State Ex Rel. American Family Mutual Insurance Co. v. Clark

106 S.W.3d 483, 2003 WL 21074484

• Court: Supreme Court of Missouri
• Decided: May 13, 2003
• Docket: SC 84610
• Status: Published

Opinions

WILLIAM RAY PRICE, JR., Judge.

I.

Plaintiffs sued American Family Mutual Insurance Company (“American Family”) for breach of contract on behalf of themselves and similarly situated plaintiffs nationwide. After an eight day hearing, the trial court certified the class. American Family sought relief by way of writ of prohibition. This Court issued a preliminary writ in August 2002, prohibiting the trial court from taking any further action in this case. The writ is made absolute, as modified, for insureds whose contracts are subject to the laws of states other than Missouri.

II.

American Family writes private passenger automobile property and casualty insurance in fourteen states.¹ The policy promises to “pay loss in money or repair or replace damaged or stolen property.” In 1985, American Family established the current guidelines that adjusters follow when writing estimates for replacement parts. For vehicles in the latest three model years, adjusters are instructed to specify Original Equipment Manufacturer (“OEM”) replacement parts for repairs. .When writing estimates for vehicles of an earlier model year, adjusters are encouraged to specify the use of non-OEM crash parts or salvage OEM parts. OEM parts are those parts made by the original automobile manufacturers or suppliers; non-OEM parts are made by outside companies without access to the design specifications of the OEM parts. American Family now uses computer software to write the estimates. The software automatically specifies non-OEM crash parts for automobiles of certain model years.

This same computer program identifies repairs the vehicle will require. The estimating software systematically excludes from estimates certain repairs deemed necessary by industry standards.² Such repairs include seatbelt safety tests, wheel alignments, adjusting the aim of headlamps, and corrosion protection.

Plaintiffs claim that American Family breached its contracts with policyholders to restore their vehicles to pre-loss condition by devising and implementing a practice that results in payment of claims based on (1) the systematic specification of “inferior” non-OEM crash parts for repairs and (2) the systematic omission of specific “necessary” repairs from estimates. Plaintiffs brought the action on behalf of themselves and “all others nationwide, or in the alternative all others in the state of Missouri,” who were insured by American Family, made a claim for vehicle repairs pursuant to their policy, and received payment based on an estimate prepared or approved by American Family that included non-OEM crash parts and/or did not include specified “necessary"’ repairs.

The Circuit Court of Jackson County certified the nationwide plaintiff class. American Family filed an application for writ of prohibition or, in the alternative, mandamus. This Court issued a preliminary writ of prohibition. The writ is made absolute, as modified, as to insureds whose contracts are subject to the laws of states other than Missouri and quashed as to the class comprised of insureds whose insurance contracts are subject to Missouri law.

III.

“Determination of whether an action should proceed as a class action under Rule 52.08 ultimately rests within the sound discretion of the trial court.” Ralph v. Am. Family Mut. Ins. Co., 835 S.W.2d 522, 523 (Mo.App.1992). However, if the trial court abuses its discretion in certifying a class, “prohibition may be appropriate to prevent unnecessary, inconvenient, and expensive litigation.” See State ex. rel Linthicum v. Calvin, 57 S.W.3d 855, 857 (Mo. banc 2001).

IV.

Certification of a class action requires, at a minimum, that (1) the class be so numerous that joinder of all members is impracticable, (2) questions of law or fact common to the class exist, (3) the claims of the representative parties are typical of the claims of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. Rule 52.08(a). See also section 507.070, RSMo 2000. These procedural rules are mandatory. Beatty v. Metro. St. Louis Sewer Dist., 914 S.W.2d 791, 795 (Mo. banc 1995) (citations omitted). Class certification is appropriate only if the prospective class meets each listed element.

A.

When class claims are governed by the laws of multiple states, it becomes more difficult for the class to show that questions of law common to the class exist. See Raye v. Medtronic Corp., 696 F.Supp. 1273, 1275 (D.Minn.1988) (focusing primarily on whether common questions predominate the proceeding); Schmidt v. Interstate Fed. Sav. & Loan Ass’n, 74 F.R.D. 423, 429 (D.D.C.1977) (mem.); McMerty v. Burtness, 72 F.R.D. 450, 454 (D.Minn.1976) (mem.); Harrigan v. United States, 63 F.R.D. 402, 405 (E.D.Pa.1974) (mem). This is especially true when the subject matter of the lawsuit is the interpretation and enforcement of insurance contracts.

Regulating the business of insurance is clearly within the duties of the separate states. In 1945, Congress explicitly recognized state regulation of insurance though the enactment of the McCar-ran-Ferguson Act. The act, in pertinent part, states that “[t]he business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.” 15 U.S.C. § 1012(a). The act applies to “the type of state regulation that centers around the contract of insurance” and governs such questions as “the type of policy which could be issued, its reliability, interpretation, and enforcement”. SEC v. Nat’l Sec., Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969).

The outcome of this breach of contract action ultimately hinges upon the interpretation of American Family’s standard insurance contract. The question of contract interpretation is clearly subject to the McCarran-Ferguson Act. Thus, the laws and regulations of fourteen states must be applied when determining whether American Family breached its contracts with the citizens of those various states by providing estimates based upon non-OEM crash parts and omitting specific repairs.

B.

While no Missouri court has examined whether class certification is appropriate when the laws of multiple states will apply, other jurisdictions have considered the question. Many courts that have addressed the issue conclude that the application of varying state laws not common to the class precludes class certification. See Leszczynski v. Allianz Ins., 176 F.R.D. 659, 671 (S.D.Fla.1997); Indianer v. Franklin Life Ins. Co., 113 F.R.D. 595, 606 (S.D.Fla.1986) overruled on other grounds by Ericsson GE Mobile Communications v. Motorola Communications & Elecs., 120 F.3d 216, 220 (11th Cir.1997); McMerty v. Burtness, 72 F.R.D. 450, 454 (D.Minn.1976) (mem.)³; but see Alba Conte & Herbert B. Newberg, Newberg on Class Actions § 4:25, at 168 (4th ed.2002) (stating that the mere “existence of state law variations is not alone sufficient to preclude class certification”).

The laws of the fourteen states applicable to the proposed class action against American Family certainly vary. The laws of the several states range from allowing the use of non-OEM parts in a vehicle if the owner is given notice, to forbidding the use of non-OEM parts as a condition to payment of a claim.⁴ A kaleidoscope of rules litters the continuum between these two extremes.⁵ The record below establishes no Missouri interest in the application of the insurance law of foreign states to their own citizens, neither does the record establish how the application of the laws of fourteen states would be “common” to the class.⁶ The trial court abused its discretion in certification of the class with respect to insureds whose contracts are subject to the laws of states other than Missouri.

V.

Separate analysis is required to determine whether the trial court abused its discretion in certifying a class action for insureds whose policies are subject to Missouri law. In addition to the elements of Rule 52.08(a), plaintiffs must also satisfy one of the three requirements of Rule 52.08(b). The plaintiffs seek class certification based upon 52.08(b)(3), which requires the motion court to find that common questions of law or fact “predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.”

American Family does not argue that a class of Missouri plaintiffs fails to meet the requirements of Rule 52.08(a). Rather, American Family contends that a class of Missouri plaintiffs does not meet the “predominance” element outlined in Rule 52.08(b)(8). American Family’s position is that the action consists of individual breach of contract claims with varying factual circumstances that “swamp” common issues. As a demonstration, American Family states that two factual premises plaintiffs must prove in order to establish liability are (1) that all of the damaged parts at issue in this case for all class members were OEM parts in good condition immediately prior to the respective covered losses, and (2) that all the non-OEM crash parts specified by American Family for repair are inferior to all OEM crash parts. American Family argues that these and other individual inquiries preclude class certification.

“The ‘predominance’ requirement ... does not demand that every single issue in the ease be common to all the class members, but only that there are substantial common issues which ‘predominate’ over the individual issues.” South Carolina Nat’l Bank v. Stone, 139 F.R.D. 325, 331 (D.S.C.1991) (citing 3B Moore & Kennedy, Moore’s Federal Practice ¶ 23.06-1 at 23-159, 160). The predominant issue need not be “dispositive of the controversy or even be determinative of the liability issues involved.” Alba Conte & Herbert Newberg, Newberg on Class Actions § 4:25, at 169 (4th ed.2002). The need for inquiry as to individual damages does not preclude a finding of predominance. Lewis v. Nat’l Football League, 146 F.R.D. 5, 12 (D.D.C.1992) (mem.); see also Freedman v. Louisiana-Pac. Corp., 922 F.Supp. 377, 401 (D.Or.1996); Gaspar v. Linvatec Corp., 167 F.R.D. 51, 60 (N.D.Ill.1996) (memo.). “A single common issue may be the overriding one in the litigation, despite the fact that the suit also entails numerous remaining individual questions.” Conte & Newberg § 4:25, at 172.

Under plaintiffs’ theory, American Family breached its contracts with each prospective class member when it made payment on policyholders’ claims based upon estimates either specifying the use of non-OEM crash parts or omitting particular repairs. This common issue is the predominant issue. If it is established at trial that American Family did not breach its contracts with policyholders by making payments based upon non-OEM crash parts or the omission of particular repairs, then the claims of all the prospective class members fail without further factual analysis. If it is determined that American Family’s payment of claims based upon the inclusion of non-OEM parts or exclusion of particular repairs constitutes breach of contract for some or all of the prospective class members, then the trial court can proceed in the most expeditious and efficient way possible relative to any individual circumstances or issues that may exist. The predominance of the common issue is not defeated simply because “individual questions may remain after interpretation of the contract — questions of damages or possible defenses to individual claims”. Kleiner v. First Nat’l Bank, 97 F.R.D. 683, 692 (N.D.Ga.1983) (analyzing predominance concurrently with commonality) (citing Brown v. Cameron Brown Co., 92 F.R.D. 32, 38 (E.D.Va.1981); Ingram v. Joe Conrad Chevrolet, Inc., 90 F.R.D. 129, 131 (E.D.Ky.1981)); but see Augustus v. Progressive Corp., No. 81308, slip op. at ¶¶ 25-27, 2008 WL 155267, **4-5 (Oh.App.2003).⁷

The object of Rule 52.08(b)(3) “is to get at the cases where a class action promises important advantages of economy of effort and uniformity of result without undue dilution of procedural safeguards for members of the class or for the opposing party.” Conte & Newberg § 4:24, at 155 (quoting Kaplan, Continuing Work of the Civil Committee: 1966 Amendments of the Federal Rules of Civil Procedure (I), 81 Harv. L.Rev. 356, 389-90 (1967)) (discussing the Federal counterpart to Rule 52.08). This is a case in which the trial court determined after rigorous analysis that the resources of both the plaintiffs and the judiciary can be conserved through class certification, without diluting American Family’s procedural safeguards. American Family has not established that the trial court abused its discretion in coming to this determination for the class of insureds whose contracts are subject to Missouri law.

VI.

This Court makes absolute the writ of prohibition, as modified.

BENTON, J., and RUSSELL, SHAW and JOYCE, Sp. JJ., concur. WOLFF, J., concurs in separate opinion filed. TEITELMAN, J., dissents in separate opinion filed. LIMBAUGH, C.J., WHITE and LAURA DENVIR STITH, JJ., not participating.

1 . American Family writes insurance policies in Arizona, Iowa, Ohio, Wisconsin, South Dakota, North Dakota, Kansas, Illinois, Missouri, Nebraska, Colorado, Oregon, Indiana, and Minnesota.

2 . I-CAR, a non-profit organization composed of insurance companies, automobile manufacturers, collision repair facilities and automotive suppliers, has developed industry repair standards since 1979. American Family software does not provide for all the repairs I-CAR recommends.

3 . One federal appellate court recently went so far as to state that "[n]o class action is proper unless all litigants are governed by the same legal rules. Otherwise the class cannot satisfy the commonality and superiority requirements of Fed.R.Civ.P. 23(a), (b)(3).” In Re Bridgestone/Firestone, Inc., 288 F.3d 1012, 1015 (7th Cir.2002).

4 . Arizona, Iowa, Ohio, Wisconsin and South Dakota all permit the use of non-OEM parts in a repair estimate so long as the part used is clearly identified in the estimate or accompanying notice. Ariz.Rev.Stat. Ann. § 44-1292, 1293 (West 1994); Iowa Code Ann. § 537B.4 (West 1997); Iowa Admin. Code r.191-15.15 (507 B); Ohio Rev.Code Ann. § 1345.81(B), (C) (West 1994); Wis. Stat. Ann. § 632.38(2), (3) (West 1995); Wis. Stat. Ann. § 100.44(2) (West 1997); S.D. Codified Laws §§ 32-15-36, 58-33-71 (Michie 1998). Minnesota forbids the use of non-OEM parts as a condition of payment of a claim. Minn. Stat, § 72A.201, subd. 6(7) (2002).

5 . For example, Kansas law ordinarily requires non-OEM parts to be clearly identified in the repair estimate, but no restrictions are placed on the use of non-OEM parts for vehicles ten model years of age or older. Kan. Stat. Ann. §§ 50-661, 50-662 (1994); Kan. Stat. Ann. § 50-664 (2000). Colorado permits the installation of non-OEM parts only with the written or oral consent of the customer. Colo.Rev.Stat. Ann. §§ 42-9-107, 10-3-1304, 10-3-1305 (West 1998).

6 . Although addressing other issues, the recent case of State Farm Mutual Automobile Insurance Co. v. Campell, No. 01-1289, slip op. at 10-11, — U.S. -, 123 S.Ct. 1513, 155 L.Ed.2d 585, 2003 WL 1791206 (U.S. Apr. 7, 2003), indicates the constitutional care that must be taken by state courts in cases that exceed the forum state’s borders.

7 . Under facts similar to those at bar, the court in Augustus found that the lower court did not abuse its discretion in denying class certification. The insurance policies at issue in Augustus required the insurer to restore damaged vehicles to pre-loss condition and specifically allowed the use of non-OEM parts to do so. After finding that "the determination of 'pre-loss condition' could only be made by individually examining each and every putative class member’s vehicle” and by "determin[ing] what parts were utilized on each and every vehicle”, the court affirmed the lower court’s decision. Augustus, at ¶¶ 25-26, ¶ 29, 2003 WL 155267, ⅛⅜ 4-5. The court concluded that the case "presents far too many individual questions of fact which outweigh the minimal common questions of fact.” Id. at ¶ 28, 2003 WL 155267, ⅝5.

The individual inquiries that may be necessary in the instant case do not defeat predominance. As stated previously, the trial court can resolve individual questions, particularly those relating to damages and defenses, after making a determination on the predominant issue. While the cotut in Augustus found that "it would be inconceivable to reason that an automobile is not returned to its 'pre-loss condition’ because a non-OEM part is utilized in making a repair”, we leave the determination of that predominant issue in this case to the trier of fact. Id. at ¶ 27, 2003 WL 155267, ⅛ 5.