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While Allstate is the defendant in a lawsuit a recent deeply divided U.S. Supreme Court tossed back to a lower court, the implications of the 5-4 ruling go well beyond Allstate. It has the potential to affect all insurers.
Shady Grove Orthopedic Associates v. Allstate Insurance was a class-action suit a New York federal court dismissed on the grounds state law prohibited it. The decision was upheld on appeal, but the Supreme Court said a federal court rule supersedes state law in allowing class actions. That means the federal court rule determines when a class action can be filed in federal court even when a decision will be based on state law.
Individual cases that had to be heard, dismissed or settled at the state level could now get a chance to become a class action at the federal level. That may mean more money on the line.
"In theory, this can mean more class actions lodged in the federal court system -- inflating a small case in state court into a large case in federal court," said Robert Hartwig, president of the Insurance Information Institute. "If it is easier to proceed to federal court, these cases can get more expensive."
As Supreme Court Justice Ruth Bader Ginsburg wrote in a dissenting opinion, the court approved "Shady Grove's attempt to transform a $500 case into a $5 million award." Ginsburg was joined by Justices Samuel A. Alito Jr., Stephen G. Breyer, and Anthony M. Kennedy.
The class action was brought in New York federal court, with Shady Grove alleging Allstate owes statutory interest for failure to pay claims on time. The clinic -- which stood to get $500 from the suit -- sought to pursue the case for all those who were owed, giving it class-action status -- which upped the potential award to more than $5 million.
Allstate's case with Shady Grove goes back to federal court in New York. A spokesman for the company said the Supreme Court ruling "does not affect the merits of the actual case and we will continue to defend it accordingly."
The Supreme Court ruling has nothing to do with insurance contract law and nothing to do with claims practices. Yet this ruling on the interaction between state and federal rules by the Supreme Court could cost the insurance industry more as it may have to spend more money and time defending litigation. And litigiousness pushes up the cost of insurance, which may impact the consumer.
While trial lawyers and those seeking to file class actions may see it as a boon, the industry could see hope in the divided nature of the ruling.
The diversity in the ruling seems to indicate this issue will be revisited. Justice John Paul Stevens wrote in his concurring opinion that he agrees with Ginsburg in that "a federal rule, like any federal law, must be interpreted in light of many different considerations, including 'sensitivity to important state interest.'"
(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)