Insurance Class Actions: Avoiding Pitfalls and Mitigating Risks
As insurers’ face increased exposure for potential class action suits, it is more important than ever to appreciate and mitigate risks.
January 19, 2017
Historically, class actions have been somewhat rare in the insurance world because most insurance claims are highly fact dependent. For instance, if an insured challenges the factual basis for an insurer’s denial of coverage and wins, that ruling is not likely to have ramifications to the insurer beyond that particular case unless those particular facts are common to a number of insureds. But there are several instances where insurers can find themselves vulnerable to class actions; and with increasing use of technology to standardize claims and underwriting decisions, insurers are more exposed than ever to the potential for class action suits.
Class Action 101:
There are generally two ways to defeat a class action case—(1) defeat it on liability or, more often, (2) defeat class certification. If class certification is denied, the case technically continues as an individual case. But as a practical matter, the potential exposure of the individual case is so much less than if the class were certified that the case can often be resolved quickly. One of the best ways to defeat class certification is by showing that the individualized issues in the case predominate over common ones. A class can only be certified under Fed. R. Civ. P. 23(b)(3)—the relevant provision if damages are sought—if “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Thus, if the issue is one that will be decided on the unique, individual facts of a particular case, it is not likely susceptible to a class action. But if the key liability question rests upon a question of law or a common set of facts, the issue could be fertile ground for plaintiffs’ counsel to bring a class action on behalf of all insureds affected by the issue.
Legal interpretations of policy provisions.
The insurance field often has standardized language that is repeatedly used in tens of thousands of insurance policies throughout the country. If a court interprets a policy provision as a matter of law in favor of the insured in a given case, the risk for follow-on class actions against the insurer increases. This was true of the wave of class actions involving the “Three Trade Rule,” where courts ruled that insurers offering replacement cost property coverage were obligated to pay GCOP (general conditions, overhead, and profit) whenever a repair was expected to involve at least three construction “trades.” Thus, whenever there is a broad and new legal interpretation of standard policy terms, an insurer may face pressure to follow that new and insured-friendly interpretation going forward for future claims in that jurisdiction (or clarify or change the language of the policy), and it could be subject to a class action by all of those insureds who had claims denied based on the decision rejecting the traditional more insurer-friendly interpretation. All it would take would be one insured who, within the statute of limitations, was denied coverage based on the insurer-friendly interpretation to follow that new and insured-friendly interpretation going forward for future claims (or clarify or change the language of the policy) to bring suit individually and on behalf of all those “similarly situated” seeking to use issue preclusion affirmatively and you could be facing significant exposure. Further, a cascade effect could be triggered for any other insurers that also use the same standard policy language and apply the same standard legal interpretation.
Liability based on a common set of facts.
Another way that insurers can find themselves in the crosshairs of the class-action plaintiffs’ bar is by having policies or practices that treat a group of insureds identically and in a way that is arguably a breach of a policy or a violation of a statute. For instance, a California court recently granted declaratory relief in favor of a class that alleged an improper use of a depreciation guide that applied straight line depreciation to like-new property in violation of the California Insurance Code. Currently, at least one insurer is facing a class action lawsuit for erroneously calculating rebates required under the Affordable Care Act. Another insurer is facing a class action by denying coverage for wildfire smoke damage where the plaintiff alleges the insurer failed to provide adequate notice of a sublimit that was added to the policy. If the class plaintiffs in these cases are successful in convincing a judge that the common questions predominate over individual ones, in addition to the other class action requirements, the plaintiff’s individual case, could turn into a much more complex and financially significant case.
Mitigating the Risks.
When faced with what seems like a routine coverage dispute, consider whether the dispute, if litigated to an ultimate judgment, could become a basis on which to bring a class action. To minimize class action risk, think strategically about whether to allow a court to rule on a legal interpretation of a policy provision that could have negative repercussions far beyond that individual case. You might be far better off settling on an individual basis rather than risking a bad ruling that could make you vulnerable to claims from a class of everyone denied coverage on the same basis.
Similarly, if an insured complains about an issue that would apply uniformly across a large group of insureds, evaluate it carefully and if remedial action is required, act quickly. If a mistake was made, like miscalculating a rebate or depreciation for instance, be sure to fix it immediately. If the insurer takes steps to affirmatively redress such a mistake, depending on the degree of remediation, it might negate the need for a class action. And if some class counsel decides to assert the case anyway, the insurer stands a strong chance of defeating the class based on the argument that a class action lawsuit is not “superior to other available methods for fairly and efficiently adjudicating the controversy,” as required by Rule 23. A insurer’s willingness to make the insureds whole again absent litigation is likely far “superior” than a class action that adds little to the mix other than a request for attorneys’ fees which could result in the insureds getting even less than they would under a more proactive, out-of-court approach.
Ultimately, the key for insurers to fend off class actions is to avoid a one size fits all approach to handling insurance claims. Counsel for insurers need keep an eye out for and evaluate all cases on their potential for creating a vehicle for a future class action and strategize accordingly.
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