Halvorson v. Auto-Owners Ins. Co.

• Decision Date: 12 August 2013
• Docket Number: No. 12–1716.,12–1716.
• Citation: 718 F.3d 773
• Parties: Gale HALVORSON; Shelene Halvorson, Husband and Wife, Plaintiffs–Appellees v. AUTO–OWNERS INSURANCE COMPANY; Owners Insurance Company, Defendants–Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

718 F.3d 773

Gale HALVORSON; Shelene Halvorson, Husband and Wife, Plaintiffs–Appellees

v.AUTO–OWNERS INSURANCE COMPANY; Owners Insurance Company, Defendants–Appellants.

No. 12–1716.

United States Court of Appeals, Eighth Circuit.

Submitted: Oct. 17, 2012.

Filed: July 3, 2013.

Rehearing and Rehearing En Banc Denied Aug. 12, 2013.

Lori McAllister, argued, Lansing, MI, Michael J. Morley, on the brief, Grand Forks, ND, for Appellant.

Todd Jackson, argued, Tucson, AZ, David R. Bossart, Fargo, ND, Eugene Nolan Goldsmith, Sue Ann Welch, Tucson, AZ, on the brief, for Appellee.

Before LOKEN, SMITH, and BENTON, Circuit Judges.

SMITH, Circuit Judge.

Gale and Shelene Halvorson (“the Halvorsons”) filed a class action complaint against their automobile insurance company, Auto–Owners Insurance Company (“Auto–Owners”) and its subsidiary, Owners Corporation, for breach of contract and bad faith. The Halvorsons sought to certify a class of all persons covered by Auto–Owners's medpay or personal injury protection (PIP) coverage under policies issued in North Dakota and Minnesota. More specifically, the class included those policy owners who submitted claims for payment of medical expenses and who received less than the submitted amount following a percentile-based review of the claim. The district court denied certification of the proposed class for policies issued in Minnesota, because Minnesota law mandated arbitration of certain claims. The district court did, however, certify a class for those whose policies were issued in North Dakota. Auto–Owners appeals, arguing that the district court abused its discretion in certifying the North Dakota class. We reverse and remand for further proceedings consistent with this opinion.

I. Background

Shelene Halvorson purchased no-fault PIP from Auto–Owners, the parent of the wholly owned subsidiary, Owners Corporation. The policy stated that Auto–Owners was obligated to pay “reasonable charges incurred” for the medical services necessary to treat injuries sustained in an auto accident. Following an automobile accident, Shelene Halvorson submitted her medical bills to Auto–Owners. The company paid Shelene's doctor only a portion of his total charge. It declined to pay the remaining $88.01 because it exceeded the “usual and customary” amount for the services. After reaching a settlement with the other car owner, Shelene Halvorson's attorney paid the balance owed to the medical provider. The Halvorsons allege that Auto–Owners employs the use of third-party bill reviewers, who automatically apply what they deem to be “reasonable and customary reductions” (R & C reductions) to claims being paid, resulting in systematic and unfair financial gains to Auto–Owners. Bill reviewers calculate R & C reductions by compiling prices for medical services in a defined geographic area and then comparing the claims against the 80th percentile for charges in the same area. The 80th percentile represents the amount 80 percent of doctors in the area charge for the medical service rendered. Auto–Owners selected the 80th percentile as a figure likely to provide coverage for what it promised to pay—“the usual and customary” amount for the service. The bill reviewers report their calculations to Auto–Owners's claims adjusters. Auto–Owners routinely approves payments for 100 percent of charges up to the 80th percentile and rejects charges for amounts that exceed the 80th percentile. Auto–Owners argues that claims adjusters have broad discretion regarding the payment of claims and that providers who feel they have not been adequately compensated can object to the bill-review reduction and ask for full payment. The Halvorsons contend that this discretion is rarely exercised and that adjusters typically accept the recommendation of the bill reviewer and ignore demands for full reimbursement.

The Halvorsons sued Auto–Owners for breach of contract and bad faith and also requested declaratory relief. They asserted that Auto–Owners had designed a bill review system that compounded minor deductions in many claims into substantial savings for the insurance company in the aggregate through a “nickel and dime” strategy that paid below the limits of policy coverage. In short, the Halvorsons contended that Auto–Owners's use of the 80th percentile limit breached the insurance policy because it routinely caused nonpayment of reasonable medical expenses.¹ The Halvorsons note that other insurers also use percentile mechanisms but set them at the 90th percentile. According to the Halvorsons, “Using the 80th percentile is simply an arbitrary cap to increase profits, not a method to identify and exclude outliers or unreasonable bills.”

The Halvorsons sought to certify a class of all persons covered by Auto–Owners's medpay or PIP coverage under policies issued in North Dakota and Minnesota, who submitted claims for payment of medical expenses and who received less than the submitted amount following a percentile-based review of the claim. SeeFed.R.Civ.P. 23(b)(1), (3). Auto–Owners responded that individual issues predominated and would consequently require an individualized review of each member of the class. Auto–Owners also pointed out that Minnesota policyholders could not be joined in the suit because Minnesota law mandated arbitration.

The district court denied certification of the Halvorsons' proposed class for Minnesota policyholders, because Minnesota law mandated that all no-fault claims for less than $10,000 had to be resolved by arbitration. According to the district court, “[t]he existence of the arbitration requirement shatters the numerosity, commonality, and typicality prerequisites of Rule 23(a).” The court noted that the Halvorsons would be inadequate class representatives for the remaining Minnesota claimants, whose claims would comprise a subclass that “would have radically different interests from the proposed North Dakota class.” However, the court, did grant class certification for North Dakota policyholders. Citing Federal Rule of Civil Procedure 23(a) and the numerosity requirement, the court found that the class consisted of over 1,000 members so that joinder would be virtually impossible.

The district court found commonality sufficiently present to warrant class certification. The court relied on Wal–Mart Stores, Inc. v. Dukes, which requires all class members to have suffered the same injury while considering “the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.” ––– U.S. ––––, 131 S.Ct. 2541, 2551, 180 L.Ed.2d 374 (2011). According to the district court, “[i]t is apparent that the proposed class of North Dakota policyholders suffered the same injury—if any can be established—as their claims were handled in a uniform matter [sic] by Auto–Owners.” The court discounted Auto–Owners's claim that the North Dakota state requirement only to pay “usual and customary charges incurred for reasonable and necessary medical services” would require a unique evaluation of each individual claim. See N.D. Cent. Code Ann. § 26.1–41–01. The court concluded that Auto–Owners's standard “bill review process was routinely used and was generally the same for all no-fault claims.” The court also observed that Auto–Owners's claims adjusters were expected to follow the payment recommendations of the bill review process. The court highlighted the following testimony from the deposition of Auto–Owners's Administrator of Auto Medical Benefits:

Q. Okay. Now, in the ordinary course if the bill was determined to be related to the accident and there were no errors evident in the review process, the payment would be issued in accordance with that EOR's recommendations and reductions?

A. Yes

* * *

Q. Okay. Was it the procedure and protocol that adjusters simply could choose whether or not to utilize the bill review process?

* * *

A. No.

* * *

Q. They were expected to use it; correct?

A. Yes.

The court concluded that there was sufficient commonality to establish the class, because North Dakota policyholders sufferedthe same injury, if any, since their claims were handled in a uniform manner.

Regarding typicality, the district court found “nothing individually remarkable about Shelene Halvorson's claim that makes it atypical in comparison to the rest of the proposed class” and concluded that the Halvorson's claim was “squarely typical” of the proposed class's claim. When discussing adequacy of representation, the court cited Rule 23(a)(4)'s requirement of having (1) a qualified plaintiff's attorney and (2) a plaintiff that did not have interests antagonistic to the class. The court concluded that the Halvorsons' attorney had the requisite amount of experience and nothing in the record suggested that Halvorsons' interests were at odds with the proposed class.

Lastly, the court found that questions of law or fact common to the class members predominate over any questions affecting individual members and that a class action was the superior method to adjudicate the controversy. The court observed that “the Halvorsons will have to prove at trial that Auto–Owners's use of the third-party bill review process violated the terms of the PIP coverage in each individual contract.” The court found that the Halvorsons focused their case on Auto–Owners's bill review process and how they used it. The court concluded that the key question of the case “[w]as [whether] Auto–Owners's use of the bill review process [was] reasonable under the terms of its insurance contracts.”

The district court certified the following class:

From December 10, 2004, through the present, all persons covered by Auto–Owners medpay or PIP policies issued in North Dakota, and their provider assignees, who (1) submitted claims for payment of medical expenses to Auto–Owners pursuant to an Auto–Owners auto policy's PIP coverage; (2) were paid an amount less than the submitted medical expenses based upon a...