Class Actions Threaten Regulators'Authority

New York

Juries and judges in class action suits have been usurping stateregulators' authority, and the regulators don't like it.

Case law made by judges and juries in multistate class actionlitigation is forcing insurers and other businesses to comply withinsurance-related rules that were never approved or even consideredby the insurance departments or legislatures in their states,regulators said during the National Association of InsuranceCommissioners summer meeting.

This type of class-action-made law is “a much more currentthreat to state regulation than a national charter,” said DavidSnyder, vice president and general counsel of the AmericanInsurance Association in Washington, D.C., speaking at the JuneNAIC meeting. “If a state can't determine its own insurance laws,you might as well have federal regulation,” Mr. Snyder added.

During the Kansas City, Mo.-based NAIC's meeting, the ClassAction Insurance Litigation Working Group–one of the few eventsconducted in a standing-room-only news-conference-typeatmosphere–cited the Original Equipment Manufacturer automobileparts cases as an example of class actions that can sidestep theregulatory process.

In OEM cases, a class of plaintiffs from multiple states sues toforce insurers to pay for replacement parts produced by themanufacturer of the damaged vehicle, instead of less expensiveparts made by other companies. There have been major class actionsinvolving OEM parts in several states, including Illinois andMissouri.

Holdings in this kind of litigation– even though the product ofone judge or jury in one state considering only the limitedevidence before them–can legally bind insurers and body shops inother states to refrain from using non-OEM parts, the Working Groupmembers stressed. And that applies even if the use of such parts islawful in the states where the insurers and body shops dobusiness.

Also, the insurance regulators in those other states neverreceived a chance to offer proof or expert opinions, such astestimony that requiring OEM parts would unreasonably drive upcosts and not benefit consumers.

Commissioner Larry Mirel of Washington, D.C., chairman of theWorking Group, noted that, in some cases, the courts trying theseclass actions have refused to allow regulators to testify. Since acourt can consider only the proof submitted, this can result indecisions based on incomplete or faulty information, he added.

Other commissioners on the Working Group are Mike Pickens ofArkansas, John Morrison of Montana, Holly Bakke of New Jersey, JimPoolman of North Dakota, Ann Womer Benjamin of Ohio, and JohnCrowley of Vermont. The group also includes several regulators whoare not commissioners.

Mr. Mirel cited New Mexico as a state that did not permit theinsurance commissioner to testify in an insurance-related classaction.

Bob Wake, an attorney for the Maine Bureau of Insurance andmember of the Working Group, said the New Mexico case involvedmodal premiums–fees and finance charges added to policies wheninsureds paid by installments. The class contended that thesecharges were subject to the requirements of the federal Truth inLending Act and other disclosure laws. The trial court decidedagainst the insurers, and the case is on appeal.

Mr. Wake called this case a “poster child” for class actionreform. “The problem is that a decision of a trial court in onestate can be applied in any other state,” he explained.

The AIA's Mr. Snyder mentioned Ohio as a state that did allowtestimony by an insurance commissioner. The case in Ohio, he said,“charged that administrative procedures involving participation ina rate hearing were not used,” noting that former CommissionerCovington of Ohio was heard by the court. The case has yet to bedecided.

“The courts trying these class actions are often unaware of, orare ignoring, the national financial ramifications and impact theirdecisions have on other states,” Mr. Snyder said. “It is aback-door way of invalidating other states' insurance laws andregulations.”

Another case discussed at the meeting was a California caseagainst Bloomington, Ill.-based State Farm Automobile InsuranceCompany alleging the insurer's reserves were too high. Plaintiffsin that case contended that the allegedly excessive reservesinflated premiums and decreased dividends. The insurancecommissioner did not testify in that case.

Commissioners on the Working Group, and insurer representativesin the audience who were given an opportunity to comment, agreedthat it is the regulators' job to determine the adequacy ofreserves, and not the job of “laypersons” on a jury in anotherstate.

AIA's Mr. Snyder noted there have also been class actionsinvolving credit scoring, automobile policy medical claims and lifeinsurance premium disclosure in which courts have or attempted to“determine rights and responsibilities of citizens in otherstates.” Those courts, he said, “make macro-level decisions aboutinsurance requirements without any thought to protecting thesolvency of insurance companies.”

Mr. Mirel said it is the plaintiffs' bar that benefits most fromthis type of litigation, as attorney fees often dwarf the recoveryof each individual in the class. That observation was greetedwarmly by the insurer lobbyists in attendance.

Current legislative proposals to move many types of classactions from state to federal court may affect how these casesinfluence insurance law, according to Bob Hurns, counsel for stategovernment affairs for the Des Plaines, Ill-based NationalAssociation of Independent Insurers.

“Many state courts have been cultivated by the trial bar,creating venues that are friendly to plaintiffs,” Mr. Hurns said.“The trial bar comes up with a theory for suing and then recruitsplaintiffs,” he said, calling this a “pathway-to-pocket”approach.

As an example, he cited “diminished value” cases, in whichplaintiffs claim that they should be reimbursed for an amount equalto the value their vehicles have lost because it is impossible,they allege, for repair facilities to restore vehicle exactly totheir pre-accident conditions. He said the majority of theseactions have been dismissed and that the trial bar seems to begiving up on them.

“Federal courts will bring more objectivity and more resourcesto these [class action] cases, and be better venues. It makes nosense to apply one state's laws to 49 other states,” said Mr.Hurns.

The NAIC Class Action Working Group is partnering with the RANDCorporation's Institute of Civil Justice in Santa Monica, Calif.,to study class action litigation frequency, scope and outcomes.Although the Working Group and insurer representatives approved ofthe study methodology proposed by RAND, consumer advocates presentat the meeting seemed uncomfortable with the emphasis on dataobtained from insurers.

Birny Birnbaum of the Austin, Texas-based consumer group Centerfor Economic Justice, during the audience comment period, urgedRobert Reville, the RAND spokesperson who made the studypresentation, to also consider data provided by plaintiff law firmsthat specialize in class action litigation.

Mr. Birnbaum noted that only a small number of firms do thistype of litigation, so the data collection process would not beoverly burdensome. Mr. Reville indicated that such data might behelpful, but made no promise to use it in the study.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, July 28, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.