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

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.

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.

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 lightning speed. This is because the key briefing will be filed within weeks of counsel’s retention. Unlike most litigation where trial is the ultimate goal on which counsel and client must focus, class certification is the crucial watershed in these cases. Once a class is certified, class counsel has substantial leverage over the defendant, making resolution far more costly and difficult.

So, with complaint in hand and counsel retained, what steps need to be taken quickly? Opposing class certification without an overall strategy is like driving across the country without a map. Maybe you will get where you want to be, but odds are you will not. In order to develop an overall strategy, this author strongly recommends an early, in depth evaluation of the class issues and the merits. This evaluation in some ways is the same analysis any major litigation requires, but with the added dimension of class certification and the distinct issues it raises.

In cases alleging purportedly improper practices in the adjustment of a certain type of claim, detailed interviews with experienced field personnel can be a key element of the evaluation of both the class aspects and the merits of the case. In a surprising number of cases these interviews quickly establish that the claimed practices simply do not routinely occur. Many savvy plaintiffs’ class action attorneys, when presented with evidence of such a situation, will dismiss a case rather than invest their time and energy in a "poor" case. This is particularly so in federal court where there is a real risk of Rule 11 sanctions.¹³

On a less sanguine note, on several occasions in the author’s practice early in-depth interviews yielded information that made liability, a strong likelihood of class certification, and the risk of punitive damages against the defendant abundantly obvious. As with any case, the sooner the defendant learns unpleasant facts like these, the better chance there is of an early resolution of a case that has little likelihood of improving.

One aspect of the evaluation that is different in class actions is the extent to which there can often be wide variations between what the "top" thinks is going on and what the rank and file employees or agents in the field actually do. Home office claims, underwriting or sales management may have a firm belief about a process or practice, which is correct in theory, but not actually followed in the field. Accordingly, it is crucial to talk with a variety of employees at different levels within the company to see what they believe the facts are. One helpful way to choose interviewees is to ask managers in several areas to make two or three of their strongest performers available for confidential interviews. Presumably, those are the employees whose activities should be closest to what the field thinks is correct.

For instance, if top management tells you the company updates computer data regularly to insure that computerized pricing is up to date and accurate, do the updates actually happen? If there are specific accepted sources of computer data, are these in fact used? If so, do the people in the field find that the data with which they are supplied meshes with the reality of what builders, medical care providers, or other vendors of the computer-priced service actually charge? If sales management insists that everyone has been trained to use particular disclaimers, are they in fact used? Does the training actually accomplish what management believes it does? This "reality gap" can provide fertile ground for counsel for a putative class to develop liability where senior management may be sincerely convinced there can be none.

The potential advantages of early scrutiny of the individual claims of the class plaintiff should not be overlooked. For instance, in one group of "claims practices" class actions the author defended, an in-depth review of the claim files of the purported class representatives rapidly demonstrated that these individuals had not themselves been subjected to the alleged practices. With this information in hand, the defense was able to obtain a stay of all discovery, other than that related to the class plaintiffs’ individual claims, to determine whether their claims were typical. This quickly resulted in a dismissal of all class allegations in four different lawsuits.

All of this differs little from the careful strategic evaluation that needs to be done in any significant lawsuit. The key difference is that class issues also need to be evaluated at the outset as well. Information about "commonality" and "typicality" issues can often be developed in the same field interviews used to evaluate the merits. Be alert in the interview process for potential declarants who can help resist class certification.

Facts about whether a class will be ascertainable or manageable often need to be developed through employees knowledgeable about the company’s information technology systems. Whether and how information is coded in the company’s computers is often pivotal to determining whether a class can be identified through the running of a simple report, or whether painstaking, costly sampling or review of individual paper files is required. For instance, many medical claims are adjudicated entirely by computer, through the use of procedure codes and diagnostic codes. With provider information and patient information tracked by computer, it is generally a modest undertaking to determine, for example, what hospitals in Nevada submitted claims in 1999 for delivery by caesarian section. If those hospitals or policyholders submitting claims for that procedure are the putative class, the number of potential class members and their identities are readily ascertained.

On the other hand, where the claims practice in question involves an issue that is not tracked by computer, the problems with ascertaining the class can be substantial. Indeed, those difficulties may persuade some courts either that class certification is inappropriate, or that class counsel should pay the often-substantial cost of ascertaining the class. For instance, there has been considerable class litigation over the withholding of general contractor’s overhead and profit from actual cash value payments to insureds making building damage claims.¹⁴ While most property carriers using computers will track the fact that a payment was made pursuant to building coverage, few, if any, will track on a computerized basis fine points such as whether a loss was eligible to have general contractor’s overhead and profit added to it, and, if so, whether the overhead and profit was paid and when. Under those circumstances, the task involved in ascertaining a class of policyholders who have not received overhead and profit is monumental.

Similarly, most companies track the number of paid claims falling into certain basic categories such as property, liability, or workers’ compensation. For major insurers, the number of these claims in a given calendar year can be in the tens or even hundreds of thousands. Some, but by no means all, courts are reluctant to certify classes with that many claimants. Gathering and verifying this information early may prove valuable in persuading a court that the class needs to be refined and downsized to be manageable.

In cases involving concededly uniform practices, such as a specific result of estimating or claims resolution software, it may well be that the likelihood of class certification is extremely high, but the company has a strong position on the merits. One practical approach under these circumstances can be an agreement to make cross motions on summary judgment on the merits, with a stipulation to certify a class irrespective of the outcome. That way, if the defense position is upheld, the issue is put to rest once and for all in a single case. On the other hand, if the defense on the merits is unsuccessful, the overall cost of defending the case is contained at an early stage.

Cases that lend themselves to resisting class certification on the grounds of a lack of common issues of fact or law seldom lend themselves to dispositive motions. On the other hand, where issues truly are common, and certification is a real risk, a stronger likelihood of a victory on the merits may well be present.¹⁵

In the classic case, which is neither earmarked for early settlement, nor for cross motions on the merits, confining discovery to class issues until there is a ruling on a certification motion is an important means of containing costs and conserving the time and energy of the company’s employees. Unfortunately, while many courts pay "lip service" to this principle, it is more often honored in the breach, particularly in state courts. When such an order can be obtained, it is almost always helpful, so an early plan to seek this relief should frequently be part of the initial strategy in the case.

For in-house attorneys, the management of discovery in these cases can present unusual problems. Because the class focus tends to be either statewide or nationwide, the more horizontal the organization is, the more difficult it can be to obtain all documents, develop accurate factual information, and identify appropriate corporate representative witnesses. The more "top down" the challenged practices are, the simpler discovery will be. However, in cases where the challenged practice originates at a regional or lower office level and variations may abound, the search for documents and for accurate information will require special focus by in-house counsel or by outside counsel very experienced with knowing where to look inside the company. The good news is that while the discovery is more work in "bottom up" cases, the likelihood of defeating class certification is much stronger. This is because local variations in practice may demonstrate that the class plaintiffs’ claims are not typical or that factual issues on liability vary among members of the putative class.

One significant feature of early discovery often is the corporate representative or "person most knowledgeable" witness. Given the speed with which class certification briefing can be required, counsel for the putative class is highly likely to notice corporate representative witnesses for deposition. Their selection and preparation must proceed swiftly. A number of factors need to go into this process. Preliminarily, it is rare for a claims or sales practice case to be filed without at least one individual lawsuit implicating the practice in question already on file. Understanding the facts and evidence in such a case is key in preparing a corporate representative. Yet, if litigation management is dispersed throughout the company, it is not unusual for defense counsel, in-house counsel managing the class litigation and the corporate witness to know nothing about such an individual suit. Class counsel, through the benefit of the ATLA web site¹⁶ or other Internet tools, may know all about it. Thus, the early gathering of information on other litigation is key.

For many issues that are not genuinely "top down," there will be no single corporate representative who can testify authoritatively about the subject matter. Begin at the class discovery phase to make your case for the absence of common issues or typical claims, offering multiple witnesses to explain local variations. On the other hand, when the issue is a "top down" practice, there is little to be gained by "keeping your powder dry" and producing someone other than truly knowledgeable witnesses. However, the person selected should be high enough up in management to discuss the issues with authority, but with enough "hands on" background in the issues to withstand scrutiny on cross-examination. Given that class certification is the "make or break" point of this litigation, a knowledgeable attractive witness will benefit the defense at this key point, to a far greater extent than producing a witness who divulges little. In general, to beat class certification in an insurance practices case, the defense will need to present a strong story, and will need witnesses to tell it.

Class representative depositions can provide an opportunity to develop a case that the plaintiff’s claims are not typical, that the plaintiff is not an adequate representative of absent class members, or, indeed, that the interests of the plaintiff are at odds with those of the absent class. In this type of litigation, it is an unusual plaintiff who understands the implications of being a class representative. Similarly, plaintiffs in this type of case can often readily be lead to agree that their homes, their medical histories, or their interactions with their agent are "one of a kind." However, unless the defense is able to develop strong evidence of a conflict of interest or a truly unique situation, many courts do not take a great interest in plaintiff-oriented issues like ignorance about the class representative role. Indeed, an experienced class action judge or experienced class counsel may simply look for another class representative to substitute for the ignorant or inadequate one. Thus, the defense should not count too heavily on an inadequate plaintiff to defeat class certification.

Although some jurisdictions will permit an extensive evidentiary hearing on class certification, the more typical process is the presentation of briefing, supported by evidence in the form of declarations, deposition excerpts and other discovery responses, ordinarily coupled with oral argument. Defense counsel should not underestimate the need for a fully developed evidentiary record and a compelling showing at this stage. Defense counsel needs to develop the evidence and legal arguments against class certification from day one. Insurance is a complex, intangible product. The substance of an insurance claim, the approach to selling or underwriting a policy, or resolving a claim can seem Byzantine to people unfamiliar with insurance, a group that will often include the judge deciding class certification.

When counsel for the putative class appears to be serious about the class aspects of the case, and the initial evaluation points to a conclusion that the arguments against class certification are weak, settlement is by far the least expensive and most desirable alternative. Settlement before class certification offers three distinct advantages to the defense: (1) the economies involved in a claims process; (2) the likelihood of avoiding "fluid recovery" or other residual payments; and (3) the opportunity to tailor the class to maximize res judicata protection from the settlement.

While courts actively questioned the use of stipulated settlement classes ten years ago, there is more and more acceptance of pre-certification resolution with relatively minimal scrutiny in many courts.¹⁷

Preparing for settlement negotiations in resolving a class action with a stipulated settlement class is a complex endeavor that requires substantial planning. There are useful elements for the defense "shopping list" that are unique to the class action arena.

One useful starting point is to examine the options for the basic structure of the settlement: (1) payment of a lump sum with no claims process, or with the defendants "walking away" from any residual funds; (2) payment of a lump sum with a claims process and residual funds reverting to defendants; or (3) a claims process and payment of attorneys’ fees, with or without a floor or cap on claims payments.

A claims process can prove valuable in resolving these cases. Frequently only a small fraction of class members make claims, so the overall indemnity payments can remain modest if a claims process is used.

If attorneys’ fees for class counsel are structured in a fashion that bases them upon the potential recovery should all class members make a claim, as opposed to the actual post-claim process payout, there will often be little resistance in a negotiation to the concept of a claims process. A sophisticated judge may well scrutinize the claims process, so it is prudent to provide adequate time for class members to make a claim, and to design a process that does not include too many hurdles to the presentation, documentation or payment of a claim.

A claims process does inevitably involve costs associated with administering the claims processed and presents a degree of uncertainty, since there is never any guarantee that the number of claims will be small. If certainty is very important to the defendant, a lump sum settlement will provide the greatest degree of certainty. One potential difficulty with a straightforward lump sum payment whose distribution is administered by class counsel is that the payment needs to be substantial in order to generate enough attorneys fees to make the settlement attractive to class counsel. Combining a lump sum payment with a claims process and a provision that unclaimed funds will revert to the defense is the "best of both worlds." However, this is not always an easy structure to negotiate and, while such settlements certainly can be approved, an attentive judge may question it in the settlement approval process.

Another key point to consider in structuring the settlement is whether the settlement class will consist of existing policyholders whom the defendant wants to retain as customers. Desire to preserve ongoing relationships may affect the structure of the settlement as well, since a further claims process may not enhance good feeling between policyholders and an insurer defendant.

In resolving cases with a policyholder class, communications within the company and with policyholders can present many difficulties. Notices of the fairness hearing and the terms of the provisional settlement, if individually distributed to thousands of policyholders, are highly likely to generate concern and confusion among the recipients, followed by a flood of telephone calls. If no provision is made for that flood of telephone calls, company agents or customer service representatives will probably get them. This will only aggravate customer confusion. Another risk of not providing an outlet for questions is the likelihood that a recipient of notice of settlement will call an attorney rather than his or her insurance agent or the company. That could generate objectors, opt outs, or at worst, a competing or parallel class action.

Accordingly, in a complex settlement, some form of call center is often useful, with a toll free number listed on the notice of settlement. If agents and customer service personnel are alerted to the fact that the notice is about to go out, and given the toll free number to refer callers, there will be far better control over communications with policyholders who have questions. Of course, the risk of any communication with class members is the charge that the defendant is somehow discouraging people from making claims or otherwise participating in the settlement. One easy end run around this potential problem is the preparation of a script containing frequently asked questions and appropriate answers, which is approved by both class counsel and the defense. While this may frustrate a few callers, it minimizes any risk that a dispute over communications with class members could upset a negotiated settlement.

Another useful term in a settlement agreement can be a requirement that neither side engage in any unilateral publicity of the settlement. This will confine the publicity attendant on a settlement which is of necessity public and help contain the risk of drawing objections or further class actions on the same subject matter.

Of course, the objective of any class settlement is closure: ending the dispute for all time with the maximum number of potential plaintiffs. Maximizing the res judicata flowing from the settlement should be the defendant’s central goal in shaping the terms of the settlement. Often, one difficult psychological adaptation defendants settling a class action need to make is realizing that, while absent members of a potential settlement class may be their adversary’s clients, to whom counsel for the settlement class owes a fiduciary duty, due process for absent class members is critical to the defense. While absent class members are not defense counsel’s clients, any deficiency in due process for the settlement class jeopardizes the res judicata protection resulting from the settlement. Typically, that due process flows from the notice of conditional settlement and the court’s hearing on the fairness of the settlement. This notice, of the right to opt out or object to the settlement is central to due process.

When a pre-certification settlement begins to become a reality, the defense is wise to take the laboring oar in preparing the notice of settlement and, as much as possible, determining the logistics of notice. The modest sums invested in individually mailed notice and dealing with returned mailings can yield a big dividend if and when a due process challenge to the settlement arises. Similarly, a substantial period to object or opt out should not frighten the defense. In the Federal Judicial Center Study, the typical opt out rate was a fraction of one percent.¹⁸ Because these "small money" cases generate so few opt outs, allowing a substantial amount of time to opt out costs nothing and ensures that the appropriate opportunity has in fact been offered.

Objectors are much less rare, but generally pose little real risk to the settlement. Typically objectors are either oddball members of the settlement class, or attorneys looking to "hold up" class counsel for some portion of the fees.¹⁹

One very useful way to enhance the likelihood that a settlement in favor of a stipulated class will be approved, and that the settlement will survive collateral attack, is to work with a reputable settlement mediator in resolving the case. Ask the mediator to prepare a report describing the arm’s length nature of the negotiations, the fairness of the settlement and the reasons that it is fair. Such a report not only may provide substantial comfort to the judge called upon to approve the settlement, but it can also buttress the defense presentation on res judicata in any subsequent attempt to relitigate the issue.

Preventing, litigating and resolving class actions for the insurance industry is a highly complex undertaking. Containing the cost of resolving and defending those cases, and minimizing the number of surprises for management is a major challenge for in-house attorneys and litigation managers. Ultimately, the combination of prevention and early strategic evaluation will go a long way to prevent the specter of the "runaway" class action.