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Class Action Defense Cases-Mills v. Foremost: Eleventh Circuit Reverses District Court Dismissal Of Class Action Complaint Alleging Underpayment Of Policy Benefits Holding Plaintiffs Possess Standing And Should Be Allowed To Conduct Discovery

District Court Erred in Holding Plaintiffs Lacked Standing to Prosecute Class Action Complaint and in Ruling on Suitability of Complaint for Class Action Treatment at the Pleading Stage of the Litigation Eleventh Circuit Holds

Plaintiffs filed a class action lawsuit in Florida state court against their mobile home owner’s insurance carrier, Foremost Insurance, for underpayment of damages caused by hurricanes, and defense attorneys removed the class action to federal court. Mills v. Foremost Ins. Co., 511 F.3d 1300, 2008 WL 45806, *1 (11th Cir. 2008). The class action complaint alleged that plaintiffs tendered a claim to Foremost for hurricane damages, but that “Foremost failed to compensate the Millses for contractors’ overhead and profit charges, and for state and local sales taxes on materials, incurred by the Millses in having their hurricane-damaged property repaired or replaced.” Id. The Eleventh Circuit referred to these unpaid items as “Withheld Payments,” see id. n.2. Before either side filed a motion concerning class action certification, defense attorneys moved to dismiss the class action on the ground “that class action treatment was inappropriate because common legal or factual questions would not predominate over individual issues.” Id. The district court granted the motion to dismiss on the ground that plaintiffs lacked standing to prosecute the class action claims, id. Plaintiffs appealed dismissal of the class action, and the Eleventh Circuit reversed.

The district court dismissed the class action based on its conclusion that, in order to have standing to prosecute the class action, plaintiffs had to satisfy three “preconditions” set forth in the insurance policy: “(1) they must complete the repairs or replacement of the damaged property; (2) they must actually incur overhead, profit, and sales tax in connection with the repairs or replacement; and (3) they must make a further claim for any ‘additional costs’ (including overhead, profit, and sales tax) incurred in repairing or replacing the damaged property.” Mills, at *1. Because the class action complaint sought damages for Withheld Payments, the district court reasoned that plaintiffs themselves would not be entitled to such damages unless they met these preconditions. Because plaintiffs “failed to allege that they had completed the repairs or replacement and made a claim for such repair or replacement costs,” the district court held that they lacked standing to prosecute the complaint either individually or as a class action. Id. The district court further held that class action treatment would be inappropriate because “the individual inquiry of the facts surrounding the property damage claims of thousands of Foremost policy holders under thousands of separate insurance policies would predominate and overwhelm any common issue.” Id., at *2. Accordingly, it granted the defense 12(b)(6) motion to dismiss the class action complaint, id.

Applying the well-established abuse of discretion standard of review, see Mills, at *2, the Eleventh Circuit first held that the policy does not require insureds first make the actual repairs in order to recover the “actual cash value” benefits provided by the policy, id., at *4. The Circuit Court also concluded that the term “actual cash value” of property damage included overhead, profit, and sales as sought by the class action complaint, id. Accordingly, it concluded that the district court erred in ruling that plaintiffs had to repair or replace their damaged property in order to have standing to seek the Withheld Payments. Id., at *5. The Circuit Court also held that the district court erred in considering the insurance coverage issues to implicate standing, explaining at page *5: “The complaint alleges that the Millses had a mobile home, that Foremost issued an insurance policy covering hurricane damage to the mobile home, that a hurricane damaged the Millses’ mobile home, that the Millses made a claim under the Policy for those damages, and that Foremost paid less on the claim than the Millses contend they are owed. Thus, the Millses clearly had standing to sue for damages under the Policy.” (Citation omitted.)

Because the Seventh Circuit found that plaintiffs possessed standing to prosecute the putative class action and that they adequately pleaded a claim for the Withheld Payments, the Circuit Court concluded that they also had standing to serve as representatives of the putative class. Mills, at *6 The court stressed, however, that it was not usurping the role of the district court to determine whether plaintiffs qualified under Rule 23 to represent the class, solely that they had standing to seek to represent the class. Id.

Finally, the Circuit Court considered whether the lawsuit was suitable for class action treatment; specifically, it addressed the district court’s finding that “the individual inquiry of the facts surrounding the property damage claims of thousands of Foremost policy holders under thousands of separate insurance policies would predominate and overwhelm any common issue.” Mills, at *7. The Court found the district court’s reasoning to be flawed for several reasons. Primarily the Seventh Circuit found that the class action certification ruling was premature, holding that often “the parties’ pleadings alone are often not sufficient to establish whether class certification is proper, and the district court will need to go beyond the pleadings and permit some discovery and/or an evidentiary hearing to determine whether a class may be certified.” Id. (citations omitted). Recall that the defense motion was brought under Rule 12(b)(6) and was filed before either side brought a class certification motion. The Court explained that “the parties’ pleadings take starkly different positions as to the number and extent of issues that will be involved in this case, and the method and ease of proof for each,” id., at *8, and held that “[t]he parties’ disputes as to issues and proof cannot be resolved simply by reviewing the face of the [class action] complaint but warrant, at a minimum, production and examination of a representative sample of the estimates of Foremost’s adjusters,” id., at *9. Thus, “the district court abused its discretion in determining, at this complaint-pleading stage in the litigation, that class action treatment of the Millses’ claims is inappropriate.” Id.

The Seventh Circuit reversed the district court order dismissing the class action complaint and instructed the district court to grant plaintiffs “an opportunity to conduct limited discovery relevant to the certification issue.” Mills, at *9. The Court stressed that it was expressing no opinion as to whether the lawsuit ultimately should be certified as a class action. Id.

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