Bad Faith - California Court of Appeal Refuses To Permit Bad Faith Class Action
Recently, in McMurtry v. Farmers Group, Inc. , 2006 WL 2411365 (Aug. 22, 2006), the California Court of Appeal affirmed the trial court’s dismissal of a class action lawsuit brought on behalf of more than one million
policyholders alleging bad faith by a number of insurance companies. The Court held that each policyholder would have to prove his or her bad faith claim individually, and therefore, the claims could not be tried as a class
action.
The plaintiffs alleged that the defendant insurers’ use of the "Colossus" software system to aid in the assessment of general damages in bodily injury claims violated the insurers’ duty of good faith
and fair dealing. As noted by the Court, “Colossus” is used to suggest a settlement range for general damages, such as pain and suffering, and plays no role in assessing individualized damages, such as medical
expenses or lost wages. The plaintiffs alleged that Colossus routinely generates unreasonably low settlement offers to certain policyholders.
The Court held that the case was inappropriate for class certification because the plaintiffs’ claims satisfied neither the commonality nor superiority requirements for class certification. The Court noted that even
if the plaintiffs proved that the Colossus system regularly generated unreasonably low settlement offers, each individual plaintiff would still need to prove that his or her claim had substantive merit. The Court observed that estimating
general damages in a bodily injury case is highly speculative and concluded that a bad faith claim cannot be based on a general corporate policy regarding such speculative calculations. Furthermore, the mere use of software
that might tend to generate low settlement offers does not mean that any particular settlement offer is unreasonable. Because each policyholder would have to show that his or her claim was adjusted unfairly, the Court held that
common issues did not predominate over individual ones.
The Court also held that a class action was not the superior means of resolving the parties’ dispute. The Court noted that individual plaintiffs would have a strong interest in controlling their own cases. Furthermore,
a class action would be extremely difficult for a court to manage given the prevalence of individualized issues and the varying damages from case to case. The Court also noted that the class claims were barred by an earlier
settlement in related litigation.