Insurance companies writing Personal Injury Protection (PIP) coverage in New York with optional extended benefits should pay careful attention to a class action recently brought against State Farm.  Judge Block of the Eastern District of New York recently denied a motion to dismiss in this case.  This may result in additional filings against other insurers.

In Servidio v. State Farm Insurance Company, 2011 U.S. Dist. LEXIS 105516 (E.D.N.Y. Sept. 19, 2011), the plaintiff claims that State Farm committed an unfair trade practice under New York statutes by selling an “extended” PIP coverage option that provided no increase in policy limits – the only additional benefit of the extended coverage was a broader definition of who is an “eligible injured person.”  While the basic PIP coverage defined “eligible injured person” as any person injured by the insured automobile in New York State and any New York State resident injured by the insured automobile outside the state, the “Q1” extended option defined “eligible injured person” as any passenger in any vehicle operated by the insured or his or her relatives.  Other than that difference, the basic and “Q1” coverages were identical.  Id. at *3.  The additional premium for this “Q1” option was approximately $1 per policy (but for a company the size of State Farm, the total amount of premiums during the statute of limitations period was over $4 million and, with the possibility of punitive damages, the amount in controversy was over the $5 million CAFA threshold).

Judge Block concluded that the plaintiff had sufficiently pled that State Farm’s conduct was misleading, and therefore potentially a statutory violation:

State Farm argues that its alleged conduct cannot have been materially misleading because the terms of Q1 coverage were (1) “fully disclosed,” Def’s Mem. of Law 23, and (2) defined in terms approved—indeed, required—by DOI.

The Court disagrees that the policy “fully discloses” the nature of Q1 coverage in such a way as to prevent a reasonable consumer from being misled. The language of the endorsement implies that the additional PIP option expands the mandatory coverage by (1) broadening the definition of “eligible injured” person and (2) providing reimbursement for “extended”—as opposed to “basic”—economic loss. At the Q1 level, however, “expanded economic loss” is precisely the same as “basic economic loss,” hardly an intuitive understanding of the word extended.

DOI does not require State Farm to define Q1 coverage as it does. It mandates the endorsement language to be used, but does not purport to assign the numerical limits to the coverage. See N.Y. Comp. Codes R. & Regs. tit. 11, § 65-1.3 n.11 (“Companies may substitute the appropriate term, reference or language for the matter set out in brackets.”). Indeed, a 2008 opinion letter by DOI’s Office of General Counsel states that an additional PIP endorsement “must confer an additional benefit on the insured by altering the time and/or dollar limits available under [mandatory] PIP.” OGC Op. 08-05-17 (May 15, 2008), available at http://www.ins.state.ny.us/ogco2008/rg080517.htm (last visited Sept. 13, 2011). Though not binding, the letter represents DOI’s official position, see id., and accords with the Court’s view that State Farm’s Q1 coverage—which does not alter any of those limits—is likely to mislead reasonable consumers as to what they are paying for.  (Id. at *10-11 (emphasis added).)

I don’t know if this particular issue is unique to State Farm or if it is common in the industry.  But it is common for plaintiffs’ lawyers to file a “test case” on a particular issue against one insurer and, if it has some success, pursue the same issue against a number of other insurers.  With the denial of State Farm’s motion to dismiss, other insurers may want to take a look at whether or not they are offering this type of coverage option and, if so, how their policy is worded and what disclosures are being made.