Supreme Court Insurance Ruling a Setback for Class Action Claimants

The U.S. Supreme Court on Tuesday ruled that a homeowner seeking to sue his insurer could not file suit in a state court considered friendly to plaintiffs.

In a unanimous ruling that marks a setback for lawyers who file certain types of class action claims, the court held that the case belongs in federal court.

The ruling is important in the context of class action cases because it will likely prevent plaintiffs’ lawyers from what critics view as an effort to circumvent a federal law aimed at keeping certain cases in federal court.

Greg Knowles, whose house had sustained hail damage, accused Travelers Cos.’ Standard Fire Insurance Co. unit of refusing to pay the cost of hiring general contractors.

He signed a stipulation to cap damages for class members at $5 million, the threshold at which a 2005 law, the Class Action Fairness Act, lets companies move class-action lawsuits to federal court.

The aim was to keep his case in a Miller County, Arkansas, state court known among some insurers as a “magnet” for class-action cases.

In a brief seven-page ruling, Justice Stephen Breyer wrote that the stipulation was not enough to keep the case in state court, for the simple reason that it was not binding. The damages could easily have exceeded $5 million, he said.

The stipulation only applied to Knowles himself, not the other class members, Breyer wrote.

“At that point, Knowles lacked the authority to concede the amount-in-controversy issue for the absent class members,” he added.

Theodore Boutrous of Gibson, Dunn & Crutcher, who argued the case for the insurance company, said the court had made it clear that “class-action plaintiffs cannot manipulate the system by slicing and dicing claims.”

Knowles’ attorney, David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, downplayed the impact of the decision, saying it would be “relatively minimal.”

In cases on the borderline between state and federal court, district courts might have to gather more evidence before making a determination, he added.

Business groups, including the U.S. Chamber of Commerce, had urged the court to rule against Knowles, saying the ruling made it clear what the Class Action Fairness Act was intended to do.

Lisa Rickard, president of the Chamber’s Institute for Legal Reform, said the ruling “preserves one of the most crucial provisions of the law.”

Consumer advocacy groups Public Citizen and Public Justice had sided with Knowles.

Scott Nelson, a Public Citizen lawyer, said the ruling would “make it harder for some people with potentially legitimate claims to pursue them in the appropriate court system”.

But, he added, the ruling will not affect major class cases that, due to the size of the claims and number of class members, are heard in federal court.

The case is one of four closely watched class action cases the court is hearing this term. So far, only one other has been decided.

In Amgen v. Connecticut Retirement Plans the court allowed shareholders of Amgen Inc. to sue the biotechnology company as a group without first having to show that misinformation had materially and fraudulently inflated its stock price.

The case decided on Tuesday was Standard Fire Insurance Co. v. Knowles, U.S. Supreme Court, No. 11-1450.