In a class action over the widespread practice of using automated review systems to determine the reasonableness of medical claims submitted under the Personal Injury Protection (PIP) coverage of automobile policies, the Oregon Supreme Court appears to have absolved class plaintiffs from responsibility for proving essential elements of their claims. In Strawn v. Farmers Insurance Company of Oregon, 2011 WL 1886283 (Or. May 19, 2011), the Court extended the scope of a 2008 PIP case in troubling ways.  

The 2008 Ivanov Decision

In 2008, in Ivanov v. Farmers Insurance Company of Oregon, 344 Or. 421, 185 P. 3d 417 (2008), plaintiffs challenged the use of an automated review system to deny PIP claims for lack of medical necessity. The trial court awarded summary judgment to Farmers, on the ground that none of the plaintiffs had established the necessity of his or her treatment. The Oregon Supreme Court reversed, because the Oregon PIP statute provides that covered medical expenses "shall be presumed to be reasonable and necessary unless the provider is given notice of denial [within 60 days]." ORS 742.524(1)(a).

In Ivanov, Farmers had issued timely denials of all of the plaintiffs' claims. The Court reasoned, however, that "it is not the validity of Farmers'[s] claim denials that plaintiffs seek to challenge," but, rather, "the sufficiency of Farmers'[s] investigation of their claims before Farmers . . . issued its denials . . . at the time the claims were presumed medically reasonable and necessary." 344 Or. at 429, 185 P.3d at 421 (emphasis in original). The Court explained: "At the time that Farmers was processing the medical claims . . . , those claims were presumed to be medically necessary; as a result of that presumption, plaintiffs were not responsible for establishing medical necessity at that point in time." 344 Or. at 430, 185 P.3d at 422.

The Court was correct that plaintiffs challenged the investigation of their claims, and that the reasonableness of an investigation does not turn on the claim's underlying merits. But it was simply wrong to suggest that the plaintiffs did not also challenge the validity of the denial of their claims. The plaintiffs sued for breach of contract and fraud, and they could not succeed on either of those theories without a finding that Farmers had failed to pay for services that were, in fact, "necessary." The Supreme Court's decision appeared to mean that the plaintiffs could take their claims to trial, regardless of whether they could actually prove this essential element of their case.  

In Strawn, the Court of Appeals extends Ivanov on Liability

Strawn v. Farmers involved a claim review system that relies on a database of medical expenses, maintained by a company called Medata. The system compares the amount of a given PIP claim with other charges for the same medical service provided in the same geographic area, and it identifies each case in which the amount of the claim exceeds the amount at the 80th percentile of such charges. Farmers deemed most such items to be "unreasonable," and it "reduced" or "partially denied" such claims by paying only the 80th-percentile amount.

Farmers maintained that the system produced only recommendations of reductions, while final decisions were made by claim professionals exercising independent judgment. The Court found, however, that "[t]he adjusters were downgraded if they departed from [the] recommendations and were rewarded when they followed them. Thus, the 'recommendation' was, as a practical matter, the final determination of reasonableness." 2011 WL 1886283, at *2.  

Strawn was filed as an Oregon class action. At the conclusion of plaintiff's case, Farmers moved to de-certify the class and for a directed verdict on the merits, on the ground that each class member, to establish liability, would have to prove the reasonableness of the amount of his or her claim. The motions were denied, and, after the Supreme Court had decided Ivanov, the Oregon Court of Appeals rejected Farmers's argument, because, "at the time the bills were submitted, they were . . . presumptively reasonable . . . ." Strawn v. Farmers Insurance Company of Oregon, 228 Or. App. 454, 465, 209 P.3d 357, 366 (Or. App. 2009).

Like Ivanov, Strawn involved claims for breach of contract and fraud. The gravamen of those claims was that Farmers had promised to pay the "reasonable" cost of covered medical services, but had failed to do so. Yet the Oregon Court of Appeals held that a class could be certified, and final judgment could be entered in favor of the class, without any showing that Farmers had paid a less-than-reasonable price for the services provided to any class member. That decision is at odds with the rule applied in other states. E.g., Bemis v. Safeco Insurance Company of America, 407 Ill. App. 3d 1164, 2011 WL 1204003, at *4 (2011).

The difference in Strawn was the Oregon PIP statute, which shifts the burden of proof on reasonableness. The statute expressly provides, however, that the insurer can shift the burden back by issuing a timely notice of denial. ORS 742.524(1)(a). In Strawn, the plaintiff did not allege that any denial had been untimely. Thus, the Court of Appeals effectively read the timely denial provision out of the PIP statute.

The Supreme Court extends Ivanov on Reliance

Farmers decided not to appeal that ruling. Instead, it focused on the claim that Farmers had represented in its policies that it would pay "reasonable" medical expenses, when it had not intended to pay all reasonable charges. Farmers argued that plaintiffs needed to offer proof of reliance on this "representation" by each member of the class.

The Supreme Court, affirming the decision below, ruled that classwide reliance could be inferred, without individualized proof (2011 WL 1886283, at * 12):

[R]eliance can, in an appropriate case, be inferred from circumstantial evidence. . . . [T]he same misrepresentation must have been without material variation to the members of the class. In addition, the misrepresentation must be of a nature that the class members logically would have had a common understanding of the misrepresentation, and naturally would have relied on it to the same degree and in the same way.  

Because PIP coverage is required in every Oregon auto policy, and because auto insurance is compulsory, the Court found that "reliance on the PIP coverage that the policy provides is inherent in the purchase of insurance" Id., at *13 (emphasis added).

Thus, an insurer that pays PIP benefits in Oregon may be found liable to a class of plaintiffs for breach of contract and fraud, without proof either (i) that the insurer failed to provide any benefit it promised to provide, or (ii) that any class member actually relied on the insurer's promise. In Strawn, the insurer was especially vulnerable to such an outcome, because of the Court's finding that it relied exclusively on the automated system to make payment decisions. But the template for future actions is straightforward: If an insurer implements any standard practice for processing a PIP claim, and if a plaintiff can coherently argue that the practice is inconsistent with policy terms, then the plaintiff can seek to establish liability -- on a classwide basis -- without any proof that the practice has produced even a single actual failure to pay "reasonable and necessary" benefits.