Defense Motion to Strike Class Action Allegations Must be Denied Pending Further Discovery to Develop Facts Needed to Evaluate Commonality and Superiority Requirements for Class Action Certification Iowa Federal Court Holds
This class action – Rios v. State Farm Fire & Cas. Co., 469 F.Supp.2d 727 (S.D. Iowa 2007) – has a tortured procedural past. The initial class action complaint was filed in Iowa state court in August 2004. Defense attorneys removed the class action to federal court on the basis of diversity jurisdiction, but the federal court remanded the action to state court for failure to establish the $75,000 threshold. See Varboncoeur v. State Farm Fire & Cas. Co., 356 F.Supp.2d 935 (S.D. Iowa 2005). Plaintiffs then filed a motion to amend the complaint so as to seek certification of a nationwide class, whereas the original complaint alleged only a statewide class action. Defense attorneys again removed the class action to federal court, this time on the basis of the Class Action Fairness Act of 2005 (CAFA); the federal court again remanded the action, holding that until the state court ruled on the motion to amend, the federal court lacked jurisdiction. Rios, at 730. Once the state court granted the motion to amend the class action complaint, defense attorneys removed the class action to federal court under CAFA. Id.
Plaintiffs filed a putative class action alleging that State Farm paid homeowner’s insurance policy benefits for roof repairs by paying the insured the cost of a roof “overlay” upfront, but withholding the balance of the policy benefits otherwise available to cover the cost of a roof “tear-off” until the insured had actually completed such repairs. Rios, at 731. As the district court explained at page 731, “For example, if a policyholder incurred roof damage that was covered under the policy, and the total replacement cost of the roof damage was $3,000.00, then under the standard policy, State Farm would only pay the policyholder the cost to overlay the roof (hypothetically $1,800.00) upfront, and withhold the rest of the replacement cost (hypothetically $1,200.00), i.e., tear-off costs plus depreciation, until actual repairs were made on the roof.” This provided a financial benefit to the insurer, because “[i]f the policyholder did not make the tear-off repairs within the two-year time period provided under the policy, then State Farm would not have to pay the $1,200.00 tear-off costs to the policyholder.” Id.
While this “holdback” practice was common in the industry, in 2000 State Farm believed that it could save money by offering to pay the total replacement cost for roof repairs upfront, and in 2000 and 2001 it obtained state approvals to introduce that new coverage as an “upfront endorsement.” Id., at 731-32. The new program was an immediate financial disaster, resulting in “historic pay-out losses in 2001 and 2002”; in fact, “In 2001 alone, State Farm paid out approximately $115 million more in replacement cost claims than in previous years due to the Upfront Endorsement policies.” Id., at 732. State Farm stopped issuing the endorsement but remained contractually obligated to honor it for existing policyholders. Id. But according to the class action complaint, State Farm continued to sell the endorsement without any intention of honoring it, reverting instead to the two-part payout program; specifically, the complaint alleged that “in the summer of 2002, State Farm stopped paying the total replacement cost of roof repairs upfront and implemented the holdback claim practice in Wisconsin, North Dakota, South Dakota, Nebraska, Iowa, and Minnesota.” Id.
The class action complaint identified two classes: Class I – the Rescission Class – consisted of insureds who paid for the upfront endorsement but never submitted a claim and sought damages for fraudulent inducement and rescission; Class II – the Roof Claim Class – consisted of insureds who purchased the upfront endorsement and submitted a claim but did not receive total replacement cost benefits upfront, and sought damages for breach of contract and unjust enrichment. Rios, at 732-33. Defense attorneys filed a “Combined Motion for Judgment on the Pleadings on Plaintiffs’ Claims for Premium Damages and Motion to Strike and Dismiss Plaintiffs’ Nationwide Class Allegations.” We do not here discuss that portion of the district court’s opinion granting the motion for judgment on the pleadings based on the filed rate doctrine. See id., at 733-40.
Defense attorneys moved to dismiss the class action allegations on the grounds that the commonality requirement of Rule 23(a) and the superiority requirement of Rule 23(b)(3) could not be met. Rios, at 740. In essence, the defense argued that because the laws governing the class claims vary from state to state, particularly the applicable statutes of limitation, the litigation should not proceed as a class action. Plaintiffs countered that the defense motion was premature because discovery was ongoing; absent further discovery, plaintiffs did not know which state laws were implicated and therefore could not provide the court with an analysis of whether conflicts among state laws exist. Id. The district court rejected the defense argument. The court explained that nationwide or multi-state class actions may be maintained even if there are variances in the applicable substantive state laws, depending on the circumstances of the case, but that the court could not determine whether commonality will in fact exist, or whether a class action device is a superior method for resolving the claims at issue, until further discovery has been completed. Id., at 740-42. Specifically, “Without further discovery, it is difficult to determine which state laws will be implicated in the class action suit,” id., at 741 (citation omitted), and “it is premature to determine the manageability of the proposed class action lawsuit given that it is unclear which, and how many, varying state laws will be implicated,” id., at 742. Because “it does not appear beyond doubt that Plaintiffs cannot establish an actionable class action lawsuit,” id., at 741, the court denied the motion to dismiss.