was the swing vote on this case.  In some of the other cases he has voted with Justices Victory, Weimer and Guidry who were the dissenters here. 

One thing that troubles me here and Louisiana Citizens might have a chance at prevailing on rehearing is that the state supreme court did not at least send the case back to the trial court for a re-examination of whether a $5,000 penalty was fair on each individual claim.  If an insured gets a call from their adjuster one day late (or even three or five or ten), does that really warrant a $5,000 penalty?  That seems grossly unfair for a minor technical violation, particularly given the size of the penalty when multiplied by thousands of class members.  It appears that Louisiana Citizens also challenged the constitutionality of that award under federal due process, although the state supreme court did not take up the constitutional issue.  I think that issue might have a shot at U.S. Supreme Court review if it has been adequately preserved in the lower courts.

Several notable recent class action filings against insurers have come across my desk (or computer screen) and seem worthy of interest to readers of this blog.  I will summarize and comment briefly on them.  If you’d like a copy of any of the complaints, just e-mail me.

• Use of Staff Counsel:  In Golden v. State Farm Mutual Automobile Insurance Company, Cause No. 02D01-1110-PL-363 (Indiana Superior Court, Allen County; removed to federal court), the plaintiff alleges that State Farm improperly fails to disclose to its insureds that it may use staff counsel to represent them in defending lawsuits under liability insurance coverage.  There are two proposed classes:  (1) insureds in Indiana that have purchased or renewed a policy with State Farm within the last two years, containing liability coverage; and (2) insureds in Indiana who were represented by State Farm staff counsel within the last two years.  The causes of action are breach of an alleged duty to disclose the use of staff counsel (at the time of policy issuance or renewal), breach of a duty of good faith and fair dealing by not disclosing the use of staff counsel at the time of policy issuance or renewal, unjust enrichment, and injunctive relief barring State Farm from continuing to issue or renew policies without disclosures regarding staff counsel, and barring State Farm from assigning staff counsel to represent insureds where no prior disclosure was made.  It will be interesting to see if this complaint survives a motion to dismiss.  There may not be any legal duty to inform insureds about the use of staff counsel absent a statute or regulation requiring it.  It also seems unclear that anyone is injured by a failure to disclose at the time the policy is issued or renewed, particularly if they have never been sued.  The complaint seems to suggest that the use of staff counsel is somehow a new or unusual practice not followed by other insurers.  I’m not sure what the practice has been in Indiana, but as far as I know all of the major insurers have been using staff counsel to defend in the vast majority of jurisdictions for some time (except for a few jurisdictions where use of staff counsel is prohibited).  The complaint also seems to suggest, without articulating any basis, that staff counsel is somehow inferior to private outside counsel.  On the other hand, there is probably no harm in disclosing the use of staff counsel, and some insurers probably are doing that.  It’s hard to imagine that people buy their auto or homeowners’ policies based on whether the insurer is going to use staff counsel in defending them in a lawsuit.
• Wildfire Claims:  In Abed v. Allstate Ins. Co., Case No. BC 473460 (Cal. Super. Ct., Los Angeles County), the named plaintiffs assert a variety of claims against Allstate arising from their claim for smoke damage to their house from the “Station Fire” in Southern California in August of 2009.  They assert various individual claims but only one cause of action on behalf of a putative class, alleging that Allstate’s policies failed to comply with California law on appraisal, and the efficient proximate cause doctrine.  The appraisal-related claim focuses on a provision in the California standard fire insurance policy providing that “In the event of a government-declared disaster, as defined in the Government Code, appraisal may be requested by either the insured or this company but shall not be compelled.”  Cal. Ins. Code § 2071.  The plaintiffs assert that the “Station Fire” was a “government-declared disaster” within the meaning of this provision.  They claim that Allstate improperly sought to compel a mandatory appraisal, and the appraisal clause in its policy failed to include this sentence.  The efficient proximate cause claim is a bit difficult to discern from the complaint.  That doctrine applies where a loss has more than one cause, and it appears that the claims at issue here were attributable only to the wildfire.  There is no suggestion that I can identify of another cause.  On the appraisal issue, although I think it involves the kind of individual issues that would not be appropriate for class treatment, insurers may want to check into their practices in California with respect to appraisal of claims for government-declared disasters given the unusual statutory language.
• Depreciation on Auto Claims:  In Silvin v. Geico General Insurance Company, Case No. 1:11-cv-24128-CMA (S.D. Fla.), the plaintiff seeks to certify a nationwide class on the question of whether a particular Geico policy form allows for deduction of “betterment” or depreciation on auto claims under either comprehensive or collision coverage.  The policy language that is quoted in the complaint does not appear to make any reference to a deduction for “betterment” or depreciation.  It will be interesting to see what happens with this case.  This also seems like an area in which insurers may want to check what their policies say and what their practices are.

The California Court of Appeal recently held in a putative class action that trial courts have discretion to defer an appraisal (which is similar to arbitration but limited to resolution of the amount of a property insurance loss) until after resolution of a declaratory judgment claim.  The court did not address what impact that may have on class certification proceedings, if the trial court chooses to defer an appraisal. 

In Doan v. State Farm General Insurance Company, the plaintiff brought a putative class action alleging that State Farm improperly calculated depreciation on property insurance claims.  The allegations regarding depreciation were similar to the allegations in a class action against Farmers Insurance that I recently posted about.  The trial court granted State Farm’s demurrers (equivalent to motions to dismiss) on the grounds that the plaintiff failed to plead that he had submitted his claim to appraisal under the policy.  On appeal, the only issue raised was whether the plaintiff had a right to obtain a declaratory judgment with respect to the legal requirements for applying depreciation before submitting his claim to appraisal. 

The court of appeal assumed (in footnote 6 of the opinion) that under California’s statute requiring use of the standard fire insurance policy, an appraisal is mandatory if there is a dispute over the amount of loss.  The court concluded that: (1) appraisal was not an exclusive remedy where California also allows a party to seek declaratory relief; and (2) a trial court has discretion on whether the appraisal or the declaratory judgment claim should go first.  The court relied in part on Kirkwood v. California State Automobile Association, 193 Cal. App. 4th 49 (2011), which reached a similar result.   The court, however, did not give trial courts much guidance in exercising their discretion, explaining that “there is a strong policy favoring arbitration . . . [b]ut there is also a strong policy favoring declaratory relief,” and “[a]nother consideration is judicial economy.”  The case was remanded for the trial court to “exercise its discretion to consider whether and when declaratory relief should be granted.” 

What is missing from this opinion is any discussion of the fact that this case is a putative class action, or how trial courts should exercise their discretion in a putative class action.  A trial court might conclude that, rather than undergoing time consuming and costly proceedings on class certification, the inexpensive and swift appraisal process, which might completely resolve the dispute between the named plaintiff and the insurer, should take place first.  Alternatively, would there be a mechanism for both parties to obtain a ruling on the merits of the declaratory judgment claim before the parties conduct class discovery and class certification motion practice?  Such a ruling could not bind members of a putative class but might be the more efficient course of action. 

In Taranto v. Louisiana Citizens Prop. Ins. Corp.(pdf), the Louisiana Supreme Court ruled, in a 5-2 decision, that the filing of a proposed class action lawsuit against an insurance company extends the time to bring suit for all members of the proposed class under suit limitation provisions in homeowners’ policies.  (The time to sue was originally one year under most policies but had been extended, with respect to Katrina and Rita claims, by the Louisiana Legislature.) 

The central issue in the case was how you interpret the term "liberative prescription" in Article 596 of the Louisiana Code of Civil Procedure.  Under Article 596, "liberative prescription" is "suspended" when a proposed class action is filed.  "Prescription" is essentially the Louisiana term for what the rest of the country calls a statute of limitations.  When "prescription" is "suspended" it means that the time to sue stops running while the proposed class action is pending, but, when the time starts running again, you count the time that ran before the proposed class action was filed.  So if a proposed class action was filed two days before the deadline, when the suspension stops running (as I'll discuss further below), individual members of the proposed class would have only two days to sue.  But if the proposed class action was filed about a year before the deadline (which some Katrina cases were), the homeowners would have another year or so to sue when the suspension stops.

The debate within the court centers on whether "liberative prescription" refers only to a statute or also refers to a contractual limitations period.  In my view, the plurality opinion of Justice Johnson and the concurring opinion of Justice Weimer (joined by Justice Clark) stretch a bit to find that a contractual provision is really equivalent to a statute.  Even though parties to an insurance contract were allowed under Louisiana law to select any time period from 1 year up to 10 years, the court says that is really no different from a statutory limitations period because the legislature has placed bounds on both ends.  But there are many different ways in which statutes and insurance department regulations place limitations on various different types of insurance contract provisions.  Would the court hold all of those provisions are in effect statutory and not really contractual?  I doubt it.  The dissent of Justice Victory seems to have the better of that argument.  The majority may have been concerned about whether a different result would place Louisiana out of the mainstream on class action tolling, see American Pipe & Constr. Co. v. Utah.  But there is little federal law on the issue in Taranto of whether class action tolling applies to contractual provisions as opposed to statutory ones.

Taranto leaves two questions without a clear answer:

1. Article 596(3) requires that the suspension of the time to sue does not stop until notice is given to the proposed class members that a proposed class action has been dismissed or class treatment has been denied.  This is unique -- federal law does not require this and I am not aware of any other state rule with a similar requirement.  Does the publication of a court decision constitute adequate notice, or is something more required?  If more is required, what is required -- publication in a newspaper or on the web?  Personal mailings?  And does a court have to approve the notice?  And who pays for it? There does not appear to be a crystal clear answer to this in the code itself, or in Taranto or other case law.  There likely will be further litigation on this issue.  It seems quite unfair to require defendants who have successfully defeated an unsuccessful (or, in some cases, frivolous) proposed class action to pay for any type of costly notice.  And in some cases the proposed class is so badly defined that it will be difficult to identify to whom notice must be given.
2. Does this notice requirement apply where the class action was dismissed in federal court, where the Federal Rules of Civil Procedure apply and do not require that notice be given of a dismissal of a proposed class action?

Stay tuned -- the resolution of these issue will be critical in determining to what extent Taranto has opened the floodgates for more Katrina and Rita insurance lawsuits.