Insurance companies often view class actions as meritless suits driven by plaintiffs’ lawyers and perhaps one or two disgruntled insureds. But they often want to resolve small disputes with their customers, and give insureds the benefit of the doubt. After all, keeping insureds happy and retaining their business year after year is very important. So insurers sometimes explore whether it is possible to settle a class action in a way that allows customers who feel they were mistreated to resubmit their claims for reevaluation by the company. Sometimes plaintiffs’ counsel objects to this and insists on a special master or some other neutral making the rulings. The Eleventh Circuit recently upheld a settlement in which the defendant would do the reevaluations of claims. This wasn’t exactly an insurance case but closely analogous.
In Faught v. American Home Shield Corp., 2011 U.S. App. LEXIS 22073 (11th Cir. Oct. 31, 2011), the plaintiffs’ claims involved home warranty contracts issued by American Home Shield (AHS). These contracts covered failures of items such as heating and air conditioning systems and appliances. The plaintiffs claimed that AHS improperly denied claims on the ground that homeowners failed to maintain or clean the system or appliance, and that AHS had an improper practice of incentivizing repairpersons to deny claims. The proposed settlement called for the establishment of a “Review Desk” at AHS that would reevaluate claims. The “Review Desk” would be required to overturn the denial if it was based on the homeowners’ failure to have annual maintenance performed, with some discretion to consider other factors. The court described the basic settlement terms as follows:
As part of the settlement, class members forfeit their right to participate in class action lawsuits against AHS and instead must pursue any future claims in individual lawsuits. In exchange, they receive a number of benefits, including the right to resubmit claims to the Review Desk, staffing requirements designed to make the Review Desk more effective, and litigation incentives aimed at ensuring that AHS treats claimants fairly. Class counsel and AHS separately negotiated the class counsel’s fee award. That award included a $1.5 million lump sum payment plus 25% of class members’ cash awards from the Review Board process.
Id. at *7-8. The litigation incentives were that claimants who retained counsel and were awarded more in court than the Review Desk offered would receive attorneys’ fees, generally capped at $5,000. Claimants who represented themselves in court would get an additional $1,000 payment if they won more than the Review Desk offered. Any claimant could opt out of the Review Desk process altogether and simply file an individual lawsuit. Id. at *16.
The main argument made by the objectors to the settlement was that it was improper to have AHS decide which claims should be paid without any review by a neutral (except if suit was filed, which would typically be in small claims court). The Eleventh Circuit rejected this argument. It did not explain its reasoning in detail but found that the approval of the settlement was not an abuse of discretion.
This is a model for a type of settlement that might work well in an appropriate insurance case. Insurance companies typically would be most comfortable with having their own claim professionals reevaluate claims, as long as the workload does not become overwhelming. The litigation incentives in this proposed settlement should ensure that settlement offers are reasonable where appropriate, without unduly penalizing the insurer if the insured chooses to go to court and collects more. The disadvantage here is that, unlike in most class action settlements, the insurer does not get a complete release – the class members cannot pursue further class actions, but they retain the right to pursue individual claims. In order for this to make sense from the insurer’s perspective, the carrier must be sufficiently comfortable that the chances are relatively small that the settlement will result in a large number of individual suits. In any event, this is an interesting model that now has the blessing of a federal appeals court and is worth considering in appropriate cases.