Class-Action Reform Passed At Last, But Impact May Be Limited

House joins Senate in backing bill, but analysts doubt new law will be a panacea

Washington

You couldnt blame the insurance industry for wanting to strike up the band and start a parade to herald the long-awaited passage of federal legislation to reform class-action litigation. However, a celebration might be premature.

It is undoubtedly a relief for supporters that the bill was finally approved in the House last week by a vote of 279-149, following Senate passage the week before. It is also certain to be signed into law by its prime backer, President George W. Bush, at a festive White House ceremony, and hailed as a triumph for the Republicans in the White House and Congress, as well as their insurance industry and risk management allies in the private sector.

But the jury is still out as to the laws likely impact on litigation costs. Indeed, the results could be surprisingly modestthat is, if the precedent-setting legislation, representing a sea change in legal philosophy dating from 1789, is sustained by the courts.

That cautious appraisal is the consensus of rating agencies, lawyers, an industry public information clearinghouse, Congressional testimony and various property-casualty companies.

The key point to remember, according to Mark Behrensa partner at the Washington, D.C. office of Shook, Hardy & Bacon, L.L.P.is that it took eight years of effort to win legislation that essentially constitutes a compromise on reform.

“It is virtually impossible to determine the impact on premiums in terms of exact dollars. What we can say is that it will have a modest, beneficial impact for property and casualty insurers,” according to Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York.

“However,” he added, the law “will not produce a windfall for the industry. The reason for that is to the extent there is beneficial experience to the industry, most of those benefits will be passed along to customers in the form of lower premiums, higher limits, lower retentions, or better terms and conditions.”

Mr. Hartwig also said he expects the effects of the legislation to be mostly for commercial casualty insurersparticularly those that write litigation-prone coverages such as product liability.

“But there will also be some benefit for private-passenger auto insurers who found themselves at the receiving end of numerous class actionsfor example, for after-market parts,” he added. Mr. Hartwig believes that “it will be more difficult to win those cases in federal courts, because that [after-market parts] case was brought in Madison County, Ill.it wasnt brought there by accident.”

At the same time, he said, the Class Action Fairness Act “does nothing to resolve the asbestos crisis or the med mal crisis, because those cases are not heard in the courts as class actions. Those are mass torts, which are different.”

“The other issue is that the federal courts are not going to be any panacea,” according to Mr. Hartwig. “The reason is that the federal courts are already overloaded, so it could mean that it could take a significant amount of time to have your case heard in a federal venue.”

Chris Winans, a staff official at American Insurance Group in New York and a long-time insurance industry securities analyst, said that “clearly, [class-action reform] is a positive for the industry, but it is unclear if it will all fall to the bottom line.”

Steve Dreyer, managing director and practice leader for North American financial services ratings at Standard & Poors, said: “Were seeing this as a good first step, but expect it to have just a marginal impact on companies balance sheets. Were taking a wait-and-see attitude as to whether this will create any benefit in companies loss ratiosin other words, if savings really materialize.”

John Iten, a director and senior analyst at S&P, added: “Will it lead to lower rates? Thats a reasonable possibility, and that will just enable companies to cut rates and compete more effectively.”

Michael J. Mueller, the partner in charge of the nationwide class-action team at Akin Gump Strauss Hauer & Feld LLP in Washington, D.C., said that while this could create “a brave new world” in class-action litigation, the law will be challenged in the courts by plaintiffs' trial lawyers as an unconstitutional expansion of federal power.

“It also has many grey areas that will require the courts to give meaning to the law,” Mr. Mueller noted. For example, he said the impact on cases involving the laws of multiple states remains unclear.

“This is the most significant change ever for where class actions will get decided,” Mr. Mueller said. “It is a substantial change in the power of federal courts to hear cases based solely on state laws, known as 'diversity' jurisdiction. As a result, companies will need to put more emphasis on counsel who know federal class-action practice and the procedures for getting state class-actions transferred to federal court under the provisions of the new law.”

He noted that current practices for dealing with class-action litigation are based on laws enacted by Congress in 1789. He also cited comments by Sen. Tom Carper, D-Del., that more than 90 percent of class-action lawsuits in his state will remain in state courts under the law, and that nationally over 60 percent of mass class-actions would remain in state courts. “But that will vary over time and by state,” Mr. Mueller cautioned.

Regarding concerns that class actions will clog the federal courts (a point discounted in a recent speech to an insurance group by a top aide to Sen. Arlen Specter, R-Pa., who chairs the Senate Judiciary Committee), Mr. Mueller said he believes plaintiffs lawyers are going to seek to narrow the claims in their cases to avoid federal jurisdictionfor example, keeping the amount under $5 million. They will also seek to define their class in such a way as to affect fewer than 100 people, which also would keep cases out of federal court under the new law.

Another example, Mr. Mueller said, is to emphasize state or local interests. “Theyll want to consider all factors, and they may want to plead to avoid the triggers in federal jurisdictions,” he noted.

Such initiatives to avoid federal court “would have the impact of limiting the impact” of the class-action reforms, according to Mr. Mueller. “There is a provision against artful pleading, if you are trying to get around the thresholds. The law says that the federal courts should consider that in determining jurisdiction. Therefore it is problematic as to whether this will clog the [federal] courts.”

Mr. Behrens, of Shook, Hardy & Bacon, who tracks class-action litigation in state courts for insurance clients, believes that “when the law goes into effect, it will ensure that insurers and other defendants will be able to have a fair federal forum to decide large interstate class actions. The plaintiffs class-action bar will no longer be able to file large class actions in jurisdictions the American Tort Reform Association calls judicial hellholesvenues where the judges do not apply rigorous scrutiny to class certification.”

Mr. Behrens, echoing Mr. Mueller, said the new law may change the way class actions are litigated. “Currently, the plaintiffs try for the largest classes possible to maximize settlement pressure on defendants,” he said. “Under the new bill, those tactics will make it easier for defendants to remove those cases to federal court, so plaintiffs may have to balance their desire to stay in state courts against their interest in having larger classes.”

He added that “what plaintiffs may have to do is break these cases into smaller cases and file where defendants are located. So the plaintiffs may be caught in a Catch-22if they try for a large class so they can increase their settlement leverage, they will have to do it in federal court under the new law.”

Mr. Behrens also doesnt think the new law will result in a logjam in federal courts. “One of the reasons is that many of the class actions that have been filed would not be certified in other jurisdictions,” he said. “The judges in judicial hellholes have been criticized for not rigorously applying judicial standards, and so some of the cases, if they dont deserve class treatment, may not be brought in the future.”

Reproduced from National Underwriter Edition, February 18, 2005. Copyright 2005 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-Action Reform Passed At Last, But Impact May Be Limited

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