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CLASS ACTIONS AGAINST AUTO INSURERS

FOR WITHHOLDING MONEY DUE CLIENTS:

A REPORT FROM THE FRONT

By William S. Bailey

Fury Bailey

710 – 10 th Avenue East

Seattle , WA 98102

(206) 726-6600

billb@furybailey.com

In the 18 months since the Washington Supreme Court held in Mahler v. State Farm Mutual Automobile Ins. Co. , 135 Wn.2d 398, 957 P.2d 632 (1998) (“ Mahler ”), that State Farm violated both the express terms of its policy and the equitable requirements of Washington law when it did not pay its share of legal expenses associated with recovering PIP payments from third parties at fault, all major insurance carriers in Washington have changed their PIP auto claims practices. Initially, the post- Mahler situation was something of an insurance industry version of musical chairs, with a scramble among the various companies for fallback positions. For a time, a number of carriers refused to pay attorney fees to their insured's counsel on PIP recovery from third parties, stating some variation of the “Our policy language is different” gambit. As time has gone by, thanks to a number of subsequent decisions from the Washington Courts of Appeal (to be discussed infra ), a solid wall of case law now exists that insurance companies have to give credit for attorney's fees and costs when the insured's attorney recovers subrogation money from the third party at fault.

As one of the attorneys representing the Mahlers, the author looked to extend the reach of Mahler case back in time after the decision was handed down. In that the Supreme Court stated that Washington law always mandated a credit for PIP amounts recovered due to the efforts of an insured's attorney in a third party case, there was no reason why this principle should not be extended to all similarly situated people over the preceding six years (due to the six year contract statute of limitations).

There was compelling justification for this retroactive application of Mahler . Insurance companies should not be allowed to profit from past wrongdoing, effectively depriving thousands of injured Washington residents out of millions of dollars of compensation. After consulting with experienced class action counsel, who determined that all the requirements of CR 23 were met for Washington insureds who received PIP benefits, retained an attorney, got a recovery from the third party and repaid the PIP benefits, a series of individual class action lawsuits for each company were filed in the King County Superior Court. The current defendants are:

•  Allstate;

•  Dairyland Group;

•  Farmers;

•  Geico;

•  Hartford ;

•  Nationwide;

•  North Pacific;

•  PEMCO;

•  Progressive;

•  Safeco;

•  State Farm; and

•  USAA.

At the present time, the following cases have been certified as appropriate class actions by the respective judges:

1. Cabell v. Allstate , Cause No. 98-2-26603-1SEA, Judge Jim Street , 7/13/99 ;

2. Jessen, et al. v. State Farm , Cause No. 98-2-25461-1SEA, Judge Stephen Scott, 8/17/99 ;

3. Bentcover v. Safeco , Cause No. 99-2-01358-1SEA, Judge Jim Bates, 9/14/99 ;

4. Daniel v. USAA , Cause No. 99-2-01359-0SEA, Judge Robert Alsdorf, 11/30/99 ; and

5. Longie v. Farmers , Cause No. 99-2-01294-1SEA, Judge R. Joseph Wesley, 11/5/99 .

Other motions for class certification are pending and are expected to be granted in similar fashion.

THESE CASES ARE APPROPRIATE FOR CLASS CERTIFICATION

A. Standards For Consideration Under CR 23.

CR 23(c)(1) requires the decision in class certification to be made as soon as practicable after the commencement of the case, before action on the merits or the opportunity for full discovery. Under these procedural constraints, the court must presume the allegations of the complaint to be true. Washington Educ. Ass'n v. Shelton School District No. 309 , 93 Wn.2d 783, 613 P.2d 769 (1980). The only issue is whether the claims alleged merit class treatment.

CR 23 lays out the requirements for class certification. CR 23(a) calls for certification where:

•  The class is so numerous that joinder of all members is impracticable.

•  There are common questions of law or fact.

•  The claims of the class representatives are typical of those of the class; and

•  The class representatives will adequately protect the interest of the class.

If CR 23(a) is satisfied, the court should certify if one element of CR 23(b) is met. Under CR 23(b)(3), certification of an opt out class is permitted where common questions predominate and a class action is the superior method for adjudicating the controversy.

B. Washington Law Favors Class Actions.

A class action is often the only feasible means to resolve claims where a defendant inflicts injury on many people for whom pursuit of costly and complex litigation on an individual basis is not economically feasible. E.g., Brown v. Brown , 6 Wn. App. 249, 492 P.2d 581 (1971):

[A] Primary function of the class suit is to provide a procedure for vindicating claims which, taken individually are too small to justify individual legal action but which are of significant size and importance if taken as a group . . .

We, too, favor a liberal interpretation of CR 23, rather than a restrictive one. Not only does liberal application of the rule avoid multiplicity of litigation, but (1) It saves members of the class the cost and trouble of filing individual lawsuits; and (2) It also frees the defendant from the harassment of identical future litigation.

Id. at 256-57.

A leading insurance treatise supports class certifications in cases founded on policy rights:

It would seem that the court should be liberal in entertaining a controversy where many identical claims have arisen, or are bound to arise, in order to keep within bounds the burdens which otherwise will be imposed upon the courts. In general, class actions have been permitted in situations of general concern, such as where there is a question as to whether services will be covered [under a health policy].

20 Appleman, Insurance Law & Practice , § 11322, at 209 (1980).

C. There Are Common Questions Of Law And Fact .

CR 23 requires only that there be a “common nucleus of operative facts” or that the defendant be engaged in a common course of conduct. See Brown , supra , 6 Wn. App. at 255. These class action cases under Mahler involve a few distinct common questions including, but not limited to:

•  Whether the policy language at issue should be construed for plaintiffs as it was in Mahler ;

•  Whether, under the policy or applicable law, the company must pay its share of insureds legal expenses when PIP payments are recovered by it from the parties at fault due to the efforts of its insureds; and

•  Whether plaintiffs have a right to recover prejudgment interest and attorney's fees.

Using the other test for class certification under Washington law, the companies were clearly engaged in a common course of conduct on the main issue in these cases, consistently denying reimbursement of legal expenses incurred before Mahler .

D. The Class Representatives Are Typical Of Others In The Class.

Typicality means that the claims of the plaintiffs arise under the same legal theory as those of other class members, even if there are factual variations in the claim. See Brown , supra , 6 Wn. App. at 255. The issue is the nature of the claim presented, not the specific facts underlying the claim. Dura-Bilt Corp. v. Chase Manhattan Corp. , 89 F.R.D. 87, 99 (S.D.N.Y. 1981). The plaintiffs in these cases are all typical of the entire class in that they were all insured under policies issued by the respective insurance company. They were injured and received PIP benefits from their company. They incurred legal expenses in pursuing parties at fault and ultimately caused their company to recover PIP payments. However, these companies each declined to reimburse its fair share of those legal expenses. Plaintiffs' claims for reimbursement of that legal expense arise from the common factual core of the application of either:

•  The legal expense reimbursement provision in the policy language, or

2) The common fund doctrine established by the Washington Supreme Court in Mahler , if there is no explicit fee sharing language.

E. Common Questions Predominate Under CR 23(b)(3).

The predominate issue in the Mahler class action cases is the insurance companies liability to reimburse for its share of the legal expenses incurred by the insureds that caused the insurance company to recover its PIP payments. Either the language of each companies policy requires that it do so or the common fund language of the Supreme Court decision in Mahler . This liability issue is essential to the claim of each class member. In this regard, the case of Spirek v. State Farm Mutual Automobile Ins. Co. , 38 N.E.2d 111, 65 Ill. App. 3d 440 (1978) is similar. There the court certified an Illinois class of policy holders challenging State Farm's right to seek subrogation of medical expenses it had advanced to its policy holders. The issue presented was whether the policy language afforded State Farm the right to such subrogation. The Court certified a class of all insurers of State Farm with similar policies. Like Spirek , these cases involved subrogation rights and were either premised on the language of the insurance company contracts or on the interpretation of those contracts under the common fund doctrine set forth in Mahler . Either way, the common questions regarding contract rights predominate.

F. CR 23(b)(3) Efficiency Factors Support Class Certification.

Washington law emphasizes that class actions should be employed when the claims involved are relatively small and the cost of litigating is high:

[A] primary function of the class suit is to provide a procedure for vindicating claims which taken individually, are too small to justify individual legal action but which are of significant size and importance if taken as a group.

Brown , supra , 6 Wn. App. at 256. These cases involve individual claims averaging no more than a few thousand dollars each. Because the claims involved are for economic injury and the amounts at stake are small, these cases are highly appropriate for class certification. The courts have so found.

POINTS IN OPPOSITION RAISED BY DEFENDANTS

As might be expected, the lawyers retained by the defendant insurance companies in these class actions have fought them vigorously, sometimes even resorting to outright nastiness and fear mongering against the clients. (It should come as no surprise that Allstate and its counsel have

been the worst offender in this regard.) The arguments raised thus far by the defendants can be summarized as follows:

1. These cases are inappropriate for class treatment because they are dominated by highly individual and fact specific issues.

2. The court will need to determine whether each and every plaintiff has caused the insurance company to be reimbursed for its PIP expenditures by the parties at fault.

3. The application of Mahler to each proposed class members claim remains an individual fact determination and requires an inquiry into whether each claimant caused the company to recover its PIP payments. These individual causation inquiries predominate over the common issue.

4. The defense of accord and satisfaction applies to many of the claims of proposed class members, requiring individualized and fact specific examination of each claim.

5. Prejudgment interest is available only where a demand has been made for a liquidated amount. Determining whether any such demand has been made in an individual case will involve fact specific inquires

6. Class certification will not offer any compelling advantage over ordinary two-party litigation.

7. The insureds and their lawyers never requested that the insurance company reimburse for PIP payments in most circumstances. This request is necessary in order to put the company on notice that any payment should be made.

8. If the class action suit is unsuccessful, the insurance companies can go after the named class representatives for their personal assets.

9. The individual class representatives have insufficient understanding of their duties and responsibilities to the class.

10. Most of the automobile accidents underlying the claims were “slam dunk” liability fact patterns which did not require any lawyers assistance to produce PIP payments.

A few of the companies attorneys, Allstate and State Farm in particular, have conducted very aggressive depositions in which they intended to intimidate the class representatives, making them fearful of the financial consequences which could befall them if the lawsuit was unsuccessful. In addition, Allstate's attorney threw out one after another hypothetical questions at the class representatives, intending to confuse them and make them appear stupid. Fortunately, none of these methods has been successful.

DECISIONS SUBSEQUENT TO MAHLER IN THE WASHINGTON COURTS OF APPEAL

In a case decided last April, the Washington Court of Appeals confirmed that Safeco was required to pay a proportionate share of an insured's legal expenses when PIP payments are recovered from the party at fault due to a settlement or judgment obtained by the insured's efforts. Peterson v. Safeco Ins. Co. , 95 Wn. App. 254 (1999). The holding in Peterson did not rely upon any language in Mr. Peterson's Safeco policy regarding the sharing of legal expenses. Rather, Peterson held that the insured's settlement with the tort feasor effectively creates “A common fund which benefits Safeco. And Safeco is therefore obligated to pay a proportionate share of [the insured's] attorney fees.” 95 Wn. App. at 264.

In DeTurk v. State Farm Mutual Ins. Co. , 94 Wn. App. 364, 370, 967 P.2d 994 (1998), the Court of Appeals applied Mahler where the PIP was paid directly by the driver at fault's carrier to State Farm after a settlement – without the insured physically transferring the money to State Farm. The Court held that the attorney's clients were entitled to reimbursement for a share of the attorney's fees and costs. In Harwood v. Group Health Northwest , 93 Wn. App. 569, 576, 970 P.2d 760 (1999), the Court overruled prior law and held that no benefit to the insurer needs to be shown to qualify for Mahler fee reimbursements.

RETROACTIVITY IS NOT A DEFENSE

All of the insurance company defendants in the class actions argue that Mahler should not be applied retroactively because it announced a new rule for fee sharing. This defense is not valid. Even assuming that Mahler established a new rule of law regarding fee sharing claims, the practice of retroactive application is “overwhelmingly a norm.” James B. Beam Distilling Co. v. Georgia , 501 U.S. 529, 115 L. Ed. 2d 481, 488 (1991). In Robinson v. Seattle , 119 Wn.2d 34, 830 P.2d 318 (1992), a class action seeking tax refunds based upon an earlier court decision, the Washington Supreme Court held:

In accordance with Beam Distilling , as we have noted, once this court has applied a rule retroactively to the parties in a case announcing a new rule, we will apply the rule to all others not barred by procedural requirements, such as the statute of limitations or res judicata . 119 Wn.2d at 77.

The Mahler court awarded the Mahlers a judgment against State Farm by applying the alleged new rule of law retroactively to the Mahlers themselves. Thus, under Robinson , the Washington Courts must apply the fee sharing rule in Mahler to all claims not barred by res judicata or the six-year statute of limitations applicable to contract claims. For example, Mahler was applied retroactively in the DeTurk case, supra .

THE CLASS IS ENTITLED TO PREJUDGMENT INTEREST

The underlying justification for an award of prejudgment interest is that a defendant who retains money which he ought to pay to another should be charged interest upon it. Hansen v. Rothaus , 107 Wn.2d 468, 473 (1986). Mahler itself confirmed that prejudgment interest is allowed when a party retains funds rightfully belonging to another and the amount of the funds at issue is liquidated, that is, can be calculated with precision without reliance on opinion or discretion. 135 Wn.2d 429. While prejudgment interest was not awarded in Mahler , it was because the funds had been held not by State Farm, but in the trust account of the Mahlers attorney. This will not typically be the case for most of the members of the various Mahler class actions.

There is no general requirement in Washington law that a demand must be made to trigger the right to prejudgment interest:

The [defendant] cites no authority for its argument that prejudgment is improper when the party requesting it made no demand for payment. None of the cases cited by the parties nor found by this court indicated demand is a prerequisite to recovery of prejudgment interest.

Universal/Land Constr Co. v. City of Spokane , 49 Wn. App. 634, 641, 745 P.2d 53 (1987).

The insurance company defendants in these cases routinely sent “Get lost” letters to insured's attorneys at the outset of each claim, advising them that it did not want and would not pay for any legal fees for recovery of the PIP. Under this consistent practice before Mahler a demand for purposes of activating prejudgment interest would have been clearly meaningless.

THERE IS PROBABLY NO RIGHT FOR ATTORNEYS TO COLLECT THEIR OWN FEES PRIOR TO MAHLER

A subject of great interest among the plaintiffs' trial bar since Mahler is whether or not the attorney, as opposed to the client, can recover attorney's fees on PIP liens from past cases. The authors own view on this, having looked at the matter closely, is that any fees under Mahler belong to the client, not the attorney who represented them. I reached this conclusion reluctantly, in that many Washington attorneys waived fees that they would have otherwise been entitled to on the PIP payments in order to protect their clients against suffering even greater losses when their clients' own insurance companies refused to pay their fair share. (While this is largely anecdotal, it is the author's impression that pre- Mahler , most Washington attorney's did not charge a fee on the amounts of the medical bills recovered for PIP repayment.)

The analysis on whether or not an attorney can recover for his/her fees post- Mahler begins with the Mahler decision itself. The language in Section C of the decision entitled “Expenses of Collecting the PIP Recoveries” addresses this subject (beginning on page 421 of the opinion). The conclusion to this section makes clear that the Supreme Court awarded the client the right to reimbursement for the insurance company's fair share of attorney's fees and costs, not the lawyer who represented the client:

Counsel is entitled to a single fee from the insured for the work performed . . . Counsel received a contingent fee from the overall recovery . . . Counsel has already been compensated pursuant to the fee agreement. The money in trust, the settlement proceeds, belongs entirely to Mahler . . . The effort to secure a personal injury recovery, which involves both the insurer's PIP payments and the insured's other damages must inure to the benefit of the insured, not the insured's lawyers.

See Mahler , 135 Wn.2d at 429. The only distinction the Supreme Court made on this is where the insurer chooses to retain the services of counsel for the insured to pursue a subrogated interest against a third party. Under those circumstances, there would be a separate obligation by the insurer to pay a fee.

Many plaintiffs' counsel have read the subsequent DeTurk decision, supra , as possibly authorizing an independent action by the lawyer for his/her own fees which were never paid by the client due to the insurance company's pre- Mahler refusal to pay its fair share of attorney's fees and costs. In DeTurk , plaintiff's counsel brought an action against State Farm on behalf of six clients who had settled personal injury automobile accident cases between 1994 and 1995. It is worthy of note that Mr. DeTurk sued State Farm, not on his own behalf, but on behalf of his clients:

DeTurk sued State Farm, contending his clients were entitled to reimbursement from State Farm for a pro rata share of legal expenses they incurred in recovering PIP payments from the third parties.

94 Wn.2d at 366.

The Court's conclusion in DeTurk is highly significant on the issue of whether an individual attorney is entitled to recover for past legal expenses which were not paid by their clients' insurance company:

In conclusion, we hold that DeTurk's clients are entitled to recover a proportionate share of their legal expenses , including attorney's fees, recovering the PIP payments made by State Farm. (Emphasis supplied.)

There is absolutely no mention in DeTurk about an attorney's separate right to demand retroactive attorney's fees for those situations pre- Mahler where the attorney waived a portion of his/her fees voluntarily in order to allow the client to be made whole.

Thus, looking at the actual language of Mahler and DeTurk , it would appear problematic for an attorney to recover fees on those cases where the attorney was entitled under the contract to a fee on the gross and waived that portion on the PIP in view of the insurance company's refusal to give a credit for attorney's fees and costs. Under Mahler , it would appear that once a lawyer is paid and satisfied under the contract, that is the end of the inquiry. The only exception to this would be if any lawyer had the client sign an assignment of the client's rights for repayment of attorney's fees and costs in exchange for the lawyer's forgiveness of fees on the PIP repayment. In the event that any attorney did that, there would be no effective defense by the company to a demand for reimbursement because the lawyer would then be standing in the shoes of the client under Mahler .

This problem of how attorneys can recover pre- Mahler attorneys fees has caused some interest in an unjust enrichment theory. Under this approach, lawyers who did not collect fees to which they would have otherwise been entitled on the PIP portion of the recovery can argue that the insurance companies were unjustly enriched, holding dollars that did not belong to them. Common fund and equity rules can be used to show the decision-maker where the money should rightly go, urging that the insurance company not profit from its wrongdoing. At this writing, this theory has not yet been tested.

Given the language of Mahler and DeTurk that the claim belongs to the client, along with the fact that there was no contractual relationship between the plaintiff's attorney and the plaintiff's own insurance company, plaintiff's counsel have not been included in the class actions for Mahler fees. However, under those circumstances where a plaintiff's attorney claims entitlement to a share of any money received by a class member, it is anticipated that both the client's name and the attorney's name will appear on the check. The appropriate court would then determine who is entitled to the recovery.

NOTICE CAMPAIGN AND OPT OUTS

Presently in the Mahler class actions where the court has certified the class, counsel are in the process of obtaining the necessary database from the defendant insurance companies for sending out a notice to the class. A number of the companies have not been forthcoming in providing the names and addresses of class members, claiming a myriad of logistical problems. (However, when it suits them, the defendant insurance companies somehow are always able to come forth with statistics to support various legal arguments.)

Once the notices have gone out to the class members, they will be asked to indicate whether they wish to opt in or opt out of the class. It is the intention of plaintiff's counsel to make the claims form as simple as possible in order to benefit the largest number of people. In that class membership goes back some six years, it is anticipated that many files of the personal injury cases of the class members will be lost or incomplete. A simplified claim form will prevent the insurance companies from benefiting from the situation.

CONCLUSION

The Washington Supreme Court struck a major blow for consumers' rights in the Mahler decision. The subsequent class actions seek to spread those benefits to the thousands of Washington residents who were unfairly cheated out of contributions for attorney's fees and costs by their own insurance company. Early indications are that these cases will help to finish the job that Mahler started. What remains unclear at this point is what, if any, relief is available to attorneys who voluntarily reduced their fees pre- Mahler , not collecting a fee on the PIP portion of a settlement, in order to minimize the effect of wrongful conduct by the insurance company upon their clients. There is no support in either Mahler or DeTurk for the proposition that the individual attorney, as opposed to the client, is entitled to the fee. The unjust enrichment approach has yet to be tested.

Arguments against Mahler fees have been made by the defense where the plaintiff's attorney did not charge a fee on the gross recovery inclusive of PIP. This is distinguished from Mahler where the disputed PIP portion of the fee was held in trust.

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