functionally worthless insurance might be actionable

Servedio v. State Farm Ins. Co., 2011 WL 4373923 (E.D.N.Y.)

Servedio, putative class representative, claimed that State Farm’s offers of additional Personal Injury Protection ("PIP") coverage constituted a deceptive trade practice and false advertising in violation of sections 349 and 350 of the New York General Business Law, as well as fraud under the common law. State Farm moved to dismiss because its policy language for its additional PIP coverage is mandated by the NY Department of Insurance and therefore uniform in the industry.

The court held that the DOI’s approval of the language didn’t preclude the statutory claims as a matter of law, though it dismissed the fraud claim.

Servedio had State Farm policies on three cars. As required by NY law, each policy provided PIP (“No Fault”) coverage, under which State Farm promised to reimburse the "basic economic loss sustained by an eligible injured person on account of personal injuries caused by an accident arising out of the use or operation of a motor vehicle." "Basic economic loss" was defined as (1) medical expenses, (2) 80% of lost wages, up to $2,000 per month for up to three years, and (3) other "reasonable and necessary" expenses of up to $25 per day for up to one year; the total benefit payable was $50,000. An eligible injured person was the named insured, his/her relatives, and any person injured by the insured car in NY or any NY resident injured by the insured car outside the state.

Each policy also had an optional PIP benefit under which State Farm promised to pay "additional first-party benefits to reimburse for extended economic loss sustained by an eligible injured person." The definition of "eligible injured person" was expanded to include any passenger (regardless of residence or accident location) in any vehicle operated by the insured or his or her relatives. "Extended economic loss" was defined as the difference between basic economic loss under the mandatory PIP provision and basic economic loss as "recomputed in accordance with the time and dollar limits set out in the schedule." The schedule, however, provided exactly the same time and dollar limits as mandatory PIP coverage. Servedio paid an additional premium for this optional coverage: $1.34 on the first policy, $0.90 on the second and $1.04 on the third. (State Farm also sold additional coverage with actually higher limits.)

Servedio was involved in a car accident, as a result of which he made a claim; State Farm refused to pay more after his $50,000 in mandatory PIP benefits were exhausted. He sued.

State Farm argued that the extra PIP it sold was fine because it enhanced coverage through the broader definition of “eligible insured person.”

The court questioned whether CAFA jurisdiction was present because of the small individual claims for premium refunds. However, State Farm “commendably” acknowledged that it had collected over $4.1 million in premiums for the type of coverage Servedio challenged over the six-year limitations period applicable to his fraud claim. Given that his statutory claims could produce treble damages and attorneys’ fees, as well as his claim for punitive damages, the court was satisfied that Servedio established a “reasonable probability” of seeking more than $5 million, as required for CAFA jurisdiction.

To show a violation of § 349, a plaintiff must show (1) a consumer-oriented act or practice that was (2) misleading in a material way, (3) causing the plaintiff to suffer injury as a result.

State Farm argued that private contract disputes unique to the parties, such as disputes over the scope of insurance coverage, don’t fall within the statute. But this was not a breach of contract claim. Servedio argued that the coverage he paid for was illusory, which was not a private contract dispute but a broader challenge to the way State Farm offers coverage to all its insureds. This was consumer-oriented within the meaning of the statute.

A practice is materially misleading if it’s likely to mislead a reasonable consumer acting reasonably under the circumstances, a far broader standard than common-law fraud. State Farm argued that the terms of its coverage were fully disclosed and defined in terms required by the DOI. The court disagreed that the policy fully disclosed the nature of the coverage. The language implied that the additional PIP option would expand the mandatory coverage both by broadening the definition of “eligible insured” and by providing reimbursement for “extended,” as opposed to “basic,” economic loss. At the level Servedio bought, though, “extended” and “basic” were equal, “hardly an intuitive understanding of the word extended.”

Moreover, the DOI did not require State Farm to do this. “It mandates the endorsement language to be used, but does not purport to assign the numerical limits to the coverage.” Indeed, DOI’s Office of General Counsel issued a 2008 opinion letter stating that an additional PIP endorsement "must confer an additional benefit on the insured by altering the time and/or dollar limits available under [mandatory] PIP." “Though not binding, the letter represents DOI's official position, and accords with the Court's view that State Farm's Q1 coverage--which does not alter any of those limits--is likely to mislead reasonable consumers as to what they are paying for.”

Servedio’s explicit allegation of injury was just that—he was injured—and was too conclusory. However, rather than going through the rigamarole of granting leave to amend, the court interpolated into the complaint the alleged injury that had become clear. The additional premium paid as a result of the allegedly deceptive practices was distinct from breach of contract damages and was a cognizable injury under §349.

The common-law fraud claim, however, failed because a fraud claim must rest on representations extraneous to the parties’ agreement; a party relying on representations intrinsic to an agreement is limited to a breach of contract claim. The description of the additional PIP coverage was intrinsic to the policy.