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Insurers Cry Out For Class-Action Reform

National Underwriter,  April 24, 2000 Edition
By Amanda Levin, Atlanta

Citing last year’s whopping $1.3 billion verdict against State Farm Mutual Insurance Company over the use of generic auto replacement parts, insurance industry officials here called for sweeping reform of the country’s class-action system.

Although class actions have always been part of the U.S. legal system, it is the recent explosion of such suits and the alleged abuses accompanying them that have generated a high level of concern on the part of insurers and the general business community alike, according to a report by the Downers Grove, Ill.-based Alliance of American Insurers distributed here at its annual meeting.

A total of 2,317 class-action suits were filed in federal court from 1985 to 1987 compared to 4,171 from 1995 to 1997—an 80 percent increase, the Alliance noted, citing statistics compiled by the Administrative Office of the U.S. Courts.

As a result, class actions are forcing corporations to focus on defending against and avoiding lawsuits rather than manufacturing better products, providing better services and lowering prices, according to the Alliance report, "Class Action Litigation: Problems and Solutions."

Meanwhile, plaintiff attorneys are making millions of dollars off these suits, the Alliance charged.  Insurers are sensitive to trends in class-action suits, in part because they have been targets themselves. "Because the insurance industry is regulated, the extent to which class-action suits are even appropriate [against the industry] needs to be determined," according to one of the panelists here, Robert Hirshon, president-elect of the Washington-based American Bar Association. "State insurance commissioners have significant authority and control over the terms and conditions of insurance policies," he noted.

Furthermore, "class-action verdicts cannot be applied in the same way in each state," said Mr. Hirshon. For instance, he noted, "Alabama insurance regulators might not be partial to generic [auto] parts, but regulators in Massachusetts might think the use of generic parts is the way to go."

In explaining the potentially se-vere impact of a class action on an insurance company, Mr. Hirshon said, "a class-action settlement in one state can be binding or influential in other states. Thus, in a country with over 130 million registered automobiles, for instance, the stakes for insurers are extremely high" when verdicts involve auto parts.

Class actions also harm consumers, said Walter Olson, a senior fellow at the Manhattan Institute’s Center for Legal Policy in New York. Regarding the State Farm verdict, he said, "a lot of consumers might be charged higher insurance rates soon because of the added cost of solely using original equipment manufacturer parts."

Barry Weprin, a partner at Mil-berg, Weiss, Bershad, Hynes and Lerach in New York, said that in some instances class-action litigation "has practically become a substitute for a lack of regulation."  Mr. Weprin said that one of the reasons plaintiff lawyers have become more involved in class actions against insurers is that "there is no federal body setting rules on a national basis for insurers to follow, which makes them more susceptible to suits."

The National Association of Insurance Commissioners sets model rules, but insurance companies are not required to follow them, he noted.

In addition, "insurance commissioners…sometimes lack the resources to do the necessary investigations into some of these companies’ practices or are reluctant to go after insurers that are large employers in their states," said Mr. Weprin.

However, Charles Newman, a partner at the law firm Bryan Cave in St. Louis, said "very seldom will a class action be brought about something that is outright illegal, because your state regulator would have probably picked it up." Instead, he said, "such suits often involve a current legal practice or approved product."

Class-action verdicts "can reach into your pockets in a very big way," warned Mr. Newman. "You’ve got to actively monitor what is going on with your company’s class-action litigation. It cannot be taken lightly."

For instance, it is important to be aware that many class-action suits are filed in supposedly "friendly state courts," which presents a problem for insurers, said Mr. Newman. "Many of these suits are brought in backwater jurisdictions where the plaintiff’s lawyer is tight with the judge."

Legislation pending in Congress—SB 353 and HR 1875—would redirect many of the class-action cases from state to federal courts, according to the Alliance report. Class actions filed in state courts make up the bulk of litigation, the group noted.