In March 2007, several State Farm policyholders filed a putative class action in Indiana state court. They sought to assert, on behalf of about 7,000 policyholders, breach of contract, bad faith denial of insurance benefits, and unjust enrichment claims alleging that State Farm had undercompensated the policyholders for hail storm damage to the roofs of their houses. Their complaint also included a claim for an injunction obligating State Farm to assess the damage to their house roofs using a “reasonable and objective standard.” State Farm removed the case to federal district court. Plaintiffs then moved for class certification. The district court declined to certify a Rule 23(b)(3) damages class because each policyholder’s claim required an individualized determination. The district court, however, certified a Rule 23(b)(2) class “to adjudicate the request for an injunction requiring State Farm to conduct a class-wide roof reinspection pursuant to a ‘uniform and objective standard for evaluating hail damage claims.’” State Farm petitioned for interlocutory review. The Seventh Circuit Court of Appeals granted the petition, heard the appeal, reversed the district court’s decision, and remanded the case with instructions to decertify the class. Kartman v. State Farm Mut. Auto. Ins. Co., 2011 WL 488879 (7th Cir. Feb. 14, 2011).
The Court of Appeals first held that the policyholders had no basis for injunctive relief. “Although the complaint invokes several legal theories, the plaintiffs have only one cognizable injury—underpayment of their insurance claims for hail damage to their roofs—and prospective injunctive relief is not a proper remedy for that kind of injury. Instead, this is simply an action for damages—not the dual remedies of an injunction plus damages—and if suitable for class adjudication at all, may be certified only under Rule 23(b)(3)… Because the district court correctly denied Rule 23(b)(3) certification based on the particularized facts of each plaintiff[‘]s claim, this class action should have ended there.”
The Court of Appeals further explained this point. “[T]he plaintiffs claimed that they suffered two separate injuries—underpayment of their hail-damage claims and a violation of a distinct right to have their hail-damaged roofs evaluated under a uniform and objective standard,” but “a claim of injury is not cognizable unless it results from the breach of a recognized legal duty owed to the plaintiff… Simply put, State Farm had no independent duty—whether sounding in contract or tort—to use a particular method to evaluate hail-damage claims. State Farm's alleged underpayment of the plaintiffs' hail-damage claims is a cognizable wrong in both contract and tort, but the method it uses to adjust claims is not independently actionable... The essence of an insurance policy is a promise by the insurer to compensate the insured for the loss of something of value that is covered under the policy, thereby shifting the risk of loss from the insured to the insurer… Insurance entails a promise to pay covered losses, not a covenant to use a particular standard for evaluating property damage. If a given policyholder was fully compensated for the damage attributable to the hailstorm, then State Farm will have satisfied its contractual obligation regardless of whether it used a ‘uniform and objective’ or an ad hoc standard to assess the damage. State Farm's allegedly inconsistent standard for evaluating hail damage might be evidence tending to show that some policyholders received inadequate compensation for their losses, but does not by itself establish liability for breach or supply a basis for injunctive relief.”
The Court of Appeals then focused on the failure of the policyholders’ bad faith claim to provide a basis for injunctive relief. “An insurer has an obligation of ‘good faith and fair dealing with respect to the discharge of [its] contractual obligation’ to the insured… Under Indiana law this obligation arises in tort and includes the “obligation to refrain from (1) making an unfounded refusal to pay policy proceeds; (2) causing an unfounded delay in making payment; (3) deceiving the insured; and (4) exercising any unfair advantage to pressure an insured into a settlement of his claim…. The plaintiffs contend that even if State Farm lacked a contractual duty to inspect their roofs pursuant to a ‘uniform and objective’ standard, the insurer's duty of good faith required it to do so. This argument reflects a fundamental misunderstanding of the tort of bad faith. As relevant here, an insurer breaches its duty of good faith when it offers ‘no legitimate basis for denying liability.’ … The bad-faith claim in this case is premised upon allegations that State Farm undercompensated the plaintiffs for the hail damage to their roofs. For purposes of the tort, this amounts to a claim that the insurer engaged in an unfounded refusal to fully pay the plaintiffs' claims… But the plaintiffs have cited no authority for the proposition that an insurer's use of an ad hoc loss-assessment standard, standing alone, qualifies as an independent basis for bad-faith liability… Instead, the bad-faith claim asserted here is a garden-variety one: Bad faith arises when an insurance claim is wrongfully denied and the insurer knows there is ‘no rational, principled basis’ for denying the claim… Thus, to prove State Farm committed the tort of bad faith, the plaintiffs must establish that their claims were underpaid-or wrongfully denied-in the first place… This requirement alone bars class certification because it cannot be established on a class-wide basis. Again, State Farm's inconsistent approach to hail-damage estimating (if it was inconsistent) might be evidence tending to show that the insurer underpaid some hail-damage claims. But it does not independently establish liability or support a separate injunctive remedy.”
“Stated differently, the plaintiffs cannot prove that their hail-damage claims were denied in bad faith without first showing that they received inadequate coverage for their loss… This requires proof that a compensable loss occurred and was underpaid or not paid at all—a claim-specific inquiry that turns on the nature of the damage to each plaintiff's roof and the amount State Farm paid to repair it. And as the district court properly held in declining to certify a Rule 23(b)(3) damages class, the class-action device is not appropriate for resolving such highly individualized questions of fact.”
The Court of Appeals then held that the existence of express contracts—the insurance policies—barred the policyholders’ unjust enrichment claims.
Next, the Court of Appeals held that even if the claim for injunctive relief somehow were viable, class certification would not have been proper. “A case may be certified as a class action under Rule 23(b)(2) where the ‘party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.’ …. Subsumed in this rule are at least two independent requirements: The contemplated equitable relief must be (1) ‘appropriate respecting the class as a whole’ and (2) ‘final.’ Here, the contemplated injunction will provide neither ‘appropriate’ nor ‘final’ relief for the alleged underpayment of the plaintiffs' hail-damage claims.”
“The proposed injunction would not be an appropriate remedy for any single plaintiff, let alone for the class as a whole,” because (1) the policyholders have not suffered irreparable harm; (2) damages are not inadequate to remedy their injury; (3) the hardships would fall disproportionately on State Farm, particularly because many of the policyholders may already have been fully compensated; (4) “[s]upervising compliance with the envisioned [mandatory] injunction would be administratively challenging… As currently envisioned, the injunction would require State Farm to reinspect the class members' roofs pursuant to a ‘reasonable, uniform, and objective standard.’ This is far too general to satisfy Rule 65(d), yet to be more specific would essentially require the court to write an insurance-adjustment code.”
The proposed injunction also would be “broadly impractical,” the Court of Appeals noted, because “[i]t is very likely that many others have already had their roofs repaired using the proceeds of their insurance payments.” This fact, indeed, “may constitute another barrier to class certification. Where a class is not cohesive such that a uniform remedy will not redress the injuries of all plaintiffs, class certification is typically not appropriate.”
The Court of Appeals then explained that the proposed injunction “would not provide ‘final’ relief as required by Rule 23(b)(2). An injunction is not a final remedy if it would merely lay an evidentiary foundation for subsequent determinations of liability. As we have explained, the plaintiffs have no independently actionable claim based on State Farm's failure to use a uniform and objective standard for evaluating hail damage. Properly understood, the contract and tort causes of action here are straightforward claims for underpayment of insurance benefits. As such, State Farm's liability cannot be determined on a class-wide basis, but instead requires individualized factual inquiries into the merits of each policyholder's claim. Far from being final relief, a class-wide roof reinspection would only initiate thousands of individualized proceedings to determine breach and damages… Seen in this light, the contemplated injunction would essentially have the effect of shifting the burden to State Farm to prove elements of the plaintiffs' claims. It goes without saying that no plaintiff is entitled to recover except on proof of breach and damage… Ordering State Farm to reinspect roofs on a class-wide basis amounts to an order requiring the insurer to establish whether it underpaid any of its policyholders, and if so, by how much.”
The Court of Appeals distinguished the proposed injunction from injunctions entered in discrimination cases and medical monitoring cases. In discrimination cases, an injunction provides “a final prospective remedy for ongoing and future discrimination,” an injury that is distinct from the injury of harm caused by past discrimination, which is cured by damages. “Here, in contrast, the plaintiffs have suffered only one cognizable injury—State Farm's alleged underpayment of their hail-damage claims—and a retrospective damages remedy would provide final, adequate relief for this singular harm... A medical-monitoring injunction is designed to relieve class plaintiffs of the prospective costs associated with medical supervision… In this sense, it is a final remedy because it permanently defrays future costs of medical supervision… In contrast, the injunction the plaintiffs request here would not perform any prospective function at all; it is designed to assess past property damage for purposes of determining liability for individual retrospective compensatory monetary remedies. In short, the plaintiffs are not really interested in final prospective equitable relief at all; they are singularly focused on recovering a retrospective damages remedy, and Rule 23(b)(3), not (b)(2), governs certification of a damages class.”
Kartman v. State Farm Mut. Auto. Ins. Co., thus provides significant guidance regarding both fundamental insurance law principles and Federal Rule of Civil Procedure 23(b)(2) governing certification of a class injunctive relief claim.