In recent weeks, two courts ruled on motions to dismiss the first wave of class action lawsuits based on alleged price optimization of auto insurance rates. In both Stevenson v. Allstate Ins. Co., No. 15-cv-04788 (N.D. Cal. March 17, 2016), and Harris v. Farmers Ins. Exch., No. BC579498 (Cal. Super. Jan. 25, 2016), the courts invoked the “primary jurisdiction” doctrine to stay the litigation, pending further proceedings by California regulators. Yet both courts also issued rulings on important elements of the plaintiffs’ claims—holding, among other things, (1) that insureds whose rates are affected by price optimization suffer an “injury in fact”; (2) that failure to disclose price optimization can make advertisements “false and misleading”; and (3) that insurers using price optimization may have been unjustly enriched. These rulings raise more questions than they answer about the exposure insurers now face for their actual practices—especially because the two courts reached opposite conclusions as to what the defendants were accused of doing in the first place.

Staying the Litigation

The most important ruling in both cases was the decision to invoke the “primary jurisdiction doctrine,” which comes into play “whenever enforcement of [a] claim requires the resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative body. … “United States v. Western Pacific Railroad Co., 352 U.S. 59 (1956). As a result, there will be no further proceedings in the Harris and Stevenson cases until the California Department addresses the question of whether each insurer’s alleged use of price optimization violates state law governing insurance rates.

But both courts also issued several rulings on issues that the analysis might resolve. In effect, the courts ruled (1) that the conduct alleged in the complaint is unlawful; but (2) that the courts need the Insurance Commissioner’s help to determine whether the defendants actually engaged in that conduct.

Interpreting the Complaints

This approach could potentially sow confusion because the courts were unable to settle on a coherent account of just what conduct the plaintiffs actually alleged. This problem emerged, for example, in connection with the courts’ rulings on the “filed rate doctrine”—a rule which provides that “rates duly adopted by a regulatory agency are not subject to collateral attack in court.” MacKay v. Superior Court, 188 Cal.App.4th 1427 (Cal. Ct. App. 2010). In Harris, the court found that the doctrine did not bar the plaintiffs’ claims, because

Plaintiffs allege that in applying the approved rate, Defendants improperly took into consideration elasticity of demand as a rating factor. …

Plaintiffs are not challenging the rate or rating factors filed with the Department of Insurance. Instead, Plaintiffs allege that Defendants used inelasticity of demand as a rating factor without the Department’s approval and as a result charged a rate higher than the approved rate.

Stevenson, on the other hand, held that the filed rate doctrine did apply. Although the amended complaints in both cases used identical language to describe the defendants’ conduct, the court in Stevenson concluded that Allstate was not accused of “charging a rate higher than the approved rate”:

The gravamen of Plaintiff’s allegations is a challenge to the approved rates and not the application thereof. … Plaintiff is unable to allege that she paid a premium higher than would be calculated using the rate and class plan approved by the Commissioner.

Multiple Rulings

This lack of clarity makes some of the courts’ other rulings problematic. For example, Stevenson held that the plaintiff had stated a claim for unjust enrichment, because

Plaintiff pleads payment of premiums that were artificially inflated based on … alleged unlawful practices. … Plaintiff’s alleged injury is … that she ‘paid higher prices … than have other insureds’ who were not charged more based on price optimization.

However, if, as the court found, the Stevenson defendant used price optimization only to modify the relativities (i.e., the numerical values) that were used in “the rate and class plan [that was] approved by the Commissioner,” then the plaintiff in that case would not have “paid higher prices” than any other insured with the same risk profile. Nor is it clear that price optimization causes premiums to be “artificially inflated.” For any given relativity used in a rating plan, there might be a range of actuarially-justified values, any of which will generate cost-based premiums. Consequently, the language of Stevenson suggests that even a premium that is justifiable on the basis of cost might still be “artificially inflated”—and therefore unlawful—if the value of a specific relativity was selected with an improper motive. Yet the court gave no guidance about how to distinguish bad motives from lawful ones.

Stevenson also held that the plaintiff stated a claim for “false and misleading” advertising under California’s Unfair Competition Law, because Allstate’s public explanations about pricing auto insurance did not disclose that the insurer “accounts for [elasticity of demand]” when it assigns values to rating variables. But insurers have historically taken account of consumer demand in pricing decisions, and failure to disclose that consideration has not previously given rise to false advertising claims. The Stevenson ruling means the court thinks some modifications to rating factors are more consequential than others, but, again, it gives little or no basis for identifying the ones that might now be “material.”

More Information

A detailed examination of the Harris and Stevenson decisions is available at PropertyCasualtyFocus.com: In Price Optimization Class Actions, Courts Defer To Regulators—But Still Leave a Mess