The Enforcement Of Nationwide Class Settlements To Bar Related Class Actions: An Example Of Finality And Preclusion

Article by Roland C. Goss, Phillip E. Stano and Shaunda Patterson-Strachan1

This article was originally printed in the Summer 2004 issue of Class

Actions & Derivative Suits, Volume 14/Number 3.

In Deborah Berardinelli v. General American Life Insurance Company, 357 F.3d 800 (8th Cir. 2004), the United States Court of Appeals for the Eighth Circuit affirmed the issuance of an injunction, originally issued to enforce a nationwide class action settlement,2 to bar class member Berardinelli from prosecuting a new putative class action in state court in New Mexico. While the claims alleged in the complaints filed in the two lawsuits were different, the Court found that the settlement nevertheless encompassed and barred the claims asserted in the later New Mexico action. This article illustrates the impact of the finality and preclusion of nationwide class action settlements on independently filed putative class actions.

I. Life insurance sales practices litigation

Over the past ten years or so, life insurance companies have been faced with a wave of class action lawsuits challenging the manner in which they sell their policies. Berardinelli implicates the resolution of two different challenges to insurance companies' so-called "vanishing premium" and "modal premium" billing practices.

A. "Vanishing premium" class actions

In the early 1990s, "vanishing premium" life insurance lawsuits began to be filed. These lawsuits describe a sales practice in which life insurance is sold on the basis that monies paid as premiums are invested, with the investment account generating sufficient income at some point in time to maintain the policy in force. If the investment income reaches this level of return, the obligation to continue paying premiums supposedly "vanishes."

Vanishing premium lawsuits allege that agents sold such policies pursuant to illustrations which projected investment income, and which showed prospective purchasers when the "vanish" point might be reached. In some instances, the "anticipated" vanish point arrived, but the obligation to pay premiums did not "vanish" because, due to market changes or other factors, the investment income was insufficient to maintain the policy in force. Disappointed policy owners, contending that the sales practice was fraudulent, filed class action lawsuits in state courts and federal courts.

In fact, the term "vanishing premium lawsuit" is a misnomer, since not only does the premium obligation not "vanish," a typical vanishing premium class action lawsuit also alleges sales practice abuses unrelated to "vanish" issues. For example, these lawsuits typically allege that life insurance was inappropriately sold not as life insurance, but rather as an investment, a retirement account or a college funding account, and that new policies were sold as replacements for existing policies without appropriate disclosures. Collectively, these suits are sometimes referred to as "market conduct" suits because they pertain to the way the insurer and/or its sales force markets policies to insureds or applicants. They are further frequently referred to as "traditional" market conduct suits because this collection of allegations was the first of many regarding insurance sales practices.

Virtually every United States domiciled life insurance company with surplus in excess of $2 billion has been sued in either a class action or individual vanishing premium case. Many of these class actions have resulted in class settlements, although class certification was contested and denied in some cases, while other cases have been dismissed or resulted in summary judgment for the insurance company.

B. "Modal premium" class actions

Beginning in 1998, a series of class action lawsuits were filed in New Mexico state court which challenge the sufficiency of disclosures made by insurance companies relating to the manner in which insurance premiums were paid. Commonly referred to as modal premium cases, they involve the practice of "modal billing," whereby an insurance company provides its insured with a choice to pay the policy premium for a policy annually, semi-annually, quarterly, or monthly. These cases allege that the insurer failed to adequately disclose charges or fees associated with modal premium billing or express the resulting price differential as an annual percentage rate.3 Several of these lawsuits have resulted in class-wide settlements.

II. Class actions against General American Life Insurance Company

Like many life insurance companies, General American Life Insurance Company ("General American") was named as a defendant in both vanishing premium and, subsequently, modal premium class actions.

A. Vanishing premium litigation

From 1996 - 2003, General American was named in a number of vanishing premium actions filed in both state and federal courts. On May 28, 1997, the Judicial Panel on Multidistrict Litigation entered an Order establishing a Multi-District Litigation ("MDL") proceeding pursuant to 28 U.S.C. 1407, in the United States District Court for the Eastern District of Missouri, styled General American Life Insurance Company Sales Practices Litigation.4 As a result of transfer Orders, this MDL proceeding eventually included actions originally filed against General American in the Northern District of Alabama, the Central District of California, the District of Colorado, the District of Massachusetts, the Northern District of Mississippi, the Southern District of Mississippi, the Eastern District of Missouri, the Middle District of North Carolina, the Western District of Pennsylvania and the Eastern District of Texas.

Pursuant to a settlement stipulation, the MDL Court entered an Order on August 28, 2000 granting a motion for preliminary approval of a proposed class settlement. Notice of the proposed settlement was provided to the class, and members of the putative class were afforded the opportunity to exclude themselves from the class or file objections to the proposed settlement. A fairness hearing was held on the proposed settlement on December 15, 2000. On December 19, 2000, the MDL Court entered an Order granting final approval to the proposed settlement, as well as a Final Judgment. The approval of the settlement became final when the only appeal, filed by an objector, was dismissed.

The class notice, sent to the putative settlement class members, advised them that if they did not exclude themselves from the settlement class, and the settlement was approved, they would be barred from suing General American for policy-related claims encompassed by the settlement release.

Under the proposed settlement, class members who do not exclude themselves from the class release General American from liability for claims relating to their policies. (The release is discussed in Part 7 of the Notice.) In addition, the Court has entered a preliminary injunction that, among other things, bars...