Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—DNJ: Class Certification Denied in Litigation Against Prudential Over Failure to Reveal Reason for Premium Increases on Closed Insurance Block, (Feb 6, 2013)

By Tobias J. Gillett, J.D., LLM.

The federal district court in Newark, New Jersey has denied class certification to policyholders seeking to bring class action claims under California’s Unfair Competition Law and other state laws against The Prudential Insurance Company of America (“Prudential”) over Prudential’s representations regarding the reasons for premium increases following its decision to cease selling a specific health insurance policy because their claims and the method of assessing damages did not satisfy Federal Rule of Civil Procedure 23(b)’s commonality requirement (Clark v. The Prudential Insurance Company of America, February 5, 2013, Debevoise, D.). The court also granted summary judgment to Prudential on the claims of two of the proposed class representatives because the statute of limitations barred their claims.

From 1973 through 1981, Prudential sold a health insurance policy called Coordinated Health Insurance Program (“CHIP”). On December 17, 1981 Prudential stopped selling CHIP to new customers (“closed the block”), and premiums began to rise significantly. Prudential initially capped these increases at 10% per year, but in 2001 it removed the cap, and premiums skyrocketed.

At the time of issuance of the policy, Prudential would send customers a letter stating that premium increases would be based only on age and medical cost inflation. In 1985, after Prudential stopped selling CHIP, Prudential allegedly began sending remaining CHIP policyholders a letter stating that the premium increases were only the result of increase in age, high cost of medical care, and high claim cost (the “three reason” letter”). In 1989, Prudential altered this letter to state that the only reasons for premium increases were age and high cost of medical care (the “two reason” letter).

A class of CHIP policyholders filed a putative class action, alleging that Prudential had concealed the real reason for the increases—that Prudential had chosen to stop selling CHIP policies. The policyholders alleged that Prudential knew that closing the block on CHIP would lead to a spiral of rapidly increasing premiums, as healthy insured individuals switched to cheaper policies, and those with medical conditions that precluded finding insurance elsewhere remained behind. The “death spiral” result was allegedly well-known within the insurance industry, but not to the public at large.

The plaintiffs alleged that the failure to inform the policyholders of the true reasons for the premium increases prevented the policyholders “from making the rational choice to switch to an alternate policy,” causing them to pay severe premium increases and to risk “being locked-out of other policies and locked-in to CHIP due to the development of a serious chronic condition.”

In their fifth amended complaint, 17,000 California, Indiana, Ohio, and Texas policyholders asserted a variety of claims, including claims under California’s Unfair Competition Law (UCL). In the present decision, the court addressed the policyholders’ motion for class certification and Prudential’s motion for summary judgment.

Class Certification

The policyholders had proposed to certify one class and two subclasses. One subclass consisted of policyholders residing in California at the time of policy issuance and asserted UCL, fraudulent concealment, constructive fraud, and implied covenant claims, and the other subclass consisted of all policyholders who paid major medical premiums on or after August 28, 1985 and asserted claims for common law fraudulent misrepresentation in relation to the “two reason” and “three reason” letters.

In addressing the policyholders’ motion for class certification, the court initially noted that the proposed class and subclasses easily met Federal Rule of Civil Procedure 23(b)’s requirement that the class must be “so numerous that joinder of all members is impracticable.” However, the also observed that “the claims or defenses of the representative parties are not typical of those of the class, and it is therefore questionable that they would be able to fairly and adequately protect the interests thereof.” The court noted that none of the six representatives were in the 85% who dropped the CHIP policy prior to distribution of the three-reason letter, or in the 94% who dropped the policy prior to the two-reason letter. All six were in the 1% of policyholders who maintained the policy until the removal of the cap on premiums in 2001.

Common law fraud. Putting the typicality and adequacy of representation concerns aside, however, the court concluded that the class did not satisfy Rule 23(b)’s commonality requirement that “there are questions of law or fact common to the class.” Although the cause of action for common law fraud had the same basic elements in each state, Prudential argued that Texas had a scienter requirement not present in the law of the other states. However, the court noted that the Third Circuit had stated that a class could be certified even if “available rights and remedies differ under the several laws that form the basis for the class claims.”

Nonetheless, the court concluded that the class did not satisfy the commonality requirement because the policyholders varied significantly with respect to the materiality of Prudential’s representations and their reliance on them, and to the communications they had with Prudential. Even prior to Prudential closing the block on CHIP, many policyholders dropped the policy, for a wide variety of reasons. The proposed class did not “differentiate the substantial number of policyholders who dropped CHIP for reasons independent of the block closure and before the staggering premium increases took root.” The wide variety of reasons for dropping the policy made “uniform treatment” of the policyholders improper.

Moreover, the class included 600 to 1,000 policyholders who developed pre-existing conditions prior to the closure of the block, and were thus effectively locked into the policy for reasons unrelated to the closure. Furthermore, the policyholders, including the named representatives, varied with respect to the amount of oral communication they had with Prudential, communication that would have to be inquired into on an individual basis to determine whether Prudential had committed fraud.

Damages. Although this lack of commonality would justify denying the motion for certification, the court also addressed the issue of whether the policyholders’ approach to assessing damages met the commonality and predominance requirement. The court concluded that the policyholders had not shown how the differences in the policyholders’ individual characteristics, such as gender, age, risk level, geography, and deductible rate, could be examined on a class basis. Although the policyholders’ expert attempted to cure this deficiency through the use of indexes, Prudential’s expert had demonstrated that individual differences could still significantly affect the damages assessment, and the policyholders had not provided any precedent applying such an approach in the health insurance context. The court concluded that the policyholders’ damages approach “appears simply too good to be true.”

California UCL claims. The court also dealt with the policyholders’ California UCL class claims. The court initially explained that the UCL has three prongs, prohibiting “any unlawful, unfair or fraudulent business act or practice.” The court disposed of a claim that Prudential had violated the “unlawful” prong by breaching the implied covenant of good faith and fair dealing by observing that it fell victim to the same “basic lack of commonality and predominance with respect to different degrees of materiality, different types of communications rendered, and an inability to establish a class-wide approach to equitable relief.” The court also determined “individualized considerations” with regard to “conduct, harm or injury, and equitable relief” predominated with respect to the “unfair” prong.

The court observed, however, that the “fraudulent” prong of the UCL differed from common law fraud. The UCL permits recovery on a showing only “that members of the public are likely to be deceived by the defendant’s conduct,” and does not require “individualized proof of deception, reliance and injury.” However, although only the class representative had to demonstrate reliance, the court determined that the UCL standard was “subject to common proof” regarding whether “the actionable conduct was both uniform and material,” and therefore materiality was “still a relevant factor in the analysis.” Therefore, the court denied class certification of the UCL fraudulent practices claim “based on the varying communications with policyholders and the individualized determinations necessary to gauge materiality and equitable relief.”

Motion for Summary Judgment

The court also addressed Prudential’s motion for summary judgment with respect to three California proposed class members and one Ohio class member based on Prudential’s argument that the statute of limitations barred their claims. The court explained that the limitations period for the California UCL claims was four years, that the limitations period for the California fraud and constructive fraud claims was three years, and that the limitations period for the Ohio fraud and constructive fraud claims was four years. The issue before the court was whether the named plaintiffs had inquiry notice of Prudential’s alleged wrongdoing outside the statute of limitations prior to the filing of the action on December 17, 2008.

The court granted in part and denied in part Prudential’s motion for summary judgment. Two of the proposed class members had clearly demonstrated that they had some suspicion that their premium increases were due to Prudential’s alleged wrongdoing outside the statute of limitations, in the court’s view.

Although the other two members had considered the increases to be “excessive,” “nasty,” “intolerable,” and “huge,” material issues of fact remained regarding whether they had a suspicion of wrongdoing prior to the limitations period. One of those two, however, had clearly drawn a connection between the premium increases, the block closure, and the alleged wrongdoing as of October 2005, outside the statute of limitations for common law fraud, but within the UCL’s statute of limitations. Therefore, the court concluded that all of one California member’s claims survived summary judgment, as well as the UCL claims of one other member.

The case is Civ. No. 08-6197 (DRD).

Attorneys: Bruce Nagel (Nagel Rice LLP) for Beverly Clark. Douglas S. Eakeley (Lowenstein Sandler PC) for The Prudential Insurance Company of America.

Companies: The Prudential Insurance Company of America

Cases: StateUnfairTradePractices NewJerseyNews