Insurance Bad Faith Class Action: Louisiana Supreme Court Reinstates $92 Million Verdict
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.