Thoughts from the Trenches: Pragmatic Reflections on The Insurance Class Action

by Jacqueline Jauregui

I. Introduction

In the last ten years class actions against insurance companies have proliferated, in part because of a variety of trends in the insurance industry. The very tools insurers have used to make their operations more efficient, competitive and economical can create the potentially uniform situations that invite class action litigation. The same computer programming that makes estimating or resolution of claims swifter and more accurate introduces a uniformity that leaves insurers vulnerable to class action suits. The manuals and training programs companies develop to enhance the quality of their sales or claims employees' service to existing and potential policyholders can leave insurers open to class action suits if practices taught in the training or manuals come into question. Uniform policy language, uniformly interpreted, is of course susceptible to class treatment as well. Finally, claims practices designed to keep overall consumer costs low, like the use of after market auto parts, have resulted in a welter of class actions nationwide.

The specter of the "runaway" class action disquiets in-house counsel and company management. However, for every runaway, with good cause, there are a host of class actions resolved in a much less dramatic fashion. This paper will suggest some practical ways to keep the class actions you defend or manage in the second category.

II. The Background: Basics of Class Action Litigation

Before turning to the particulars of prevention, litigation and resolution of these cases, a brief review of the basics of class action litigation provides a frame of reference. United States District Courts, under Federal Rule of Civil Procedure 23, as well as state courts in most jurisdictions, permit litigation using the device of a class action. The elements in most jurisdictions are similar. The crux of the device is a representative plaintiff or group of plaintiffs who sue on behalf of themselves and other plaintiffs in similar circumstances to address a common problem. Through the process of class "certification," a court must determine whether the case is properly treated as a class action.

In the certification process, one core issue is whether the claims of the named plaintiffs and those of the class on whose behalf they sue present common issues of law and fact.1 Although this "commonality" is crucial, the court is required to examine other issues as well: are there too many potential plaintiffs to join in one lawsuit (numerosity);2 will the named plaintiffs adequately represent the interests of the class;3 are the named plaintiffs' claims typical of those of absent class members (typicality);4 can the attorney or attorneys who seek to represent the class do so adequately;5 is use of the class device the best way to address the claims at issue (superiority);6 can class members be identified (ascertainability);7 and will any class ultimately certified be manageable for purposes of administration (manageability).8 In the insurance context, the requirement of commonality is most likely to prove pivotal.

Two practical realities dominate insurance class action practice: risk and reward. First, for an insurer of any size, in a case where a class has been certified, the downside of proceeding to trial is significant. Indeed, one Federal appellate panel has described consumer class actions as creating an opportunity for a form of "legalized blackmail."9 Most class actions where a case is certified settle on terms unfavorable to the defense. This is because the risk of proceeding to trial on liability with a class of tens if not hundreds of thousands of plaintiffs is so substantial.

Second, because the sums of money most class members stand to recover are comparatively minor, counsel for the potential class has the greatest financial stake in the outcome. As one in depth study aptly put it, consumer class actions are "clientless" cases, where there is little or no constraint of class counsel's activities by any client with a major financial stake in the outcome.10 While certain safeguards exist to prevent exploitation of the class by class counsel, the practical reality is that the financial interests of class counsel play a dominant role in these lawsuits.

At least in theory, the court plays a major role in a class action, particularly in approving any settlement. In the author's experience, where there are no significant objections, many courts will routinely approve negotiated class settlements.

III. Prevention: The First Line of Defense

In-house counsel and claims managers who supervise individual extra contractual or sales practices cases, and outside counsel working with them, are best positioned to spot problems that could lead to class actions before they fester.

According to one authoritative study, a class is certified in sixty-four to ninety-three percent of non-securities class actions seeking damages.11 Clearly, an ounce of prevention here can be worth many pounds of cure. Counsel supervising individual cases need to know how to spot issues with class action potential. With respect to claims practices, one good question to consider is whether there is a computer program in the mix. The software that property insurers use to estimate home repair costs, the programs that health insurers use to detect "unbundled" medical bills and to "rebundle" charges are used in the resolution of tens, if not hundreds of thousands of claims each year. A problem with the accuracy of such a program or a widespread misapplication of it will spread at a rapid fire pace. For instance, if claims representatives using estimating software to determine the cost to repair building damage consistently fail to add sales tax to estimates because they mistakenly believe sales tax is already incorporated in the database prices, the potential mischief is substantial.

Another "yellow flag" is whether a sales or claims practice that causes concern is incorporated into company training materials or regular training programs. Whenever a sales or claims process is "top down," that is, driven by a central authority, the likelihood of a uniform practice is high. While this can be an obvious boost to quality and efficiency from a business perspective, if there are legal problems lurking in that conformity, the damage can and will be multiplied many times over, inviting class action treatment.

Vigilant outside counsel should always call problems of this nature to the client's attention, explaining the risks inherent in class action treatment. This gives the client the maximum opportunity to nip the problem "in the bud." In-house attorneys and litigation managers need to be attuned both to spotting these issues and to emphasizing to business people within the company the risks inherent in uniform practices that are not as accurate and fair as they should be.

IV. Time is of the Essence

Most class action litigation exists on its own form of "rocket docket." Setting aside the nightmare of a class suit in a venue where what is dryly dubbed "drive by" certification is practiced, even in a desirable forum like federal court, class certification can happen with head spinning speed. A Federal Judicial Center Study found that most class certification hearings took place within three to four months after class actions were filed.12 This means that selection and retention of defense counsel, bringing counsel up to speed on the facts and issues and developing an overall strategy has to happen at...