Do insurance companies charge premiums for coverage that can never be triggered?  That is the essential allegation in Keeling v. Esurance Ins. Co., 2012 U.S. Dist. LEXIS 26998 (S.D. Ill. Mar. 1, 2012).  In my October 4, 2011 blog post, I wrote about a Seventh Circuit decision finding federal jurisdiction in this case, based on the possibility of punitive damages pushing the amount in controversy over $5 million.  After jurisdiction was established, Esurance challenged the complaint in a motion to dismiss.  The motion to dismiss was denied (except for dismissal of a fraudulent misrepresentation claim). 

The plaintiff claimed that underinsured motorist (UIM) coverage of $20,000/$40,000 was illusory under Esurance’s policies because it would never be paid.  The plaintiffs focused on the following provision in Esurance’s policies:

“Underinsured motor vehicle” means a land motor vehicle or trailer of any type to which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the limit of liability for this coverage.

However, “underinsured motor vehicle” does not include any vehicle or equipment:

1. To which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the minimum limit for bodily injury liability specified by the financial responsibility law of Illinois.

Id. at 7-8 (emphasis added).  The class was defined as insureds who bought UIM coverage from Esurance with limits of $20,000/$40,000 in Illinois.  The claim was that this coverage was worthless to insureds because the minimum required coverage under Illinois law is $20,000/$40,000.  Thus, the plaintiff asserted that if an Esurance policyholder bought UIM coverage of $20,000/$40,000, the only way coverage would apply  under the definition of “underinsured motor vehicle” would be if the underinsured motorist had coverage less than Illinois law required, which was unlikely unless the driver was from out of state.  But if the underinsured motorist had lower limits than what Illinois law requires ($20,000/$40,000), then the exclusion (paragraph “1” above) would bar coverage, and therefore there would never be coverage. 

Esurance argued that coverage should be based on whether the underinsured motorist or his or her insurer pays less than the limits, rather than what the policy limits are, but the court rejected that position, finding it inconsistent with the terms of the policy and applicable Illinois law.  The court also rejected Esurance’s argument based on the filed rate doctrine because the case was not a challenge to premium rates but rather a challenge to the illusory nature of the coverage.

One problem insurance companies sometimes experience, which can lead to these kinds of class actions, is that when policy forms are written or revised that is done by the underwriting department without involvement of the claims department and without involvement of any lawyers who are familiar with the kinds of issues raised in coverage litigation and class actions.  The issue presented by this case seems like precisely the type of issue that could be flagged by a company that is proactive in attempting to identify problems that might lead to class actions.  (See my blog post about Rob Herrington’s book, “Verdict for the Defense,” for more on that.)

In my view, in defending a case raising the kind of issue that Keeling does, insurers should not file motions to dismiss reflexively.  Too often these motions are filed because that is the standard playbook, or to avoid burdensome discovery if the judge will stay discovery while the motion is decided, without thinking about the consequences of losing the motion.  You do not want a judge to rule against you early, as a matter of law, on an issue of contract interpretation that is at the very heart of the case.  (A plaintiff cannot seek such a ruling before class certification because of the one-way intervention rule that applies in class actions.)  You may be better off defending against class certification and not risking an early adverse ruling on a contract interpretation issue that is a close call or, even worse, on which you can identify substantial weaknesses in your own position.  Another common strategy for filing a motion to dismiss is to whittle down some of the causes of action before discovery and class certification.  But unless the discovery can be separated by causes of action, keeping some additional causes of action in the case until class certification also can sometimes help the defense case by broadening the issues on which individualized adjudication is necessary, where narrowing them with a motion to dismiss might make the case easier to certify.  All of this should be considered before the trigger is pulled on a motion to dismiss.