NAII Lists State Farm Verdict as Second Largest ‘Disaster’ of 1999

A $1.2-billion verdict against State Farm Insurance Company, handed down by an Illinois county court in October 1999, ranked right up there with intense storms and major explosions as one of the most costly insurance losses for 1999.

According to the National Association of Independent Insurers (NAII), in terms of insurance losses, if the verdict (which was related to the policy of using non-OEM parts for vehicle repair) could truly be categorized as a “disaster,” it would rank second only to Midwestern tornadoes. These tornadoes wreaked havoc to the tune of $1.464 billion in May of last year.

The NAII, which has been heavily lobbying in support of federal legislation to place tighter restrictions on class actions, made the comparison of figures to preface its conviction that such legislation is vital. Without such reform, the association contends, juries-or, perhaps more specifically, class action attorneys-may increasingly become the new regulators of insurance.

“When we look at the impact of hurricanes and other disasters, we find the drama in that readily; when you look at [the State Farm non-OEM parts] verdict along with those other costs for catastrophes, you can see the enormous impact of this,” said Michael Duncan, senior vice president, secretary and general counsel for the NAII. “Now with catastrophes, there’s a lot of work being done on modeling. You can have a provision in rates to account for the occasional catastrophe, and you try to build up funds over time to prepare for that.”

On the other hand, class action lawsuits can be so random and unpredictable that insurers often end up with an inability to handle the potentially huge costs that can result from the suits.

Duncan said the issue of whether, in the State Farm case, the use of non-OEM parts is a good or bad public policy would be more appropriately decided in the legislature. “What happens in class action cases…is you get a skewed set of facts before a jury,” he said. “The jury, then, is making law that’s appropriate to be made by the legislative body.

“It’s had a tremendous impact beyond the size of the verdict, in that many companies have curtailed the practice [of using non-OEM parts] because of the fear of another suit against them,” Duncan continued. “This is costing consumers…Clearly, there is a need for legislation so that these things don’t continue to happen.”

The NAII has been a strong supporter of the Class Action Fairness Act of 1999 (Sen. Hatch, R-Utah), also known as S. 353, which was approved by the Senate Judiciary Committee on June 29, 2000.

Duncan explained that one of the fundamental provisions of the bill would be the ability to remove a case from the state court to the federal court.

“What these lawyers do is they select a county and try to get a favorable judge and jury in a particular place,” Duncan said. “Why a jury in this small county in southern Illinois should be determining policy for the whole country is a good question.”

Another would require that all notices of proposed settlements have to be written in easily understood English, include all material terms and include the amount and source of attorney’s fees. The state’s attorney general would have to be notified of proposed settlements that affect residents of their states, and given an opportunity to object if the terms are unfair.

In addition, attorneys’ fees would have to be based on a reasonable percentage of damages or a reasonable hourly basis.

“[What] you will see, probably more in the very high profile cases around tobacco, is in many cases this seems to be about lawyers and not about citizens, because the extraordinarily high fees that lawyers get out of these class-action cases really diminishes the impact of it for consumers,” Duncan said. “There have been some where, for example, you get a coupon for free purchase of a future product-that’s what the consumer gets through the class action, but the lawyers get millions of dollars.”

Finally, S. 353 would provide for mandatory Rule 11 sanctions for frivolous lawsuits.

In the event that the State Farm non-OEM verdict stands and there are no legislative restrictions placed on class-action lawsuits, Duncan said he foresees tremendous additional costs for both insurers and consumers.

“You stop doing something good for the consumer if you feel that it’s going to cost you a lot of money to do so,” he said.