Attorney’s Advice to Insurers on Reducing Class Action Exposure Post-Sandy

November 8, 2012

A veteran attorney who spent several years defending insurance companies in lawsuits from Hurricane Katrina is offering advice to insurers on class action and bad faith exposure post-Sandy.

Insurers will be denying claims where flood is not covered by their policies, and segregating damage between wind and flood, similar to the adjustment of claims following Hurricane Katrina, said Wystan Ackerman, a partner at the Hartford, Conn.-based law firm Robinson & Cole LLP.

“Given that I spent most of my time for several years defending insurance companies in lawsuits from Hurricane Katrina, including numerous putative class actions, I thought I would offer here some thoughts on what claim executives and their counsel can be doing now to try to reduce potential class action and bad faith exposure,” Ackerman wrote on his blog, Insurance Class Action Insider. He offered the following advice to insurance companies:

• Some states have specific deadlines for certain claim-related activities, which may or may not be extended for catastrophes, and violation of these deadlines sometimes results in automatic penalties. In the Hurricane Katrina class actions, insurers were able to successfully defeat class certification in federal court in numerous cases, Ackerman said, but there were a few class actions certified in state court that resulted in some large verdicts and settlements.

Most significant was the Louisiana Supreme Court’s decision in Oubre v. Louisiana Citizens Fair Plan, 79 So. 3d 987 (La. 2011), which awarded penalties of $5,000 per claim for every adjustment that was not initiated in compliance with the statute, without any showing of bad faith. The verdict against Louisiana Citizens Fair Plan was over $100 million with interest.

• Keep in mind that general contractor overhead and profit has been a major hotbed of class action litigation in recent years. In the Katrina litigation, the federal courts refused to certify classes on this issue, but one state intermediate appellate court certified a class (that decision was later overturned by the state supreme court).

• Segregation of wind and flood damage is likely to become a key battleground in litigation. The Katrina decisions on this include Leonard v. Nationwide Mutual Ins. Co., 499 F.3d 419 (5th Cir. 2007), Corban v. USAA, 20 So. 3d 601 (Miss. 2009), and Arctic Slope Regional Corp. v. Affiliated FM Ins. Co., 564 F.3d 707 (5th Cir. 2009). The new COASTAL Act could also come into play on this, although it appears FEMA has not yet promulgated regulations under that Act.

• Adjusting each claim on its individual merits helps reduce class action exposure. Class action lawsuits are easiest to defend when a company’s adjusters make case-by-case decisions based on the particular factual circumstances of each loss. That also often makes business sense, although sometimes adjusters ask for “rules” to follow when they should be using their discretion.

• Good customer service helps avoid lawsuits. Adjusters won’t always be delivering good news to insureds following Sandy because many policies do not cover flood and a lot of the damage was caused by flood. How that news is delivered and how people are treated can make a difference in reducing the number of lawsuits your company receives and whether the company is sued in class actions.

Insureds who have a more positive experience in their interactions with the company, even when bad news is being delivered, will be less likely to respond to an advertisement from a plaintiffs’ attorney suggesting that they file a lawsuit. Especially when they are asked to file a putative class action lawsuit, where they would be subjected to extensive discovery and other burdens on their time.

Even lawsuits that seem relatively frivolous cost money to defend, and meritless class action suits cost more. And even where a lawsuit is filed, it is always helpful in defending the case when the insured at her deposition and at the class certification hearing or trial admits that Jane Smith the adjuster was so nice and explained things to her so well.

• Start putting a plan together for coordinating the litigation that inevitably will follow the storm. In Louisiana following Katrina, some plaintiffs’ lawyers filed suits in Baton Rouge, including class actions, before the New Orleans courts were even open.

There are several important strategies that can be used by insurers, including: (1) establishing coordination among defense lawyers and using test cases for seeking court resolution of critical issues; (2) recognizing the unique issues of judicial ethics that can occur when a widespread catastrophe affects everyone living in the affected area; (3) moving to strike class allegations in putative class actions; (4) using methods to efficiently resolve large amounts of smaller suits, such as establishing a protocol to administratively stay cases, conduct written discovery, and then have settlement negotiations; and (5) taking measures to minimize possible class action tolling of suit limitation provisions in insurance policies.

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