Often the first step for a carrier in defending an insurance class action filed in state court is to determine if the $5 million amount in controversy under the Class Action Fairness Act (“CAFA”) can be met for removal to federal court, and how the amount in controversy can be proven.  In Back Doctors Ltd. v. Metropolitan Property & Casualty Insurance Company, No. 11-8003 (7th Cir. Apr. 1, 2011), the issue was whether punitive damages could be considered in determining the amount in controversy where punitives were not requested in the complaint, but a state court potentially could award them on the causes of action pled.  The Seventh Circuit held that punitive damages could be considered, and that the defendant does not have to establish the amount in controversy by a preponderance of evidence.  Rather, the defendant’s estimate of the amount in controversy controls unless the plaintiff can show it is legally impossible for more than $5 million to be recovered: 

The legal standard was established by the Supreme Court in St. Paul Mercury:  unless recovery of an amount exceeding the jurisdictional minimum is legally impossible, the case belongs in federal court.  Only jurisdictional facts, such as which state issued a party’s certificate of incorporation, or where a corporation’s headquarters are located, need be established by a preponderance of the evidence.

. . .

[T]he estimate of the dispute’s stakes, advanced by the proponent of federal jurisdiction controls unless a recovery that large is legally impossible.  So the question here is not whether the class is more likely than not to recover punitive damages, but whether Illinois law disallows such a recovery.  (Slip opinion at 4-5) 

The court also made an interesting comment about how the named plaintiff could not, after removal, attempt to disavow any claim by the putative class for punitive damages in order to reduce the amount in controversy.  In addition to mentioning the settled rule that actions taken to reduce the amount in controversy after removal cannot deprive the federal courts of jurisdiction, the court explained that: 

[Plaintiff] has a fiduciary duty to its fellow class members.  A representative can’t throw away what could be a major component of the class’s recovery.  Either a state or a federal judge might insist that some other person, more willing to seek punitive damages, take over as representative.  What [Plaintiff] is willing to accept thus does not bind the class and therefore does not ensure that the stakes fall under $5 million.  (Slip opinion at 6.) 

Lessons Learned for Insurance Class Actions:  The lightened burden should make it easier for insurers to win battles over the amount in controversy under CAFA.  But this is only the Seventh Circuit speaking, and other circuits have imposed a preponderance of the evidence standard.  For plaintiffs who want to bring a class action for less than $5 million, the lesson is that the complaint must be very specific because plaintiffs will have only one chance to “get it right.”