Monday, October 11, 2010

O&P Insurance Class Actions and the Predominance Test

Hurricanes have long tails. Six years after the 2004 hurricane season, class actions are being actively litigated on the issue of general contractor's overhead and profit ("O&P"). In a just-released opinion, Mills v. Foremost Insurance Company, a Tampa federal trial court has denied certification of an O&P class action, principally reasoning that O&P claims could not meet the "predominance" test of the class action rules.

A History of Mills
Mobile homeowners Dale and Diane Mills filed claims against Foremost for damages from 2004 Hurricanes Frances and Jeanne. In November 2006, the federal trial court granted Foremost's motion to dismiss, holding that there was no claim for O&P costs under the Millses' actual cash value ("ACV") coverage when the Millses did not actually incur such costs. (Mills No. 1, United States District Court, Middle District, Tampa). The trial court held also that the O&P did not lend itself to class action treatment.

In January 2008, the trial court was reversed. (Mills No. 2, United States Court of Appeals, Eleventh Circuit). The Eleventh Circuit recognized a claim under Florida law for non-incurred O&P and, in addition, directed the trial court to allow class discovery and reconsider the class certification issues. As discussed below, following discovery and a hearing, the Tampa trial court on September 29, 2010 denied certification of the O&P class. (Mills No. 3, United States District Court, Middle District, Tampa).

O&P Standard under ACV Coverage
In Mills No. 2, the Eleventh Circuit decided that O&P is payable under Florida law if it is "reasonably likely" that the insured would need the services of a general contractor. Because no Florida appellate court had ruled on O&P, the Eleventh Circuit followed the "weight of authority" and "majority rule" of cases reported outside of Florida.
Although Mills No. 2 establishes O&P liability for purposes of federal court litigation, there is no Florida appeals case directly on point. ACV coverage for O&P is, however, recognized in state decisions that are not binding on the issue. Illustrative is a 2008 Florida appellate case, Goff v. State Farm Florida Insurance Company, which takes O&P liability (and the "reasonably likely" standard) as a given and, then, rules that an insurer may withhold a portion of O&P representing depreciation until the insured repairs or replaces the damaged structure.

Predominance Test in O&P and Insurance Class Actions
Federal class action rules are substantially the same as Florida class action rules. Among their many requirements, the rules provide that a class action seeking money damages must meet the "predominance" test. Simply stated, predominance means that the court must determine whether "questions of law or fact common" to the case "predominate" over individualized questions affecting class members.
In Mills No. 3, the federal trial court concluded that the O&P "reasonably likely" standard would require individualized proof from each class member, that use of a general contractor was "reasonably likely." Based on this and several other factors, the federal trial court ruled that the predominance test could not be met for O&P claims. The court cited support in seven federal trial court decisions (from Louisiana and Mississippi), which had reached the "same conclusion, that is, post-hurricane claim adjustments are not appropriate for class treatment due to the individualized facts of each claim."

What's Next?
The absence of case law makes it more difficult for company counsel to advise insurers on a particular course of action. Thus, case law (good or bad from the insurer's point of view) is usually welcomed by company counsel.
Florida appeals courts have not fully defined the contours of the predominance analysis in the context of insurance claims. Although there is nibbling around the edges, uncertainty remains regarding the maintainability of insurance class actions -- hinging on factors such as the nature of the claims, the discretion of trial courts, and the final opinions of appellate courts.
Mills No. 3 may be appealed to the Eleventh Circuit, and O&P class actions are pending in Florida state courts. So additional clarity (or confusion) may result if (and once) additional decisions are published.

Perry Cone practices insurance, compliance and government law, and provides consulting to in-house counsel, from the Tallahassee office of GrayRobinson. He writes from his perspective as a former general counsel, legal executive, and leader in the Florida insurance industry.

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