Regulators Warned of Class-Action Threat to Their Authority

NEW ORLEANS December 07 (BestWire) — State insurance regulators were warned that cross-border class-action suits could usurp their authority unless they take an active role in seeking reform of the civil justice system.

Published on December 7, 2004

Industry representatives and attorneys delivered their warning to the Class Action Insurance Litigation Working Group of the National Association of Insurance Commissioners at the NAIC's Winter National Meeting in New Orleans. But a consumer advocate accused the working group of stacking the session with pro-industry speakers.

Bob Zeman, senior vice president of industry and regulatory affairs for the Property Casualty Insurers Association of America, outlined steps he said may be helpful in stemming the tide of class-action litigation. One would be "exhaustion of administrative remedies" — requiring would-be plaintiffs to pursue all regulatory avenues to address their grievances before turning to the courts. Another would be the right to appeal immediately to overturn a class certification, before the litigation proceeds. A third measure would be caps on appeal bonds that defendants must post when asking a higher court to overturn a decision.

"The trend at the state level has been to focus on the appeal bonds," Zeman said, citing Georgia, Iowa and Virginia as states that have adopted caps in 2004.

Steve McManus of State Farm told the working group that class-action reform may pass in the next Congress, but work still is needed at the state level. He said that after tort reform was enacted in Texas, class-action lawyers were encouraged to cross the border and bring their cases in Oklahoma.

McManus also updated the regulators on state-level litigation against his company that in effect sought to extend the reach of one state's laws across the country. One case in California alleged that State Farm is overcapitalized and should pay out its entire net worth in a dividend to policyholders. McManus said he was confident of victory in the case, but nevertheless it's costing the company tens of millions of dollars.

Another case, in New Mexico, challenged fees State Farm charges in connection with installment premiums, claiming they weren't filed properly with the state. McManus said the insurer maintains the fees aren't for risk transfer and thus aren't subject to rate filing laws. But the disturbing aspect, he said, was the attempt to apply New Mexico law to 16 states.

Phillip E. Stano of the Washington law firm Jorden Burt LLP updated regulators on other cases involving so-called "modal premiums" in New Mexico, which allege that insurers failed to disclose adequately the added cost of such premiums or the effective "annual interest rate" reflected by that cost. Stano said insurers argue that a percentage rate only must be disclosed in the case of a loan, which a modal premium is not.

Stano said such litigation would have the effect of taking away regulators' basic function of approving insurance products for sale in their states, and he urged the regulators to get involved in such cases. Where regulators have come forward, the outcome has been successful, but where they haven't, insurers have tended to settle the cases, he said.

"This is a fundamental challenge, in my opinion, to state regulation," Stano said.

Birny Birnbaum, executive director of the Center for Economic Justice and a funded consumer representative to the NAIC, chided the committee for entertaining a string of pro-industry speakers.

"This whole process is really outrageous to consumers," Birnbaum said. "There is no balance in the opinions being presented..."

Birnbaum said that consumers and state attorneys general are the ones holding insurers accountable. He called the regulators' approach to the class-action issue "a poke in the eye to consumers who seek redress" and pleaded with the working group to "at least pretend to get some balance."