How class action lawsuits work
March 12, 2001

Churning, vanishing premiums, and misrepresenting insurance policies as investments are just a few of the ways insurance companies have cheated their customers. When abuse by an insurer is widespread, victims often band together in class action lawsuits when they might not have the financial resources to sue alone.

But if you get a notice in the mail about a lawsuit against your insurance company, should you automatically join? Or what if you think you've been cheated but you haven't heard of any class actions against your company?

How class action suits form
When there's some kind of perceived fraud or misconduct that affects many people in a similar way, those people tend to look for a law firm to represent them all. The damages may not be sufficient to justify paying lawyers for many separate individual cases. Sometimes a law firm will take on a class action "on contingency," meaning that the attorneys risk their time and efforts and only get paid if they win.

A class-wide action is much more efficient for the judicial system, according to lawyers.

Who brings the suit?
The suit is brought by an individual or several individuals on behalf of the class.

How is a class "certified" by the court?
Once a case is filed, and it's a federal case, the plaintiffs file a motion for "class certification" under Federal Rule No. 23. State cases are similar but have their own numbering systems.

In order to be certified as a class action, these requirements must be satisfied:

    1. Reasonable class size
    There have to be enough people to justify bringing the suit as a class. Class actions have been brought with as few as 20 or 30 people and as many as millions.

    2. Common facts of the case
    You must be able to demonstrate to the court that there are questions of law or facts common to the class — meaning similar misconduct has occurred, such as misrepresentation of vanishing premiums.

    3. Claims or defenses are typical
    You must show that each person in the class is making allegations typical to the others class members.

    4. Representatives will fairly and adequately protect the interests of the class
    The legal counsel representing the case must be adequate, and there can be no conflicts of interest in representing class members.

    The plaintiffs also have to show it makes sense to proceed as a class. The most common way to demonstrate that a class action is the superior avenue is to show that common questions predominate over individual questions. If there are a lot of individualized issues among disgruntled policyholders, a class action may not be the best way to proceed.

How does a person become part of a class action suit?
If the court certifies the class, class members will be "defined" and the class will be everybody who fits that definition. An example of a definition would be: Everyone in the U.S. who bought a life insurance policy from a certain company between 1986 and 1991. In effect, if you fit the definition, you're automatically a member of the class. Depending on the case, you're given notice that you should choose to "opt out" (which is what you do if you prefer to bring an individual lawsuit) or to stay in the class (and be bound to the ultimate settlement).

What if I never knew about the suit and I think I was cheated by an insurance company?
There are forms to fill out and claims to file if you want your slice of the settlement — and there are deadlines. If you took no action at all and the settlement is long over, you may or may not have access to a share.

If opt-out notices were sent out and you missed that deadline, your right to sue on your own later has been waived because the defendant has to have a final resolution. Part of the incentive for companies to settle class action suits is that everyone who didn't opt out of the class is forfeiting all future claims. Some people may lose their claims because they didn't know about the suit and were represented without their knowledge or consent.

If no opt-out notices were sent, it may be possible to look at a settlement and decide whether to take a share or opt out after the fact. And you can ask if special circumstances, such as being the owner of a very large policy, can turn back the clock for you.

How do people find out about the suit?
The plaintiffs are responsible for sending notices out to members of the class, and the defendants must provide their names and addresses. Under the 1995 Private Securities Litigation Reform Act, notice must also be published in nationwide papers such as The Wall Street Journal, The New York Times, USA Today, or on the Internet.

How are class action suits brought to court?
If a law firm decides there's a good case to be made, it drafts a complaint, files it with the court, and serves the defendant with notice of the suit.

How long do class action suits take?
They can take years, and just getting them certified as class actions by a court can take a long time. Defendants may file motions to dismiss the case or motions about conducting discovery, both of which can delay a case.

How is settlement money handed out?
The court has to approve the settlement and then award attorney fees. Plaintiffs then have to submit claims that show they were a member of the class. Proceeds are allocated on a pro rata (proportionate share) basis. Compensation often comes in the form of a discounted insurance policy rather than money.

In some class actions, if the amounts would be too small to send to class members, the settlement money is given to a charity or other non-profit cause.

What does it mean to "remain in the class and object"?
If you stay in the class but are displeased with the settlement, you can file objections to the settlement. Usually this means you'll appear with legal counsel at a fairness hearing, where you'll appeal the court's approval of the entire settlement and ask an appellate court to reverse it.

How can I find out if there are any class action suits pending against my company?
Unfortunately there's no single place to go, but rather lots of different ones. You can start with a search on the Internet, then take a look at press releases on your insurance company's Web site. You can search the company's financial reports for major litigations. You can consult your state department of insurance, or the insurance department in the state were your insurer is domiciled.

Finally, look for ads in the national papers and visit insurance-related and financial-related Web sites.

What should you do if you receive notice of a class action?
An individual who receives notice needs to decide whether or not to join (sometimes very quickly, and sometimes after the settlement is reached), so it's important to find out what the deadlines are. If you might want to pursue your own legal action, or join with others in a private suit, talk to an attorney.

You'll have to opt out of the class in order to pursue a legal action outside of it. But if you know you're not going to pursue your own lawsuit, you might get something by staying in the class and submitting a claim.

Should you opt out?
Not everyone who suffers financial losses at the hands of an insurance company must stay in a certified class to sue. People who want to sue individually, those who protest class actions, or those who would prefer to band into smaller groups of litigants may do so if they opt out of the class. Opting out requires more than muttering, "I don't care about that."

If you fit the court definition of someone eligible for a class action and you don't follow official procedures to opt out by a specified deadline, you may lose your right to sue. Remember, corporations often settle class actions in order to cut off future claims and limit their losses. That can make you a victim all over again if you don't know when to jump off the bandwagon — especially if you had no idea you were riding one to begin with.

Attorneys on both sides of settlements are generally barred from reporting the terms of the settlements, but published reports following the settlement of the Allen vs. Prudential suit, which was settled in January 1999, put an average of $3,100 each in the hands of class members, and $500,000 each in the hands of mass action plaintiffs.

Some say the problem with class actions is that lawyers get exorbitant fees and the companies get an across-the-board release for wrongdoings. It's possible that, in an insurance context, many people don't know they've been harmed, won't know for a long time, and won't understand it. This is especially true with vanishing premium scams, where policy owners expect to stop paying premiums years down the road and won't know for years that they must continue to pay the premiums.

Some attorneys say, for the individual policyholders, it's better to proceed as a group, not in a class action.

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