Class Actions Threaten Regulators' Authority

New York

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

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

This type of class-action-made law is “a much more current threat to state regulation than a national charter,” said David Snyder, vice president and general counsel of the American Insurance Association in Washington, D.C., speaking at the June NAIC 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 Class Action Insurance Litigation Working Group–one of the few events conducted in a standing-room-only news-conference-type atmosphere–cited the Original Equipment Manufacturer automobile parts cases as an example of class actions that can sidestep the regulatory process.

In OEM cases, a class of plaintiffs from multiple states sues to force insurers to pay for replacement parts produced by the manufacturer of the damaged vehicle, instead of less expensive parts made by other companies. There have been major class actions involving OEM parts in several states, including Illinois and Missouri.

Holdings in this kind of litigation– even though the product of one judge or jury in one state considering only the limited evidence before them–can legally bind insurers and body shops in other states to refrain from using non-OEM parts, the Working Group members stressed. And that applies even if the use of such parts is lawful in the states where the insurers and body shops do business.

Also, the insurance regulators in those other states never received a chance to offer proof or expert opinions, such as testimony that requiring OEM parts would unreasonably drive up costs and not benefit consumers.

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

Other commissioners on the Working Group are Mike Pickens of Arkansas, John Morrison of Montana, Holly Bakke of New Jersey, Jim Poolman of North Dakota, Ann Womer Benjamin of Ohio, and John Crowley of Vermont. The group also includes several regulators who are not commissioners.

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

Bob Wake, an attorney for the Maine Bureau of Insurance and member of the Working Group, said the New Mexico case involved modal premiums–fees and finance charges added to policies when insureds paid by installments. The class contended that these charges were subject to the requirements of the federal Truth in Lending Act and other disclosure laws. The trial court decided against the insurers, and the case is on appeal.

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

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

“The courts trying these class actions are often unaware of, or are ignoring, the national financial ramifications and impact their decisions have on other states,” Mr. Snyder said. “It is a back-door way of invalidating other states' insurance laws and regulations.”

Another case discussed at the meeting was a California case against Bloomington, Ill.-based State Farm Automobile Insurance Company alleging the insurer's reserves were too high. Plaintiffs in that case contended that the allegedly excessive reserves inflated premiums and decreased dividends. The insurance commissioner did not testify in that case.

Commissioners on the Working Group, and insurer representatives in the audience who were given an opportunity to comment, agreed that it is the regulators' job to determine the adequacy of reserves, and not the job of “laypersons” on a jury in another state.

AIA's Mr. Snyder noted there have also been class actions involving credit scoring, automobile policy medical claims and life insurance premium disclosure in which courts have or attempted to “determine rights and responsibilities of citizens in other states.” Those courts, he said, “make macro-level decisions about insurance requirements without any thought to protecting the solvency of insurance companies.”

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

Current legislative proposals to move many types of class actions from state to federal court may affect how these cases influence insurance law, according to Bob Hurns, counsel for state government affairs for the Des Plaines, Ill-based National Association 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 recruits plaintiffs,” he said, calling this a “pathway-to-pocket” approach.

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

“Federal courts will bring more objectivity and more resources to these [class action] cases, and be better venues. It makes no sense to apply one state's laws to 49 other states,” said Mr. Hurns.

The NAIC Class Action Working Group is partnering with the RAND Corporation'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 of the study methodology proposed by RAND, consumer advocates present at the meeting seemed uncomfortable with the emphasis on data obtained from insurers.

Birny Birnbaum of the Austin, Texas-based consumer group Center for Economic Justice, during the audience comment period, urged Robert Reville, the RAND spokesperson who made the study presentation, to also consider data provided by plaintiff law firms that specialize in class action litigation.

Mr. Birnbaum noted that only a small number of firms do this type of litigation, so the data collection process would not be overly burdensome. Mr. Reville indicated that such data might be helpful, 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Class Actions Threaten Regulators' Authority

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