Study: Class Actions Against Insurers Surged in 1990s; Many Resolved Behind Closed Doors

The number of class action lawsuits filed against insurance companies in the U.S. increased sharply during the 1990s prior to the passage of the federal Class Action Fairness Act of 2005 (CAFA), according to a RAND Corp. report.

About 90 percent of the lawsuits were filed in state courts and two-thirds were either disposed of in favor of the defendants or voluntarily dismissed by the plaintiffs, according to the report from the RAND Institute for Civil Justice. The study provides a portrait of class action suits filed against insurance companies before the enactment of CAFA.

Researchers for RAND, a nonprofit research organization, say that many class action lawsuits are filed and resolved outside of public view, even though the suits are designed to provide recourse to broad groups of consumers that have been victims of corporate wrongdoing.

“In class actions prior to CAFA, we saw many cases filed, litigated and resolved in relative obscurity,” said Nicholas M. Pace, a RAND researcher and lead author of the report. “This shadow litigation happened outside the view of many interested parties. That probably does not serve the public interest.”

Researchers from the RAND Institute for Civil Justice tried to better understand a subset of class action litigation by surveying insurance companies about their involvement in class action cases active between 1993 and 2002.

Researchers analyzed information from 57 large U.S. insurance companies regarding 748 class action cases where they were named as a defendant. The surveys detailed information about trends in case outcomes, the distribution of compensation to class members, the awarding of attorneys fees, and regulatory activity. Among the findings:

Among insurance companies responding to the survey with complete records for all 10 years in the study period, there were nearly seven times as many class actions filed in 2002 as there were in 1993. However, the growth in filings was more limited during the last few years of the study period.

Having a judge certify a suit as a class action greatly increases the chance that a case will settle. While just 12 percent of all cases studied ended in a class-wide settlement (an additional 20 percent were settled on an individual basis), class settlements were reached in 90 percent of the cases where a judge certified a class.

Two-thirds of the cases studied involved automobile insurance policies. The most common claim was that the insurer failed to compensate policyholders for the diminished value of automobiles following repairs under the insured’s first-party coverage.

Payments to individuals are typically small. Among the 22 cases where researchers had detailed payment information, the median benefit available to each class member was $97. The available settlement payments ranged from $3.50 to $61,000 per class member. The largest benefits were available in cases alleging unpaid property damage and personal injury claims made under uninsured motorist policies.

Just a fraction of the members of a settlement class receive payment in most cases. Among the 29 cases with detailed information, an average of 45 percent of potential class members received payments (the median was 15 percent). Some potential recipients either are not aware of a settlement or decline to file the paperwork needed to qualify for payment.

Researchers found that payments to attorneys who filed class action suits varied widely. Among the 48 cases with adequate information, plaintiffs’ lawyers were awarded fees and expenses that ranged from 12 to 45 percent of the settlement fund. The median was 30 percent.

However, when viewing attorneys fees and expenses in relation to the payments actually made to class members (rather than just the amounts potentially available), attorney fees and expenses rose to a median of 47 percent in the 36 cases with complete information. In a quarter of those cases, payments to class counsel amounted to 75 percent or more of the settlement fund when money actually paid out is included. In five cases, the amount paid to attorneys topped 90 percent.

The federal Class Action Fairness Act of 2005 allows defendants to move a state court class action to federal court if there are class members or defendants located outside the state where the case is filed. In addition, total compensation sought must be more than $5 million. Researchers estimate that 89 percent of the state cases studied met the first prong of the CAFA standard allowing them to be moved to federal court, but were unable to determine the percentage of state cases that also met the second prong of the CAFA standard.

Class action lawsuits are one of the most controversial features of the U.S. civil justice system. In such cases, parties initiate a lawsuit that includes as plaintiffs large numbers of people who are not specifically named.

Supporters say the suits create the only realistic mechanism for legal remedies when individual damages are small and the problem impacts large numbers of people. The suits also are seen as providing a means for relief when government oversight of an industry fails.

Critics deride class action suits as little more than legalized blackmail, driving defendants to settle claims without merit to avoid the potentially damaging outcome of a trial. In addition, critics contend that many issues targeted by class action suits are better left to regulatory agencies.

Despite periodic headlines about individual cases, little is known about the workings of the class action process because of traditional shortcomings in court recordkeeping practices and by participants’ reluctance to reveal outcomes or the fact that litigation is underway.

Other authors of the study issued today are Stephen J. Carroll, Ingo Vogelsang and Laura Zakaras of RAND.

Source: The RAND Institute for Civil Justice
The study, titled “Insurance Class Actions in the United States,” is available at www.rand.org