UARTERLY VOL. 64, NO. 1 FALL 2014

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1 ON COLOR BACKGROUND Q UARTERLY VOL. 64, NO. 1 FALL 2014 ON WHITE BACKGROUND TECHNOLOGY AND THE FOURTH AMENDMENT: HISTORY AND APPLICATION OF PRINCIPLES OF DECISION IN LIGHT OF NEW MEANS OF SURVEILLANCE David M. Fuqua and Christopher M. Stevens TURNING NEW GUNS ON OLD TARGETS: CLASS ACTIONS AGAINST INSURANCE COMPANIES Wystan Ackerman MEDIATION IN THE UNITED STATES CIRCUIT COURTS OF APPEALS: A SURVEY Craig A. Marvinney LIABILITY FOR SUDDEN MECHANICAL FAILURE ON THE HIGHWAY: THE WHEEL OFF CASE Robert A. Biggs, III Browse this Edition

2 FEDERATION OF DEFENSE & CORPORATE COUNSEL FDCC OFFICERS PRESIDENT TIMOTHY A. PRATT Boston Scientifc Corporation Natick, MA PRESIDENT-ELECT VICTORIA H. ROBERTS Meadowbrook Insurance Group Scottsdale, AZ SECRETARY-TREASURER STEVEN E. FARRAR Smith Moore Leatherwood LLP Greenville, SC BOARD CHAIR EDWARD M. KAPLAN Sulloway & Hollis PLLC Concord, NH EXECUTIVE DIRECTOR MARTHA (MARTY) J. STREEPER N. 56th Street Tampa, FL Fax SENIOR DIRECTORS BRUCE D. CELEBREZZE Sedgwick LLP San Francisco, CA WALTER DUKES Dukes Dukes Keating Faneca PA Gulfport, MS H. MILLS GALLIVAN Gallivan, White & Boyd, PA Greenville, SC J. SCOTT KREAMER Baker, Sterchi, Cowden & Rice, LLC Kansas City, MO DEBORAH D. KUCHLER Kuchler Polk Schell Weiner & Richeson, LLC New Orleans, LA ELIZABETH F. LORELL Gordon & Rees LLP Florham Park, NJ DONALD L. MYLES JR. Jones, Skelton & Hochuli Phoenix, AZ DEBRA TEDESCHI VARNER McNeer Highland McMunn Varner LC Clarksburg,WV DIRECTORS ROBERT L. CHRISTIE Christie Law Group, PLCC Seattle, WA EDWARD J. CURRIE, JR. Currie Johnson Griffin Gaines & Myers PA Jackson, MS ANDREW B. DOWNS Bullivant Houser Bailey, PC San Francisco, CA MICHAEL T. GLASCOTT Goldberg Segalla, LLP Buffalo, NY HOWARD M. MERTEN Partridge, Snow & Hahn Providence, RI LESLIE C. PACKER Ellis & Winters, LLP Raleigh, NC BRETT J. PRESTON Hill Ward & Henderson PA Tampa, FL TODD A. ROBERTS Ropers, Majeski, Kohn Bentley Redwood City, CA W. MICHAEL SCOTT CrownQuest Operating, LLC Midland, TX PUBLICATIONS CHAIR BRUCE D. CELEBREZZE Sedgwick LLP San Francisco, CA FDCC QUARTERLY-EDITOR SUSAN M. POPIK 38 Woodhill Drive Redwood City, CA Fax EDITOR-WEBSITE DAVID M. FUQUA Fuqua Campbell, PA Little Rock, AR EDITOR-FLYER GREGORY A. WITKE Patterson Law Firm Des Moines, IA FDCC HISTORIAN STEPHEN P. PATE Norton Rose Fulbright Houston, TX CLE COORDINATOR FRANCIE BERG nd Avenue South Minneapolis, MN,

3 FDCC QUARTERLY Fall 2014 Volume 64, Number 1 Contents Technology and the Fourth Amendment: History and Application of Principles of Decision in Light of New Means of Surveillance David M. Fuqua and Christopher M. Stevens...2 Turning New Guns on Old Targets: Class Actions Against Insurance Companies Wystan Ackerman...26 Mediation in the United States Circuit Courts of Appeals: A Survey Craig A. Marvinney...53 Liability for Sudden Mechanical Failure on the Highway: The Wheel Off Case Robert A. Biggs, III...68 Cite as: 64 FED N DEF. & CORP. COUNS. Q. (2014). The Federation of Defense & Corporate Counsel Quarterly is published quarterly by the Federation of Defense & Corporate Counsel, Inc., North 56th Street, Tampa, FL Readers may download articles appearing in the FDCC Quarterly from the FDCC website for their personal use; however, reproduction of more than one copy of an article is not permitted without the express written permission of the FDCC and the author. Copyright, 2014, by the Federation of Defense & Corporate Counsel, Inc.

4 FDCC Quarterly/Fall 2014 Turning New Guns on Old Targets: Class Actions Against Insurance Companies Wystan Ackerman This article provides an overview of recent developments in class action litigation against insurance companies. Part I focuses on recent class action jurisprudence in four discrete areas: property insurance, automobile insurance, life insurance, and subrogation. Part II contains a detailed discussion of several decisions from the United States Supreme Court s October 2012 Term and their potential impact on insurance class actions. As will be seen, while insurers have had substantial success in defeating class actions over the last few years, there are a few significant unfavorable decisions and areas of continuing potential concern for the industry. I. Recent Developments in Insurance Class Actions A. Property Insurance Class Actions For a number of years, plaintiffs attorneys have brought class actions seeking to recover for general contractor fees, known as general contractor overhead and profit, or O&P. In these cases, plaintiffs attorneys typically take the position that there is or should be a three trade rule under which insurers must always include general contractor overhead and profit Submitted by the author on behalf of the FDCC Class Action and Multidistrict Litigation Section. 26

5 Turning New Guns on Old Targets Wystan Ackerman is a partner at Robinson & Cole, LLP in Hartford, Connecticut. He chairs the firm s Class Action Team and is a member of the Appellate Team. He has defended class actions in a variety of substantive areas and industries, including insurance, products liability, financial services, consumer contracts, and securities. Mr. Ackerman writes the blog www. insuranceclassactions.com, and regularly serves as national counsel for insurance companies in class actions, complex coverage litigation, and appeals. Mr. Ackerman s appellate experience includes successfully petitioning the U.S. Supreme Court to grant certiorari, and serving as co-counsel on the merits, in Standard Fire Ins. Co. v. Knowles, 133 S. Ct (2013), involving the Class Action Fairness Act. He has also litigated appeals in the First, Second, Third, Fourth, Fifth, Eighth, and Eleventh Circuit Courts of Appeal, and in various state appellate and supreme courts. Mr. Ackerman has been listed as a Second Circuit Litigation Star in Benchmark Appellate (2013) and as a Future Star in Benchmark Litigation (2013). Mr. Ackerman received his B.A., summa cum laude, from Bowdoin College, and his J.D. from Columbia Law School, where he was a James Kent Scholar. Mr. Ackerman is currently serving as the Vice-Chair of the Appellate Law Section of the Federation of Defense & Corporate Counsel, is an active member of the Class Action and Multidistrict Litigation Section, and is a frequent speaker at FDCC meetings. if there are three or more trades involved in the loss. In the most recent appellate decision, National Security Fire & Casualty Company v. DeWitt, 1 the Alabama Supreme Court surveyed the law across the country on this issue and agreed with the strong majority view that class certification was improper. As the court explained: Although this case will involve issues that are common to all class members, it is highly likely that it will also involve individualized evidence regarding whether it was reasonably foreseeable that the services of a general contractor would be necessary in each of [the putative class members ] claims. 2 Another significant recent decision is the Louisiana Supreme Court s opinion in Oubre v. Louisiana Citizens Fair Plan, 3 which involved a Louisiana statute requiring an insurer to initiate loss adjustment within thirty days after notice of a catastrophic loss (fourteen days 1 85 So. 3d 355 (Ala. 2011). 2 at So. 3d 987 (La. 2011). 27

6 FDCC Quarterly/Fall 2014 for noncatastrophe claims). The statutory 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. 4 The plaintiffs claimed, and were ultimately able to prove, that the insurer violated the statute with respect to thousands of Hurricane Katrina and Rita claims. According to the Louisiana Supreme Court majority, violation of the statute subjects an insurer to an automatic, mandatory penalty; 5 and because no lesser amount of damages was proven, the court upheld a penalty of $5,000 on each individual putative class member s claim. 6 There have also been significant class action rulings at the trial court level. For example, in a case involving an Arizona-only class concerning the scope of covered repairs for losses resulting from leaking polybutylene (PB) plumbing, 7 the insurer sought to decertify the class in light of Wal-Mart Stores, Inc. v. Dukes. 8 In a report, the magistrate judge recommended denial of the motion, concluding that the Wal-Mart commonality standard was satisfied because the central question whether leaking PB plumbing must always be replaced in its entirety was a question common to all members of the class and could be resolved with an answer common to all class members. 9 In better news for insurers, the Eastern District of Tennessee dismissed a putative class action alleging the insurer improperly calculated actual cash value by failing to account for contractor s overhead and profit and excluding certain items that would be reimbursed only when the cost was actually incurred. 10 Despite these allegations, the plaintiffs failed to set forth a plausible claim that they received insufficient funds from State Farm to repair their property, and their complaint was therefore dismissed. 11 To the extent they are not already parties to them, property insurers will be closely monitoring a collection of putative class actions in Arkansas involving calculation of actual cash value. In those cases, the plaintiffs allege that when ACV is calculated as replacement cost less depreciation, insurers should not be allowed to apply depreciation to the labor 4 La. Rev. Stat. 22:1220(C) (recodified at La. Rev. Stat. 22:1973). 5 Oubre, 79 So. 3d at at According to the court, when damages are not proven, the greater of the two enumerated amounts, i.e., two times the damages sustained or five thousand dollars, is five thousand dollars. at See Guadiana v. State Farm Fire & Cas. Co., No TUC FRZ, 2011 WL (D. Ariz. Mar. 31, 2011) S. Ct (2011). 9 Guadiana v. State Farm Fire & Cas. Co., No. CIV TUC FRZ, 2014 WL , *5 (D. Ariz. Mar. 13, 2014). The insurer also sought decertification on the ground that damages could not be calculated on a classwide basis, thus precluding commonality under Comcast Corp. v. Behrend, 133 S. Ct (2013). The magistrate judge concluded that Comcast was inapposite and declined to revisit[] the court s prior damages inquiry. Guadiana, 2014 WL at *7. 10 Stiers v. State Farm Ins., No. 3:11 CV 437, 2012 WL (E.D. Tenn. June 25, 2012). 11 at *1. 28

7 Turning New Guns on Old Targets component of the replacement cost. In one such case, Adams v. Cameron Mutual Insurance Co., 12 the Western District of Arkansas concluded that decisions in Oklahoma, Texas, and Florida supported the insurer s position that depreciation of labor costs is permissible, but found there was a lack of pertinent guidance in Arkansas law. Accordingly, the court certified the following potentially dispositive issue to the Arkansas Supreme Court: Whether an insurer, in determining the actual cash value of a covered loss under an indemnity insurance policy, may depreciate the costs of labor when the term actual cash value is not specifically defined in the policy? 13 The Arkansas Supreme Court accepted the certified question and held in late 2013 that the costs of labor may not be depreciated when determining the actual cash value of a covered loss under an indemnity insurance policy that does not define the term actual cash value. 14 The court found the policy ambiguous, relying heavily on the dissenting opinion in Redcorn v. State Farm Fire & Casualty Co., 15 in which the dissenters rejected the contention that labor costs were depreciable: Labor... is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value over time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of depreciating the value of labor is illogical. 16 In the wake of the Arkansas Supreme Court s decision, numerous putative class actions were filed raising the same issue, almost all of which have been removed to the Arkansas federal courts and are in their early stages. As yet, there have been no rulings on class certification. In California, a trial court has granted class certification in Doan v. State Farm General Insurance Co., another case focusing on an insurer s depreciation practices. 17 In that case, the plaintiffs allege that State Farm failed to comply with a California statute and regulation that require an insurer to consider the actual condition of specific items of property, in addition to their age, in determining depreciation. 18 Instead, plaintiffs allege, State Farm 12 No. 2:12-cv PKH, 2013 WL (W.D. Ark. May 3, 2013). 13 at *3. 14 Adams v. Cameron Mut. Ins. Co., S.W.3d, 2013 WL , *6-7 (Ark. Nov. 21, 2013) (emphasis added) P.3d 1017 (Okla. 2002). 16 at 1022 (Boudreau, J., dissenting). 17 No CV (Cal. Super. Ct. Mar. 18, 2013). 18 See Cal. Ins. Code 2051(b); Cal. Code Regs. tit. 10, (f). 29

8 FDCC Quarterly/Fall 2014 adjusters use a depreciation guide that measures depreciation based on age alone, without taking condition into account. Plaintiffs further allege that State Farm does not ask insureds about the condition of their personal property items. In its ruling on class certification, the trial court found that certification of an injunctive relief class was appropriate because Defendant does not adequately address Plaintiffs showing that insureds are not provided with a written explanation of how Defendant calculates depreciations for purposes of [the governing regulation], which requires that the basis for any depreciation adjustment be fully explained to the claimant in writing. 19 With respect to the proposed damages class, the court found that State Farm did not make an attempt to seek information about the physical condition of contents items. The court found it significant that, extrapolating from a small sample of claim files, the plaintiff s expert concluded that somewhere between sixty-five and ninety-two percent of claim files would have some items that were depreciated based solely on the depreciation guide. 20 In response to State Farm s argument that class treatment was inappropriate because individualized inquiries would be necessary to determine the proper depreciation on individual items, the court ruled that the plaintiffs could recover only for items that were depreciated solely based on the depreciation guide (and, if this turned out to be unworkable, the class could be decertified later). The court also certified a class with respect to the plaintiffs bad faith claims, explaining only that [a]ssuming commonality on the use of the Depreciation Guide, the issue of bad faith would flow from it. 21 The court further concluded that State Farm had failed to present specific evidence that individualized defenses would predominate. This case has been stayed pending the outcome of an inquiry being conducted by the California Department of Insurance regarding State Farm s depreciation practices. As Doan and Adams v. Cameron Mutual demonstrate, class actions focusing on depreciation are an important emerging area worth watching in property insurance class actions. B. Automobile Insurance Class Actions In the auto insurance arena, there have been several notable appellate decisions over the last few years. Of particular import is the Eighth Circuit s decision in Halvorson v. Auto- Owners Insurance Co., 22 which was significant in imposing a standing requirement on all class members. That case arose out of Auto-Owners use of third-party bill reviewers who determined pricing for particular medical services within a geographic area and flagged submitted charges that exceeded the eightieth percentile of charges in the area. Although Auto-Owners asserted that adjusters had discretion to pay more, there was testimony that adjusters were expected to limit amounts paid to the eightieth percentile. On these facts, the district court certified a putative class of defendants policyholders in North Dakota who 19 Doan, slip op. at at F.3d 773 (8th Cir. 2013). 30

9 Turning New Guns on Old Targets submitted claims for medical expenses under medical payments (med-pay) or personal injury protection (PIP) coverage 23 but who received less than the submitted amount after a percentile-based review of their claim. 24 According to the district court, whether the bill review process complied with the insurance policies was a predominant common question justifying class treatment. 25 The Eighth Circuit reversed. Although the commonality requirement was satisfied based on the common question of whether the routine and relatively rigid use of the 80th percentile cutoff for claims breached the contract or constituted bad faith, 26 the predominance requirement was not satisfied. Applying Comcast Corp. v. Behrend, 27 the Halvorson court ruled that individual inquiries regarding what is usual and customary for each class member will predominate over whether Auto-Owners s process was reasonable and overwhelm questions common to the class. 28 Moreover, the court explained, [a] district court may not certify a class... if it contains members who lack standing. 29 In this case, some members of the putative class would not have standing because, for example, [i]f a health-care provider accepted Auto-Owners s payment at the 80th percentile as payment in full (or if Auto-Owners settled the dispute without involving the plaintiff), the plaintiff was not injured. 30 Halvorson is of potentially broad significance in defending insurance class actions. It is frequently the case that the putative class is defined in a manner that would encompass people who were not injured, or would not want and might even be disadvantaged by the requested relief. In many cases, it will be impossible for the plaintiff to redefine the class in a manner that would include only people who were injured (or who would want the requested relief) because such a class would not be ascertainable without individualized inquiries into each class member s circumstances and preferences. That can be a powerful line of argument in defending these cases, and one that is sometimes overlooked, or not framed in terms of standing. 23 In states that have adopted no fault auto insurance schemes, drivers typically must purchase either PIP or med-pay coverage. PIP coverage provides for payment of medical expenses, lost wages, funeral expenses, and other accident-related losses incurred by the insured or occupants of the insured s vehicle, regardless of fault. Med-pay coverage is more limited in that it typically reimburses only medical and funeral expenses. See generally State Farm Mut. Auto. Ins. Co. v. Swearingen, 590 So. 2d 506, (Fla. Dist. Ct. App. 1991). 24 Halvorson, 718 F.3d at at at 780 n S. Ct (2013); see infra text accompanying notes F.3d at at (internal quotes omitted). 30 at

10 FDCC Quarterly/Fall 2014 The Eighth Circuit s holding in Halvorson could also be applied outside the auto insurance context, such as in a property insurance class action, where some putative class members received sufficient payments to repair their property regardless of the claims practice alleged to be improper. Similarly, this holding could be useful in defending a class action involving underwriting, where some putative class members may have received the coverage they desired despite the allegedly improper underwriting protocol. The Colorado Supreme Court issued a significant decision in State Farm Mutual Automobile Insurance Co. v. Reyher, 31 one of many putative class actions involving insurers use of databases to evaluate the reasonableness of medical bills on auto insurance claims. The Colorado Supreme Court held that the trial court had properly denied class certification, reversing a decision by the Colorado Court of Appeals. Notably, the court agreed with the U.S. Supreme Court s decision in Wal-Mart in explaining how a trial court can properly consider merits issues when they overlap with class issues. Here, the trial court acted within its discretion in denying certification on the ground that proof at trial would be predominantly individual where, after rigorously analyzing Plaintiffs class-wide proof, namely the nature of State Farm s claim review process, the trial court was satisfied that State Farm did not have a class-wide practice of relying solely on the database. 32 The Washington Supreme Court upheld class certification in Moeller v. Farmers Insurance Co. of Washington, 33 one of several class actions alleging that collision coverage payments must include not only the cost to repair the insured vehicle but also any diminution in the vehicle s value as a result of having been in an accident. The central issue in dispute in Moeller was whether the plaintiff could prove liability and damages for the putative class as a whole through mathematical modeling, without showing the fact or amount of each putative class member s diminution in value loss. In a 5-4 decision, the majority seemed to sidestep that issue, rejecting an argument that the plaintiff had conceded that some class members had suffered no loss, and focusing instead on the abuse of discretion standard for reviewing a class certification ruling. Noting that the trial court had conducted a lengthy evidentiary hearing and that the result was not unreasonable or untenable, the majority found no abuse of discretion and therefore no basis for overturning that ruling. 34 A dissenting opinion reasoned that the trial plan effectively converts the damages element of [plaintiff s] claim into an affirmative defense. This impermissibly shifts the burden to prove damages from the plaintiffs to the defendant. This offends due process P.3d 383 (Colo. 2011). 32 at P.3d 998 (Wash. 2011). 34 at at 1012 (Alexander, J., dissenting). 32

11 Turning New Guns on Old Targets In Ortega v. Topa Insurance Co., 36 the California Court of Appeal affirmed a decision striking the class allegations on the pleadings in a putative class action challenging the use of non-original equipment manufacturer (non-oem) parts to repair damaged automobiles. The court held that common issues did not predominate on the face of the allegations both because each putative class member would have to prove that the particular non-oem parts involved in his or her repair were inferior, and because the question of whether and when a putative class member received notice that non-oem parts were used would require an individual inquiry. 37 Other putative class actions have been filed against auto insurers based on policy provisions entitling insureds to compensation for assisting the insurer in investigating and defending lawsuits against the insured. Plaintiffs have alleged that insurers should be proactively seeking out these claims and paying them even when the insured has not requested reimbursement. In Albert v. Erie Insurance Exchange, 38 the court rejected such a challenge. In that case, the auto policy provided that the insurer would pay for reasonable expenses anyone we protect may incur at our request to help us investigate or defend a claim or suit. This includes up to $100 a day for actual loss of earnings. 39 The trial court granted the defendant s motion to dismiss the complaint based on the plaintiff s failure to allege that she made any request for reimbursement under this provision. It appears the plaintiff did not want to make that allegation because it would be detrimental to pursuit of a class action (perhaps on the assumption that many insureds do not request reimbursement under this coverage, and those who do request it likely receive it). In a 2-1 decision, the Pennsylvania Superior Court affirmed, holding that the insurance policy did not require Erie to advise the insureds of the terms of the policy, which they had read and signed. The court also relied on a policy provision requiring the insured to notify the insurer or its agent when a loss happens, concluding that this provision required an insured to make a claim for the reimbursement of litigation expenses. 40 In analyzing the issue, the court cited with approval the Ohio Supreme Court s decision in a similar case, Kincaid v. Erie Insurance Co., 41 in which the court rejected the argument that the insurer had an obligation to advise the insured about the availability of this coverage when it hired counsel to defend the insured. The Albert court found no basis for bad faith Cal. Rptr. 3d 771 (Ct. App. 2012). 37 at A.3d 923 (Pa. Super. Ct. 2013). 39 at at N.E.2d 207 (Ohio 2010). 33

12 FDCC Quarterly/Fall 2014 liability where there was no duty to inform the insured about the policy provision, and no duty to provide reimbursement without a request. 42 Although appellate courts in both Ohio and Pennsylvania have now ruled in favor of insurers on this issue, insurers should continue to monitor developments in this area and to review their own policy language since there is no assurance a court in another jurisdiction would not come to a different conclusion. At the trial court level, another significant decision is Folks v. State Farm Mutual Automobile Insurance Co., 43 which denied class certification in part because of a voluntary payment program implemented by State Farm to redress the practice challenged in the lawsuit. The use of this type of voluntary relief program is an emerging technique for defending insurance class actions where appropriate. C. Life Insurance Class Actions In class actions involving life insurance policies, one of the hottest issues in recent years has been the use of retained asset accounts. Under such an arrangement, rather than paying a lump-sum death benefit to the beneficiary, the insurer creates an interest-bearing account for the beneficiary and sends her a checkbook that can be used to draw down the funds, in part or in whole, at any time. 44 Such an account was at issue in Phillips v. Prudential Insurance Co. of America, where the insurance policy provided that the insured may choose to have any death benefit paid in a single sum or under one of the optional modes of settlement described below, including the retained asset account (and several other options). 45 The insured never selected a payment method. After the insured s death, the beneficiary (the plaintiff) was provided with a claim form that gave her the opportunity to select a payment method and stated that, if she did not select one, benefits would be paid through a retained asset account (known as the Alliance Account). The plaintiff returned the form without making a selection. 42 Albert, 65 A.3d at 929, 931. The dissent noted that the motion was improperly granted as to the breach of contract and declaratory judgment claims since the policy was silent with respect to the mechanism for requesting reimbursement. Moreover, to the extent the policy required the insured to provide notice to the insurer [w]hen there is an accident or loss, the dissent concluded that a claim for reimbursement of litigation expenses would not be an accident or a loss, and thus this policy provision was inapplicable. at (Colville, J., dissenting) F.R.D. 608 (D. Colo. 2012). 44 Phillips v. Prudential Ins. Co. of Am., 714 F.3d 1017, 1019 (7th Cir. 2013). 45 at

13 Turning New Guns on Old Targets The Seventh Circuit affirmed dismissal of the putative class action, holding there was no actionable breach of contract: Prudential s establishment of the Alliance Account as the default option, and its enrolling Phillips in an Alliance Account rather than providing her a lump-sum benefit payment, did not breach the insurance policy. The policy allowed Phillips to choose any available payment method those listed in the Settlement Options brochure, those listed in the policy, or those, like the Alliance Account option, that Prudential may have available at the time the proceeds become payable and by leaving the two lines blank on the Claim Form, Phillips chose to enroll in the Alliance Account option Contrary to Phillips s suggestion, the policy did not make lump-sum payment the default payment method, such that Prudential was required to pay Phillips a lump sum unless she told them otherwise; the policy entitled her to choose how she would be paid, and she did just that. 46 In reaching its decision, the Seventh Circuit distinguished the First Circuit s opinion in Mogel v. UNUM Life Insurance Co. of America, 47 which ruled in favor of the plaintiff in a case involving a similar issue, but involved an ERISA claim and different policy language. Another significant recent appellate decision regarding retained asset accounts is the Third Circuit s decision in Edmonson v. Lincoln National Life Insurance Co. 48 That case involved a group life insurance plan governed by ERISA, and a policy that provided that benefits be paid immediately after the Company receives complete proof of claim. 49 The plaintiff alleged that the insurer breached its fiduciary duty of loyalty under ERISA when it paid the claim through a retained asset account and invested the funds for its own benefit. The district court granted summary judgment on the ground that the insurer was not acting as a fiduciary at the relevant time. 50 The Third Circuit affirmed, but on different grounds. It held that the insurer was acting as a fiduciary when it chose to pay the plaintiff s claim through the retained asset account, but that the insurer did not breach its fiduciary duty. 51 The court explained that the insurer s selection of the payment method was an act of plan administra- 46 at F.3d 23 (1st Cir. 2008) F.3d 406 (3d Cir. 2013). 49 at at

14 FDCC Quarterly/Fall 2014 tion or management, and also involved exercising discretionary authority or control over plan assets, and therefore the insurer was acting as a fiduciary under ERISA. 52 The insurer did not breach its fiduciary duty, however, because the account was established to pay the plaintiff benefits, and the insurer did not directly gain any financial benefit from this decision. 53 The fact that the insurer might earn a profit if the insured chose to leave money in the account did not constitute a breach of fiduciary duty. 54 The court further explained that ERISA does not mandate a particular method of payment of benefits, and that the insurer did not cause the plaintiff s injury because she could have immediately withdrawn the funds from the account. 55 The court also found that the insurer had discretion because the policy was silent regarding the method of payment, and that, once the account was set up, the assets were no longer plan assets and the insurer and plaintiff were in an ordinary debtor-creditor relationship. 56 In another series of class actions, the plaintiffs allege that life insurance companies should be required to perform searches of the Social Security Death Master File database to ascertain whether unclaimed death benefits may in fact be payable. 57 In Andrews v. Nationwide Mutual Insurance Co., 58 one of the first appellate decisions on this issue, the Ohio Court of Appeals upheld a trial court s decision dismissing the complaint for failure to state a claim upon which relief could be granted. In Andrews, the plaintiffs brought a putative class action alleging that Nationwide breached the duty of good faith and fair dealing under life insurance policies by failing to take reasonable steps to ascertain whether insureds had died and death benefits were due but unclaimed. The trial court dismissed on two grounds: the plaintiffs lacked standing, and the claims were barred by the plain language of the policies. For example, one of the policies stated: 52 at at at at 425, 429; see also Vander Luitgaren v. Sun Life Assur. Co. of Canada, 2013 WL , *4-5 (D. Mass. Aug. 9, 2013) (agreeing with Edmonson). In Edmonson, one judge dissented and would have held that the plaintiff lacked standing because she failed to show that, if she had been paid in a lump sum, she would have invested the money and earned a return equivalent to that earned by the insurer for its own benefit. at 431 (Jordan, J., dissenting). 57 This same argument has also been the focus of regulatory action by some insurance departments. See Feingold v. John Hancock Life Ins. Co., F.3d, 2014 WL (1st Cir. May 27, 2014) (affirming dismissal of putative class action on grounds that plaintiff was not a third-party beneficiary of insurer s agreement with regulatory authority and Illinois unclaimed property statute did not require insurer to perform searches of death master file). 58 No , 2012 WL (Ohio Ct. App. Oct. 25, 2012). 36

15 Turning New Guns on Old Targets We agree to pay the Death Proceeds to the Beneficiary upon receiving proof that the Insured has died while this Policy is in force and before the Maturity Date. * * * [Nationwide] will pay the Death proceeds to the Beneficiary after we receive at our Home Office proof of death satisfactory to us and such other information as we reasonably require. 59 On appeal, the Ohio Court of Appeals assumed the plaintiffs had standing but affirmed the dismissal based on the policy language. Noting that the language was mandated by Ohio statute, the court reasoned that [t]he terms receipt and receiving demonstrate Nationwide s passive role in establishing an insured party s proof of death; they do not connote an obligation to procure such information. 60 Accordingly, a finding obligating Nationwide to solicit or gather information pertaining to an insured s death would be contrary to the terms contained in the insurance policy. 61 In so holding, the court rejected the plaintiffs contention that because death is inevitable, the duty of good faith and fair dealing requires proactive action by a life insurer; to the contrary, [w]hile we understand that the death of an insured party is an inevitable fact, we are not persuaded that such certainty places an additional duty on Nationwide beyond what is expressed in the life insurance contracts, and appellants provide no case law to support such a proposition. 62 Moreover, the court held, [i]n the absence of legislative or administrative regulatory action, we will not import additional unspoken duties and obligations onto Nationwide that will conflict with the parties contracted terms. 63 Another significant area of life insurance class action litigation involves changes to cost of insurance (COI) charges. A significant decision favorable to insurers is Norem v. Lincoln Benefit Life Co., 64 which focused on a policy provision stating that [t]he cost of insurance rate is based on the insured s sex, issue age, policy year, and payment class. 65 The plaintiff argued that the insurer breached the policy by considering factors other than sex, age, policy year, and payment class in setting COI rates, including expected policy lapse rates, agent commissions, and anticipated death benefit costs. 66 Focusing on the words based on, the 59 at *4 (emphasis in original) at * F.3d 1145 (7th Cir. 2013). 65 at 1147 n at

16 FDCC Quarterly/Fall 2014 insurer argued that it could include other factors as long as the factors listed in the policy were a significant part of the calculation. The district court agreed and granted summary judgment. The Seventh Circuit affirmed. 67 Although noting that lower courts had disagreed on this issue in other COI litigation, the court concluded that no one would suppose that a cake recipe based on flour, sugar, and eggs must be limited only to those ingredients. Thus, neither the dictionary definitions nor common understanding of the phrase based on suggest that Lincoln Benefit is prohibited from considering factors beyond sex, issue age, policy year, and payment class when calculating its COI rates. 68 The court also noted that it would be incorrect to interpret the policy in a manner that would not expect an insurer to make a profit. 69 In another class action involving COI rates (but different policy language), the court reached an outcome much less favorable to insurers, enjoining the insurer from implementing a COI rate increase. That case, Yue v. Conseco Life Insurance Co., 70 arose out of life insurance products sold by Conseco Life that became a particularly bad deal for the company when there were fewer policy terminations than anticipated, as a consequence of which the expected death benefits were projected to result in substantial losses. The policy had the following provision allowing a change in COI charges: Current monthly cost of insurance rates will be determined by the Company based on its expectation as to future mortality experience. Any change in such rates will apply uniformly to all members of the same age, sex, and premium class. 71 Conseco first tried to rely on this language to impose a future rate increase starting in the 21st year of policies, which would rein in its projected losses, but not result in any profits. The court rejected that approach, ruling on summary judgment that the policy provision allowed only immediate, current rate changes, not future changes, and that the phrase expectation as to future mortality experience meant expectation of the rate of mortality, not the expected amount of death benefits. 72 Conseco then sought to implement immediate and substantial rate increases for the vast majority of policyholders. If, for example, the mortality rate for a particular class of policyholders was per 1000 policyholders, the rate would become $ per $1000 of coverage. These rate increases were implemented notwithstanding that morality rates for the vast majority of policyholders had decreased at at F.R.D. 469 (C.D. Cal. 2012). 71 at (internal quotes omitted; emphasis added). 38

17 Turning New Guns on Old Targets In response to this second attempted rate increase, the court certified a class of those policyholders who had not surrendered their policies. 73 The court concluded that certification was proper under Rule 23(b)(2) 74 because the class was seeking only injunctive and declaratory relief preventing implementation of the rate increase and because [a]ny monetary relief sought by the class, such as the return of any additional COI charges deducted after the rate increase, would be incidental to the equitable relief sought by Plaintiff. 75 The court went on to grant a preliminary injunction. It found a likelihood of success on the merits because it concluded that the COI provision likely did not allow a rate increase where it was the insurer s expected losses, not actuarial mortality rates, that were increasing. The court explained that in order to base COI rates on expected mortality rates, Conseco must consider the relationship between current and past expected mortality rates and determine how those rates have changed. 76 Of particular significance was the court s finding on imminent irreparable injury: The Court finds that without a preliminary injunction, policyholders are likely to suffer imminent irreparable harm. It is common knowledge that people purchase insurance policies for security and peace of mind. In the context of life insurance, the security being purchased is the knowledge that the policies designated beneficiaries will be left with some degree of financial support when the insured passes away. When policyholders face large, unanticipated increases in charges, the peace of mind they paid for is irreparably lost instead, they are left with stress, anxiety, and uncertainty regarding the state of their life insurance. 77 The potentially broad implications of this statement are hard to overstate. Outside the realm of bad faith claims, which were not involved here, the fact that a contract was entered into for security and peace of mind is typically not even relevant to an analysis of claims arising under that contract, much less the basis for granting a preliminary injunction. There are many situations in which security and peace of mind are factors in consumer relationships with businesses. In any event, it is not at all clear why the kind of loss the court describes is not one that money damages can compensate, since the beneficiaries are only entitled to money, i.e., the policy proceeds, and those can be paid later, with interest. 73 The court also indicated it would consider certifying a class of policyholders who had surrendered their policies if an appropriate representative of that proposed class joined the suit. at 475, See Fed. R. Civ. P. 23(b)(2). 75 Yue, 282 F.R.D. at at at 483 (emphasis added). 39

18 FDCC Quarterly/Fall 2014 D. Subrogation Class Actions A significant new focus of class action litigation against insurers over the last few years has been subrogation practices, specifically the made whole doctrine. Under that doctrine, an insurance company is not entitled to any third party funds recovered in subrogation, in certain circumstances, until its insured has been fully compensated or made whole from the wrongdoer or another source. 78 The Pennsylvania Supreme Court affirmed the dismissal of one of these putative class actions in Jones v. Nationwide Property & Casualty Insurance Co., which involved a challenge to an auto insurer s practice of reimbursing its insured s deductible payment, on a pro rata basis only, from funds obtained in the insurer s subrogation action against the third party tortfeasor. 79 The Pennsylvania Supreme Court rejected the claim as a matter of law. According to the court, the result advocated by the insured requiring the insured to recover the entire deductible before the insurer could recover anything from its subrogation action would in essence creat[e] a no-deductible policy, in the limited circumstances of cases involving subrogation recoveries, in violation of Pennsylvania s Motor Vehicle Financial Responsibility Law. 80 Moreover, the court stated, such a result would force the insurer essentially to cover the risk of the deductible where the insured has not paid premiums to cover that risk. 81 In Vandenbrink v. State Farm Mutual Automobile Insurance Co., 82 plaintiffs filed a putative class action challenging their insurer s attempt to subrogate med-pay payments 83 following the insureds direct settlement with third party tortfeasors when the insureds were not made whole. The federal district court struck the class allegations on the pleadings, ruling that class treatment was facially improper because the threshold inquiry is whether the Plaintiffs were made whole through their settlements, 84 and this would require individual inquiries into the damages incurred by an individual plaintiff, the amount of the settlement, and the portion of the settlement that actually was for medical payments The made whole (or make whole ) doctrine provides generally that an insurance company cannot exercise its right of subrogation until its insured has been fully compensated or made whole. Jones v. Nationwide Prop. & Cas. Ins. Co., 32 A.3d 1261, 1263 (Pa. 2011) at at No. 8:12 cv 897 T 30TBM, 2012 WL (M.D. Fla. Aug. 3, 2012). 83 See supra note Vandenbrink, 2012 WL at *

19 Turning New Guns on Old Targets Erlich v. American International Group, Inc. 86 was a putative class action challenging an insurer s ability to retain the full proceeds of a subrogation action against a third party tortfeasor when the insured had recovered the full value of the policy, but not its uninsured losses (i.e., the unreimbursed portion of the deductible and depreciation holdback). The trial court granted the insurers motions to dismiss, ruling that, under controlling New York authority, an insurer who has paid its insured the full amount due under a [policy], but less than the insured s loss, may proceed against the third-party tortfeasor responsible for the loss before the insured has been made whole by the tortfeasor. 87 According to the court, the insurer s subrogation rights are limited only when the sources of recovery ultimately available are inadequate to fully compensate the insured for its losses In further support of its ruling, the court explained that [t]he policyholder cannot sit on its rights, allowing its claims against the tortfeasor to become time barred, and then sue its insurer for a portion of the subrogation settlement. That is fundamentally unfair, and contravenes the subrogation framework and public policy repeatedly articulated by the Court of Appeals. 89 II U.S. Supreme Court Class Action Decisions; Implications for Insurance Cases The U.S. Supreme Court decided six class action cases during its October 2012 term that have the potential to significantly impact class action litigation in the insurance arena: Standard Fire Ins. Co. v. Knowles, interpreting the Class Action Fairness Act of 2005, held that a named plaintiff cannot avoid federal jurisdiction by stipulating to an amount in controversy below the $5 million threshold for federal jurisdiction. 90 Addressing Rule 23(b) s predominance requirement, Comcast Corp. v. Behrend held that damages must be susceptible to classwide proof, and reiterated both the rigorous analysis requirement for class certification and the rule requiring consideration of the merits when merits issues overlap with class certification issues N.Y.S.2d 634 (Table), 2013 WL (Sup. Ct. 2013). The author represented defendants American International Group, Inc. and New Hampshire Insurance Co. in this case. 87 at *3 (brackets in original) (quoting Winkelmann v. Excelsior Ins. Co., 626 N.Y.S.2d 994, 995 (1995)). 88 at *4 (quoting Winkelmann, 626 N.Y.S.2d at 996) S. Ct (2013). See infra text accompanying notes S. Ct (2013). See infra text accompanying notes

20 FDCC Quarterly/Fall 2014 Amgen Inc. v. Connecticut Retirement Plans & Trust Funds focused primarily on issues unique to securities class actions, but also addressed the circumstances under which the merits may be considered in deciding class certification. 92 In Genesis Healthcare Corp. v. Symczyk, 93 the Court sidestepped the question of whether a defendant can defeat a collective action by making an offer of judgment on a named plaintiff s claim, but provided helpful analysis for cases in which a named plaintiff s claim is subject to arbitration or appraisal. In American Express Co. v. Italian Colors Restaurant, 94 the Court held that an arbitration clause prohibiting class action arbitrations is enforceable even when the cost of arbitrating a federal statutory claim on an individual basis exceeds the potential recovery. In Oxford Health Plans LLC v. Sutter, the Court held that an arbitrator did not exceed his authority in deciding that a contract provided for class arbitration (i.e., a class action arbitration proceeding). 95 Each of these cases, and its potential impact on insurance cases, is discussed below. A. Standard Fire Insurance Co. v. Knowles Standard Fire Insurance Co. v. Knowles 96 was one of a series of class actions brought in the Miller County, Arkansas Circuit Court focusing on when general contractor fees are owed on claims for property damage under homeowners insurance policies. In order to avoid removal under the Class Action Fairness Act of 2005 (CAFA), 97 the plaintiff stipulated that he would not seek more than $5 million in the aggregate on behalf of the class. After Standard Fire removed the case to federal court, the plaintiff moved to remand to state court on the ground the amount in controversy did not exceed the required $5 million. Although agreeing that, absent the stipulation, the amount in controversy was slightly above the $5 million jurisdictional threshold, the district court remanded the case in light of the stipulation. 98 The Eighth Circuit denied Standard Fire s petition for permission to file an interlocutory appeal under CAFA S. Ct (2013). See infra text accompanying notes S. Ct (2013). See infra text accompanying notes S. Ct (2013). See infra text accompanying notes S. Ct (2013). See infra text accompanying notes S. Ct (2013). The author represented The Standard Fire Insurance Company in this case. 97 See 28 U.S.C. 1332(d). 98 Knowles, 133 S. Ct. at Knowles v. Standard Fire Ins. Co., 2012 WL (8th Cir. 2012). 42

21 Turning New Guns on Old Targets The United States Supreme Court held unanimously that [t]he District Court... wrongly concluded that Knowles precertification stipulation could overcome its finding that the CAFA jurisdictional threshold had been met. 100 Relying on its 2011 decision in Smith v. Bayer Corp., 101 the Court explained that a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified : 102 Because his precertification stipulation does not bind anyone but himself, Knowles has not reduced the value of the putative class members claims. For jurisdictional purposes, our inquiry is limited to examining the case as of the time it was filed in state court. At that point, Knowles lacked the authority to concede the amountin-controversy issue for the absent class members. 103 The Court also cited with approval and quoted from the Seventh Circuit s opinion in Back Doctors Ltd. v. Metropolitan Property & Casualty Insurance Co., 104 which noted that a class representative has a fiduciary duty not to throw away what could be a major component of the class s recovery (e.g., in Back Doctors, by disavowing a present intention to seek punitive damages that might exceed the jurisdictional threshold). 105 The Supreme Court also reasoned that allowing the plaintiff to use a stipulation to avoid CAFA jurisdiction would run directly counter to CAFA s primary objective: ensuring Federal court consideration of interstate cases of national importance. 106 Plaintiff s improper tactic would also have the effect of allowing the subdivision of a $100 million action into 21 just-below-$5-million state-court actions simply by including nonbinding stipulations; such an outcome would squarely conflict with the statute s objective. 107 As a further indication of the Supreme Court s views on the use of tactics designed to avoid federal jurisdiction under CAFA, at oral argument, Chief Justice Roberts asked the plaintiff s counsel whether it would be proper under CAFA for a named plaintiff to limit the proposed class to persons whose last names begin with the letters A through K. The plaintiff s counsel responded that such a legal strategy would be perfectly appropriate. Justice Breyer, who ultimately authored the Court s unanimous opinion, commented that 100 Knowles, 133 S. Ct. at S. Ct. 2368, 2380 (2011). 102 Knowles, 133 S. Ct. at (citation omitted) F.3d 827 (7th Cir. 2011). 105 Knowles, 133 S. Ct. at 1349 (quoting Back Doctors, 637 F.3d at 830). 106 at