UNITED STATES HOUSE OF REPRESENTATIVES
COMMITTEE ON THE JUDICIARY
Hearing on H.R. 1115
“Class
Action Fairness Act of 2003”
Testimony of
Commissioner
District of Columbia Department of Insurance and Securities Regulation
Mr. Chairman and
members of the Committee, my name is Lawrence Mirel. I am the Commissioner of Insurance and
Securities for the
As you know, the
business of insurance is regulated primarily by the states.[3] Although the
Although I chair an NAIC working group looking into the issue of the impact of class action lawsuits on the regulatory authority of state insurance commissioners, I am speaking today solely in my capacity as insurance commissioner for the District of Columbia, and not on behalf of the NAIC. The NAIC working group was established only recently and has just begun its work.
I want to thank the Committee for its consideration of H.R. 1115. This is
very significant legislation and an important first step in curbing the abuses—“havoc” is not too strong a term—that certain kinds of class action lawsuits can visit on an orderly and well-regulated insurance system. I do not think this legislation alone is sufficient to protect the public against the cost and dislocation of questionable class action litigation against insurers, but it will go a long way toward eliminating one of the most egregious aspects of the current system—the ability of plaintiffs’ lawyers to “forum shop.” Currently plaintiffs’ lawyers can file their nationwide suits in the most favorable state or county court they can find. H.R. 1115 provides for the removal of most class action suits to federal District Courts, where appointed, tenured judges are likely to have a broader outlook on the issues at stake.
What H.R. 1115 does not address directly, however, is the larger issue of the impact of certain kinds of class action lawsuits on the statutory authority of elected or appointed state insurance regulators. I would like to urge this Committee to consider, as part of this bill or as future legislation, an “exhaustion of administrative remedies” provision that would make clear that where there is a statutory regulator and an administrative remedy available for the abuse complained about, plaintiffs must show that they tried and failed to obtain relief from the regulator before they are allowed to file their complaint in court.
As a state insurance commissioner, my primary function is to protect the public. My colleagues and I see ourselves as consumer advocates, and the laws we administer give us that responsibility and authority. Our expert staffs are knowledgeable about the stringent laws that govern the operation of the business of insurance, and about the complex financial rules that insurance companies must follow. We receive and act upon consumer complaints against insurance companies. We make sure that insurance contracts are fair, understandable, and in accordance with the law. We go after companies that do not treat their customers properly, or that are engaged in fraud. We have substantial enforcement tools at our disposal, including the authority to fine or even to close down insurance companies that misbehave, and to refer bad actors for criminal prosecution.
Insurance is a highly regulated business, and it needs to be. There is no other business in which a customer pays up front for protection against some future event without knowing when, or sometimes even if, that event will occur. As insurance commissioners, we must make sure that when a covered claim is made the company that took the consumer’s premium money is able and willing to pay that claim. That means we must assure that the insurers we regulate are solvent and are prudent in how they manage and invest their capital and reserves. We are also responsible for maintaining a fair and competitive insurance market that allows insurance companies to offer their customers good products at fair prices in accordance with clear and uniformly applied laws and regulations. In other words, we have the statutory responsibility to balance all aspects of the insurance market to make sure that the public is well served.
Judges have very different responsibilities. They are required to render justice as between the parties before them, without regard to the larger public or to issues of economic impact on persons or institutions that are not represented in the courtroom. Where the matter at issue involves one or a small number of injured persons, a litigated solution can provide the fairest solution. Where a claim is filed, however, on behalf of millions of persons, most of whom are unaware that they have been “injured,” and where the result of such litigation is to severely distort the insurance market, by increasing costs to policyholders and future policyholders in order to provide token benefits to those persons putatively injured, the system does not provide justice and does not serve the public interest.
Large-scale nationwide litigation against major insurance companies frequently circumvents or simply ignores state insurance laws and the role of state regulators. Class action lawsuits against insurers can, and often do, directly impair our statutory authority to regulate the business of insurance in our jurisdictions. Moreover these suits, whether successful or not, can have a major effect on the cost and even the availability of good insurance products to the public. That is because they produce small, sometimes negligible, benefits to a large class of present or past policyholders—and, incidentally, huge legal fees to the lawyers who bring them—without regard to the impact on the insurance market as a whole and the cost to the insurance-buying public.
Consider the following examples:
§
In
§
More
than 20 nationwide class action lawsuits are currently pending in New Mexico’s
trial courts claiming that the nation’s largest life insurance companies are
misleading policyholders by not disclosing the “annual percentage rate” of fees
charged for processing installment payments of premiums. In the
Facing billions of dollars in
potential liability, as well as the threat of massive costs to defend
themselves against these suits, insurance companies are under tremendous
pressure to settle. Once the first modal
premium case was settled, with $7.5 million paid to the plaintiffs attorneys
and nothing to class members, that pressure increased. A second insurer agreed to a proposed
settlement of $10 million, all of which was to go to the plaintiffs attorneys,
but this proposal was withdrawn when Trial Lawyers for Public Justice—a
plaintiffs’ lawyers trade association—denounced it as “outrageous” and “an
abuse of both the class-action device and class members.” The settlement was reinstated when the
company agreed to give all class members $30 off their next purchase of an
insurance policy from that company. None
of these modal payment cases has yet to be tried on the merits, but the damage
already done to the insurance market is enormous.
§
A
county court in southern
§
A
suit was brought in a
§
A
case was brought in Georgia against a major auto insurer claiming that the company
is defrauding its insureds by paying only the cost of
fixing a damaged car, and not the loss of value of the car because it has been
damaged in an accident—even though the insurance contract, which has been
approved by insurance commissioners of the various states where the company
operates, specifically requires the company to fix the car, not to pay for any
diminished value of the vehicle.
There are many more examples like
these where multimillion dollar nationwide class action lawsuits are dreamed up
by creative plaintiffs’ attorneys and filed against insurance companies that
have large amounts of money in “reserve”—money that we insurance commissioners
require companies to maintain in order to fulfill our statutory obligation to
protect the public by making sure that insurers are able to pay legitimate
claims. The lawyers reap millions of
dollars in fees from these cases, most of which are settled because of the high
cost of defending against them and the fear that a loss in court could be crippling. The large policy-owning public in whose names
these suits are filed generally receive little if any benefit, but end up
paying for them through higher insurance premiums as companies factor the risk
and cost of this kind of litigation into their rate bases.
Let me be clear about my position.
I am not opposed to class action lawsuits per se, but rather to
the abuse of such powerful and expensive litigation weapons. Class action suits, when used properly, have
an important role to play in our legal system.
But they should not be allowed to substitute for, or interfere with,
administrative systems enacted into law by the various state legislatures and
the U.S. Congress for protecting the public.
When suits are filed on behalf of persons residing in more than one
state, those suits should be heard in Federal, not state, court so that we do
not have a court in one state, applying the law of that state, setting policy
for all the other states and the
The costs of large class action lawsuits are substantial, whether
the cases are litigated or settled, and these costs will be paid by insurance
consumers in the form of higher premiums.
When valid insurance company practices, reviewed and approved by state
insurance regulators, are challenged in class action litigation, we must
recognize that the result could be the discontinuation of products that are
desired by the public and are beneficial to the public.
I commend the House Judiciary Committee for holding hearings on
this important topic, and for considering H.R. 1115, the “Class Action Fairness
Act of 2003.” It would be very helpful
to those of us who regulate insurance at the state level to know that class
actions brought in the name of our citizens in another state are going to be
heard in Federal court, under Federal procedural rules, rather than the courts
of that state.
I want to conclude by expressing my hope that class action reform
not be looked at as a partisan issue. I
was appointed to my present position by the Democratic Mayor of the
Thank you for inviting me to
testify. I am happy to answer any
questions you may have.
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