A common tactic by plaintiffs’ lawyers in filing class actions against insurance companies is to attempt to recover automatic statutory penalties which are small on each individual claim but, when aggregated, potentially impose a very large liability on the insurer. An example of this type of suit is Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 130 S. Ct. 1431 (2010), where the plaintiffs sought to recover an automatic statutory penalty under New York law for failure to pay or deny certain auto insurance claims within a 30-day period. (The Supreme Court held that, despite the fact that New York state law precluded asserting these violations in a class action, in federal court Rule 23 controlled and therefore class certification could be sought in federal court.) In the cases in which Hurricane Katrina-related insurance class actions were certified in Louisiana state courts, the plaintiffs pled violations of Louisiana bad faith statutes providing penalties for failure to initiate loss adjustment within a specified period of time.
A recent New Jersey Appellate Division decision adopts and highlights a key argument defendants can make in opposing certification of this type of class action: if the individual penalty is large enough that it would not be impractical for individuals to seek it, at least in small claims court, a class action is not the superior method of adjudicating such claims. In Local Baking Prods., Inc. v. Kosher Bagel Munch, Inc., 23 A.3d 469 (N.J. Super. Ct. App. Div. 2011), the plaintiffs sought certification of a class making claims under the federal Telephone Consumer Protection Act, sometimes called the “blast fax statute.” It prohibits the transmission of unsolicited advertisements to fax machines. The penalty for each violation is $500, unless actual damages are higher. Id. at 470. The court found superiority not satisfied because:
[B]y imposing a statutory award of $500, a sum considerably in excess of any real or sustained damages, Congress has presented an aggrieved party with an incentive to act in his or her own interest without the necessity of class action relief. As the motion judge observed, ‘the nature of the harm . . . as near as I can tell, is about two cents worth of paper and maybe a little ink and toner.’ The judge also noted that in New Jersey, “pro se individuals and consumers are allowed to file a small claims complaint, [and] they do not need a lawyer.” . . . The combination of the TCPA’s design and New Jersey’s procedures suggests that the benefit of a class action has been conferred on a litigant by the very nature of the procedures employed and relief obtained.
Id. at 476-77.
The takeaway here is that if you are defending against certification of this kind of class action seeking a statutory penalty, you may have a strong argument that there is a lack of superiority.