Keeling ex rel. a class v. Esurance Ins. Co., No. 11–8018,2011 WL 4448578 (7th Cir. Ill. Sept. 26, 2011).
In this case, the Seventh Circuit observed that the jurisdictional inquiry is simple and mechanical, and considerations which are part of the damages determination after the merits have been resolved should not be smuggled into the jurisdictional inquiry.
The plaintiffs brought a class action on behalf of Esurance’s policyholders alleging that Esurance committed fraud by charging for uninsured or underinsured motorist coverage that is worthless in light of the policy’s restrictions.
Esurance removed the suit to federal court under CAFA.
The plaintiff moved to remand arguing that the amount in controversy was less than $5 million, the statutory threshold.
The District Court agreed and remanded the action. (Editors’ Note: See the CAFA Law Blog analysis of the District Court decision posted on September 30, 2011).
Upon Esurance’s interlocutory appeal, the Seventh Circuit reversed the District Court’s decision.
Esurance has issued more than 50,000 automobile insurance policies containing the contested clause. During the period of limitations before the suit began (five years), it collected a net premium of $613,894 on these coverages and paid no claims.
The District Court treated this as the principal amount in controversy (the class wants the money repaid). The District Court next stated that prospective relief would be costless to Esurance, because that relief would require changing only a few words on a printed form. Finally, the District Court found that it would be “legally impossible” for the class to receive $4.4 million in punitive damages, the amount required to put the stakes over $5 million.
The Seventh Circuit held that the District Court did not apply the legal certainty standard correctly.
First, the Seventh Circuit noted that regarding the value of the injunctive relief that the class demanded, the District Court wrote that the cost to Esurance would be trivial: just reprint the forms. “But this suit is about money, not ink,” the Seventh Circuit remarked. If the class was right and Esurance must either stop charging a premium or change the terms so that policyholders receive indemnity more frequently, it would suffer a financial loss. Suppose it was to comply with an injunction by eliminating this coverage and its premium. Esurance’s current profit on this coverage in Illinois is about $125,000 a year. The present value of foregoing this stream of profits is about $1.5 million. (That is the present value of $125,000 a year for 20 years, discounted at 5% per year.) The alternative means of complying with an injunction would be to change the policy’s terms so that it paid more claims; that form of compliance would have an uncertain cost—presumably something less than $1.5 million (Esurance would not knowingly offer a coverage on which it loses money), but still far from trivial. Thus the Seventh Circuit observed that the cost of prospective relief could not be ignored in the calculation of the amount in controversy.
Second, the expense of restitution plus the cost of prospective relief would be about $2 million. That left Esurance $3 million short of the jurisdictional minimum.
Finally, the Seventh Circuit stated that punitive damages are available under both the common law of fraud and the Illinois Consumer Fraud and Deceptive Business Practices Act, the two principal bodies of law that the complaint invoked. When calculating punitive damages, Illinois likely would ignore the cost to the defendant of prospective relief, because that sum is not part of any class member’s injury. Thus, the question before the Seventh Circuit was whether it was “legally impossible” in Illinois for policyholders to obtain $3 million in punitive damages on account of a fraud that cost them a little more than $600,000.
The Seventh Circuit stated that a punitive award of $3 million would amount to a multiplier of five. Courts in Illinois have affirmed awards for fraud or violations of the Consumer Fraud and Deceptive Business Practices Act that reflect higher multipliers.
The plaintiffs’ claim arose from the policy’s written terms. Any tort therefore is not concealable, and that this implied a lower multiplier, the Seventh Circuit pointed. On the other hand, each policyholder’s loss was small, which could justify a substantial multiplier—at least if this was individual rather than class litigation. The Seventh Circuit observed that considerations such as these are properly part of the damages determination after the merits have been resolved; they should not be smuggled into the jurisdictional inquiry, which is supposed to be simple and mechanical. The Seventh Circuit therefore did not think it “legally impossible” for the class to recover more than $3 million in punitive damages. The Seventh Circuit exclaimed, recovery of more than $3 million perhaps “Improbable… but not impossible.”
Accordingly, the Seventh Circuit reversed the order and remanded the case to the District Court for decision on the merits.