Mini-MDL approved to consolidate business interruption cases against one regional insurer

 

Last week, the U.S. Judicial Panel on Multidistrict Litigation agreed to at least one mini-MDL, consolidating the business interruption lawsuits filed against Society Insurance Co.  At the same time, it decided against consolidation of cases against several other insurers, saying it would be inefficient.

In August the MDL panel ruled against centralizing all COVID-19 business interruption lawsuits because of differences between policies and unique facts of certain policyholders.  However, the panel requested additional briefing on mini-MDLs against five insurers. Those five (Lloyds, Cincinnati, Hartford, Society Insurance, and Travelers) insurers accounted for approximately 275 cases (approximately 1/3 of cases filed). 

In approving the mini-MDL against Society Insurance Company, the MDL court stated consolidation “will serve the convenience of the parties and witnesses and further the just and efficient conduct of this litigation.”  Unlike the other insurance carrier defendants, the panel noted that Society is a regional insurer only operating in six states (Minnesota, Iowa, Illinois, Indiana, Wisconsin, and Tennessee).  These cases were transferred to the U.S. District Court for the North District of Illinois, in Chicago.

In a series of separate opinions, the MDL ruled against consolidating the cases against the other insurers involved.  Generally speaking, the insurance carriers argued that local courts were already familiar with state law (which governs most substantive insurance law issues), that various states and municipalities issued unique and differing civil authority issues, that a variety of policy forms were at issue, and that any question of damages would require individualized, fact-specific attention. 

Supreme Court to hear arguments in captive insurance case on December 1

Last Wednesday, the Supreme Court released its December arguments calendar. Included on the calendar was CIC Services v. IRS, a case we first blogged about in 2016.  Since then, our firm has been involved as counsel for an amicus party, the district court dismissed the case, the Sixth Circuit affirmed in a 2-1 decision, and the Supreme Court has granted certiorari.  The issue that the Supreme Court will hear oral arguments on December 1st is:

• Whether the Anti-Injunction Act, which prohibits lawsuits to stop the assessment or collection of taxes, also bans challenge to reporting and information-gathering mandates imposed by the Internal Revenue Service, when the violation of those mandates carries tax penalties.

The case has generated significant amicus attention at the high court, with a dozen amicus briefs being filed (10 in favor of CIC Services, two in favor of the IRS).  It remains to be seen whether the passing of Justice Ginsburg will result in an alteration of the oral argument calendar. 

Incentive fee awards for class plaintiffs struck down by 11th Circuit

 

Last week the Eleventh Circuit shocked the legal world by ruling that incentive payments to named representatives in class actions are improper, striking a $6,000 award to the plaintiff in a Telephone Consumer Protection Act class action . Johnson v. NPAS Solutions, LLC, No. 18-12344, “Slip Op.” (11th Cir. 2020).  

Incentive awards are a special payment to the named plaintiffs in class actions.  Courts began awarding these in the 1980s, and they are commonplace today.  Civil rights and consumer protection class action settlements include incentive awards to the named plaintiffs approximately 90% of the time.  While these awards are typically small compared to the total settlement or judgment amounts – they often range from $1,500 to $20,000 depending on how involved the named plaintiffs were in the case – the incentive award is usually drawn from the common fund or otherwise paid by the defendant as an awardable cost. 

In Johnson, the defendant (a medical debt collector) and the class had agreed to settle the case for $1.432 million (which included a $6,000 payment to the named plaintiff).  Only one person opted out of the class and objected.  Relying on two cases from the 1880s, the panel held “that Supreme Court precedent prohibits incentive awards like the one” awarded to the plaintiff (and the type customary in virtually all class actions). Id. at 18. Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885).

In Greenough, the Supreme Court first held that a plaintiff could seek reimbursement for his  costs, attorney’s fees, and reasonable and necessary expenses in bringing a case on behalf of others 105 U.S. at 537. But, at the same time, the high Court also stated that “there [was] one class of allowances” that was “decidedly objectionable.” -- the plaintiff’s “personal services and private expenses.” Id. 

Three years later, in Pettus, the Court again held that a plaintiff representing others in an equity suit could claim “expenses incurred in carrying on the suit and reclaiming the property . . .” 113 U.S. at 122. As in Greenough, the representative plaintiff could not claim his personal compensation out of the common fund recovery. Id.

Relying on  Greenough and Pettus, the Eleventh Circuit concluded that “the modern-day incentive award” was akin to either a salary which is earned or a bounty to be won, both of which were forbidden by two 19^th century cases. Slip Op. at 23.

The Eleventh Circuit noted that Rule 23 practice and “inertia” had resulted in incentive awards as being “commonplace in modern class-action litigation,” but added “that doesn’t make them lawful, and it doesn’t free us to ignore Supreme Court precedent forbidding them.” Id. at 25, 28.

In dissent, Judge Martin argued that the 11th Circuits own prior cases required the panel “to determine whether the incentive award [] is fair,” and concluding that the $6,000 award was fair. Id.

This opinion creates a clear circuit split – which the panel recognized – and will be top of mind with every class-action lawyer in the country.  Incentive fees have become boilerplate in insurance class action settlements; some empirical research indicates 90% of consumer class actions contain incentive fee awards, which average slightly more than $4,000 per plaintiff.  The empirical evidence suggests that Judge Martin's conclusion - that the district court did not abuse its discretion in awarding $6,000 - was in line with common practice.  

While the focus of this blog is typically business insurance, we will continue to monitor this case as it moves ahead for three reasons:  

1. Insurance companies continue to face class actions against themselves for their own business practices, making this case relevant to them. 
2. This case has major implications for this blog's readers; which include many businesses which could face class action litigation. If courts begin to disallow class action incentive fee awards, plaintiffs' firms will have a harder time finding people who are willing to sign up for the burdens of serving as class representatives (being subject to discovery, depositions, mediations, and court appearances) when the representatives could get the exact same compensation by merely being an unnamed class members.
3. Finally, we routinely advise clients regarding insurance coverage issues for class actions and are currently representing defendants in nearly a dozen high-stakes class actions.  While Johnson v. NPAS Solutions is technically a decision regarding civil procedure, it has major implications for both policyholders and insurers.   

What’s next?  Plaintiffs and Defendant could petition the Eleventh Circuit for en banc review.  But en banc petitions are granted less than 1% of the time. Because this opinion creates a circuit split, the Supreme Court may grant review.   But if neither en banc review nor certiorari to the Supreme Court are granted, the opinion will stand. In that event, the 11^th Circuit will be seen as a less-favorable jurisdiction for class actions, and class action objectors in all other circuits will start citing to Johnson.

All Risks Covered team publishes North Carolina Insurance Desk Reference

The team of Womble Carlyle attorneys who contribute to this blog have curated a number of the blog posts, in addition to other content, into an e-book titled The North Carolina Insurance Desk Reference.  You can access it here.

Lawsuit filed to set aside IRS Notice 2016-66

Two months ago, without any prior warning or public notice, the IRS issued Notice2016-66 which defined a number of common captive insurance transactions as “transactions of interest.” The Notice is limited to captive insurers organized under 831(b). The IRS states that these “transactions of interest” have the “potential for tax avoidance or evasion.” It places reporting responsibilities on the captive insurers and the owners of captive insurance companies, as well as a number of other professions (including lawyers, accountants, actuaries, and captive managers), with stiff monetary penalties for non-compliance.

The Notice has generated a substantial amount of reporting and commentary in the captive insurance community. By imposing reporting requirements on any 831(b) which has used risk pools to achieve risk distribution, had loss rates of less than 70%, or been involved in related-party lending, the Notice applies to the vast majority of 831(b)s which have had operations for the last 10 years. Further, captives (and professional advisors) were given only until January 30, 2017 to comply with filing the new reporting requirements, which include retrospective reporting of transactions for the last 10 years. However, since the time that this lawsuit was filed, the IRS has issued 2017-08 which extends the reporting deadline until May 1, 2017.

Two days ago, on December 28, 2016, CIC Services, LLC filed a lawsuit against the Treasury Department and IRS. It seeks an injunction from the federal district court, which would prohibit the IRS from enforcing the Notice.

More specifically, CIC Services, LLC is a captive manager located in Tennessee.It claims it is entitled to an injunction because (1) the Notice is a “legislative-type rule” which was unlawfully issued without proper compliance with the Administrative Procedures Act (which includes a public notice and comment period) and (2) because the Notice is “arbitrary and capricious and ultra vires in nature” and lacks the proper analytic foundation required under the Administrative Procedures Act.

The thrust of this injunctive lawsuit is that the APA contains a four step process before an administrative rule can be put into place, and the Treasury Department and IRS did not give public notice and seek public comment before publishing the Notice.

It will be interested to see how this lawsuit proceeds in the federal court system. If CIC Services, LLC prevails on a temporary restraining order or early motion for a permanent injunction, the IRS will not be able to enforce the Notice.

Is the Owner-Manager of your Vendor your “Employee?”

Expansion of Coverage: North Carolina Crime Coverage Part:  Embezzlement

Is the Owner-Manager of your Vendor your “Employee?”

            On November 14, 2014, the Eastern District of North Carolina entered summary judgment in favor of an insured seeking coverage for embezzlement for actions by owners of a vendor. Colony Tire Corp. v. Fed. Ins. Co., No. 2:15 CV 27, 2016 WL 6683590 (Nov. 14, 2016 E.D.N.C.)

            The insured was seeking coverage under a claims-made policy for theft that occurred between 2002 to 2014.  The embezzlement losses were approximately $492,350.00.  The insurer denied coverage claiming that Colony, the insured, could not establish that the loss was caused by an “Employee” under the Policy.

            The money was stolen from Colony through its payroll and tax vendor, Employee-Services.Net (“ESN”).  Through the contract between ESN and Colony, ESN was allowed to withdraw funds from a designated bank account to pay Colony’s payroll and taxes.  Owners/Managers/Principals of ESN, James Staz and William Staz (collectively “the Stazes”) pled guilty to embezzling over $14 million from ESN’s many clients, including Colony.

            Essentially, the Stazes would withdraw money from Colony’s account, claiming that the money would be used to pay payroll taxes.  In reality, the taxes would go unpaid, and the money would fund the Stazes’ extravagant lifestyle, which included alcohol, strip clubs, jewelry, a luxury car, and a luxury home “with a lavish three-tiered pool, a cascading waterfall, wet bar, and dining area.”

            The critical issue for the court was whether the Stazes were “Employees” under the policy.  In the policy, the definition of Employees included “contractual independent contractor.”  In the definition, “contractual independent contractor” had to be a natural person.  Thus, from the outset, ESN, as a business entity, could not be a “contractual independent contractor.”  Further, to qualify as a contractual independent contractor, there had to be a written contract between Colony on one hand, and on the other hand either (a) the natural person or (b) an entity “acting on behalf of” the natural person.

            The written contract was between Colony and ESN.  The Stazes were not a part of the contract.  Thus, to qualify as “contractual independent contractors,” the court had to determine whether ESN was an entity “acting on behalf of” the Stazes pursuant to part (b) of the definition.

            The court interpreted the phrase “acting on behalf of” broadly due to its ambiguity.  Thus, not only did the phrase mean to act within the scope of a formal agency relationship, the Court also construed the phrase to mean actions in the general interest of or in the general benefit of the natural person.  Given this broad definition of “acting on behalf of,” the Court determined that ESN acted on behalf of the Stazes when it contracted with Colony.  Thus, the Stazes were Employees as defined by the policy.  Because they were Employees, there was coverage for the loss and directed the insurer to pay the loss.  The Court then directed the insured to prepare additional briefings on potential costs, attorney’s fees, and interest that it sought through its prayer for relief.    

            An important portion of the analysis, in our opinion, was the Court’s use of the Federal indictment for the Stazes.  Using the facts of the indictment, the Court concluded that ESN’s purpose was to facilitate the Stazes’ embezzlement scheme.  No one, other than the Stazes, benefited from ESN’s existence.  Further, the Court emphasized that ESN was a tool used by the Stazes for their criminal actions:  “the Stazes “through [ESN] defrauded ESN clients.” Id. at *5 (emphasis in original).  While not explicitly done in this case, such findings could support a veil piercing theory under North Carolina law, which would yield similar results through equitable means. 

            Given the results of this case, it would not be surprising to see a re-write of the “contractual independent contractor” provision in the future.  However, litigators could also distinguish this case on the basis of the facts.  The facts in the indictment supported showing that the Stazes used ESN for their exclusive, personal benefit.  One could potentially argue that similar facts, establishing this high-bar, close to a veil-piercing standard, would need to be found in order to meet the burden of “acting on behalf of” language.  This would be distinguished from actions by a "lone wolf" employee at a vendor who steals funds without benefiting the owners. 

Opioid Use and NC Workers’ Compensation

As we have previously reported, the North Carolina Industrial Commission was tasked to investigate a prescription formulary for North Carolina State workers.  The results of the investigation were published earlier this year.  The Commission considered the potential savings, benefits, and implementation procedures of a drug formulary, not just for State workers, but for the workers' compensation system as a whole.  Also requested specifically by the General Assembly, the Commission also investigated the use of narcotic drugs and the growing health problem of opioid use.

 

The results of the investigation included a general statement that given the complexity of drug formulary implementation, the Commission recommended additional time and resources be spent evaluating the costs and benefits associated with a formulary.  The Commission recognized that, in the meantime, a generic mandate could have potential savings.  Specifically for this post, the Commission stated that strong consideration should also be given as to how opioids are treated in the North Carolina workers’ compensation system. 

 

A new Wall Street Journal article published recently offers a new option in which the Commission may have interest.  The article discusses that insurers, such as Liberty Mutual and Broadspire, are using algorithms to suggest other treatment options after a certain number of opioid refills. 

 

Given that the North Carolina Industrial Commission has utilized new technology to help identify non-insureds, the use of a computer program to aid management of this potential epidemic is very interesting.  It would not be surprising if the Commission’s further work on this subject included new technology in this area.