KARTMAN v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY (February 14, 2011)
In early 2006, a severe hailstorm hit the Indianapolis, Indiana area, causing extensive property damage. Almost 50,000 area residents filed insurance claims under homeowners insurance policies with State Farm Fire and Casualty Company. State Farm adjusted and paid over $263 million on hose claims. The following year, however, several State Farm policyholders filed suit for breach of contract, bad faith denial of benefits, and unjust enrichment. The suit was brought as a class action and alleged that State Farm underpaid claims and failed to use a uniform standard for evaluating the hail damage. The class sought damages and an injunction ordering State Farm to reinspect the roofs under a uniform standard. Judge Lawrence (S.D. Ind.) refused to certify a Rule 23(b)(3) damages class because of the need for individual underpayment determinations. He did certify, however, a Rule 23(b)(2) class to address whether the class was entitled to an injunction requiring the uniform reinspections. State Farm sought interlocutory review of the certification order.
In their opinion, Judges Cudahy, Wood, and Sykes granted the petition of review, reversed, and remanded with instructions to decertify the class. The Court’s problem with the district court's approach was a basic one – what are the claims? An insurance policy is a contract. For its part, the insurer agrees to pay for covered losses. It does not agree to use a particular standard in evaluating any alleged damage. An insurance policy also implicates tort law as a result of the bad faith denial of benefits claim. But again, tort law does not consider the failure to use a uniform standard a breach of a duty of good faith. Neither contract law nor tort law imposed a separate duty on State Farm to use a particular method to evaluate an insured's loss. The district court’s treatment of the uniform standard claim as a separate claim was error. Having clarified the claims, the Court turned to Rule 23. Rule 23(b)(2) requires that class-wide injunctive relief be both appropriate with respect to the class as a whole and final. The Court found both requirements absent here. First, with respect to appropriate, the Court noted that the class could not even satisfy the most basic of equitable relief requirements -- irreparable harm. Whatever their loss, it can be adequately satisfied with damages. The balance of hardships is also inequitable. The cost of compliance would be enormous, with little benefit. The Court also found that the injunction would be an administrative challenge and impractical. Second, the injunction did not meet the Rule 23 finality requirement. The plaintiffs are not seeking uniform roof inspections as their final remedy. Even in their view, the inspections are merely stepping stones to further proceedings on liability. The injunction does not meet the Rule 23(b)(2) requirements -- the class should not have been certified.