On May 9, the Fifth Circuit Court of Appeals issued a decision in Slade v. Progressive Sec. Ins. Co, Case No. 15-300010, 2017 WL 1843737 (5th Cir. May 9, 2017), in which the court discussed how the practice of claim splitting can create an adequacy bar to class certification.
The appeal was taken from a putative class action filed in the United States District Court for the Western District of Louisiana against Progressive Security Insurance Company (Progressive).
The lawsuit asserts claims for breach of contract, Louisiana state law claims and fraud brought by policyholders who allege they were underpaid on their total-loss automobile insurance claims. For total-loss claims, Progressive calculates the value of a vehicle by assigning a vehicle a base value and then adjusting for the condition of the vehicle. The plaintiff alleges that Progressive improperly used valuation software (WorkCenter Total Loss) – rather than the National Automobile Dealers Association Guidebook or the Kelly Blue Book – to calculate the base value of total-loss vehicles and that the software assigned vehicles a lower base value, which ultimately lowered the payments on the insurance claims.
The district court below certified a class as to the plaintiff’s contract and Louisiana insurance law claims, as well as the fraud claims. Perhaps concerned that individual issues with the condition adjustment aspect of the total-loss valuation could result in predominance problems and threaten class certification, on appeal the plaintiff agreed to accept Progressive’s condition adjustment and waive any claims related to the condition adjustment of the vehicles. This practice, which plaintiffs use in class action litigation to limit their claims to those legal theories most suited to classwide adjudication and to decline to assert claims that require individualized fact finding, is known as “claim splitting.”
Progressive argued that the plaintiff impermissibly waived unnamed class members’ ability to assert future claims contesting the condition adjustment of their vehicles. In Slade, the Fifth Circuit explained that a class representative’s proposal to waive some of the class’s claims “risks creating an irreconcilable conflict of interest with the class” that calls into question the named plaintiff’s adequacy to represent the class. 2017 WL 1843737, at *2. And though not every purported conflict of interest between a class representative and unnamed members of the class defeats the adequacy inquiry, “[a] class representative’s decision to waive unnamed class members’ claims will defeat adequacy where the lost value of the waived claims (percent risk of future preclusion multiplied by the value of the waived claim) is greater than the strategic value of the decision to waive.” Id. at *3. The court also reversed the district court’s certification of a fraud class because the plaintiff failed to show that class issues would predominate. In Louisiana, fraud requires proof of individual reliance and that, as a factual matter, the plaintiff would have had to make individual inquiries into each class member’s negotiation of his or her claims.
Because the district court did not have an opportunity to weigh the value of the potentially waived claim (individual actions related to the condition adjustment) against the strategic value of the waiver (proceeding as a class on the base-value claim), the Fifth Circuit remanded the class certification decision and identified a number of possible outcomes on remand:
- Conclude the risk of preclusion is too great and decline to certify the class.
- Certify the class and tailor the notice and opt-out procedure to alert the class to the risk of preclusion (while noting that an opt-out procedure does not necessarily cure the issue if the risk of future preclusion of a valuable claim is disproportionately high and warning that a large number of opt-outs can lead to superiority problems).
- Conclude the benefits of proceeding as a class is greater than the risk of preclusion and certify the class.
- Redefine the class to exclude unnamed plaintiffs who would pursue their individual claims.
The court of appeals did not give an opinion as to which conclusion the district court should reach. But the formula outlined in Slade provides another tool for defendants who may need to challenge a class representative’s adequacy when claim splitting is proposed.