Written by Attorneys Michael R. Nelson, Craig A. Cohen and Mark H. Rosenberg

Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

In a landmark decision that will have a significant impact upon the insurance industry’s potential exposure to antitrust claims, the United States Court of Appeals for the Eleventh Circuit ordered the dismissal of a national antitrust insurance class action regarding a purported conspiracy to inflate automobile insurance rates by misrepresenting the quality of non-original equipment manufacturer parts. The Court’s decision in Gilchrist v. State Farm Mut. Auto. Ins. Co., No. 03-10799, --- F.3d --- (11^th Cir. Nov. 18, 2004) reaffirms well-established case law applying the McCarran-Ferguson Act’s antitrust exemption for the “business of insurance”[1] to any activity having a direct impact upon the policyholder-insurer relationship, including the adjustment of claims. NLdH lawyers represented one of the defendants in this matter.

The Plaintiffs in Gilchrist alleged that Nationwide and other insurers conspired to violate federal antitrust law by purportedly agreeing to specify “inferior” non-OEM parts to repair insured vehicles and by affirmatively misrepresenting the quality of such parts, thereby enabling the insurers to charge excessive rates. Over four years ago, the Defendant Insurers[2] filed Motions to Dismiss.

In the Motions, the Insurers contended that the antitrust claims were barred by a provision of the McCarran-Ferguson Act creating an exemption from federal antitrust law for any activities deemed to fall within the “business of insurance” that are subject to state regulation. 15 U.S.C. § 1012(b). In Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982), the United States Supreme Court identified three criteria to be examined in determining whether an activity falls within the “business of insurance” exception: (1) “whether the practice has the effect of transferring or spreading a policyholder’s risk,” (2) “whether the practice is an integral part of the policy relationship between the insurer and the insured,” and (3) “whether the practice is limited to entities within the insurance industry.” The Insurers argued that the practices at issue directly concerned the policy relationship between the insurer and insured and therefore fell within the “business of insurance” exemption. The trial court rejected this argument, holding (in apparent contravention of Supreme Court precedent) that the “business of insurance” exception was limited to activities pertaining to rate-making and risk-spreading. Despite the fact that the Complaint directly concerned allegations of improper rate-making, the trial court held that the conduct at issue was more analogous to the type addressed in Group Life & Health Ins. v. Royal Drug Co., 440 U.S. 205 (1979) and Pireno, supra, in which the Supreme Court held that the McCarran-Ferguson antitrust exemption did not apply to agreements made between insurers and third-party service providers to obtain goods and services at reduced rates.

In reversing the trial court, the Eleventh Circuit held that the case fell within the “business of insurance” exemption set forth above, as the allegations at issue “clearly attack both Insurers’ premium-setting and the performance of their contractual obligations to their policyholders.” Gilchrist, slip opinion at p. 9. Citing previous holdings, the Eleventh Circuit noted that it has consistently “rejected attempts to avoid McCarran-Ferguson by plaintiffs who creatively disguised what was fundamentally an attack on insurance premiums by masking it with a barrage of antitrust verbiage.” Id. The Court recognized that “[t]he heart of Gilchrist’s complaint is that Insurers have lowered the quality and cost of repairs by specifying the use of non-OEM parts and not passing along the savings to their policyholders through reduced premiums.” Therefore, the Court concluded that the complaint “goes to the heart of ‘the relationship between insurer and insured’ and attacks the ‘reliability, interpretation and enforcement’ of the insurance policy itself.” Gilchrist, slip opinion at p. 11 (quoting SEC v. National Securities, Inc., 393 U.S. 453, 460 (1969)).

The Eleventh Circuit also observed that contrary to the practices that were at issue in Royal Drug and Pireno, Gilchrist’s claim does not constitute a challenge to reimbursement agreements between insurers and third parties, but rather concerns the alleged failure of insurers to satisfy their contractual obligations under insurance policies. The Court emphasized that “the repair of the insured’s automobile, and the way in which it is repaired, are the obligation of Insurers under their policies of insurance,” and that Gilchrist’s allegation that the defendant insurers have used “inferior” parts in vehicle repair is therefore “an attack on the business of insurance.” Gilchrist, slip opinion at p. 14.

Having determined that the practices at issue constituted the “business of insurance” for the purposes of the McCarran-Ferguson antitrust exemption, the Eleventh Circuit next analyzed whether the allegations concerned an activity subject to state regulation, thus qualifying it for the exemption. The Court concluded that the activity was clearly subject to state regulation, noting that in addition to the fact that the insurance industry in general is heavily regulated by the states, numerous states have enacted statutes and/or regulations specifically concerning the ability of insurers to use non-OEM parts in the repair of vehicles.

Finally, the Court held that the conduct at issue did not fall within a provision of the McCarran-Ferguson Act holding that the “business of insurance” exemption does not apply to agreements to boycott. 15 U.S.C. § 1013(b). The Court recognized that under Supreme Court precedent, a “boycott” under this provision is limited to “the refusal to deal in a collateral transaction as a means to coerce terms respecting a primary transaction.” Hartford Fire Ins. Co. v. California, 509 U.S. 764, 801-05 (1993). The Court noted that the allegations of “boycott” in the present case concerned the defendant insurers’ purported refusal to deal with parts manufacturers selling “like kind and quality” parts, as well as the alleged refusal to provide policyholders with such parts. As these allegations did not concern a “collateral transaction,” but rather the same transaction at the center of Plaintiff’s Complaint, the Court held that the Complaint did not constitute a “boycott” for the purposes of the McCarran-Ferguson Act.

Therefore, the Court concluded that the action is barred by the McCarran-Ferguson act, and remanded the case to the district court with instructions to dismiss.

The Gilchrist decision rejects a creative but ultimately unpersuasive approach to obtaining class certification in cases regarding insurance claims handling procedures. Many courts have refused to certify conventional breach of contract or bad faith classes in such cases, holding that the individualized issues of fact and law relevant to each policyholder’s claim makes class certification inappropriate. By dismissing Gilchrist, the Eleventh Circuit has made clear that plaintiffs may not utilize attenuated theories of antitrust liability as a means of bypassing the consideration of such individualized issues.

However, the importance of the Gilchrist opinion clearly extends beyond the class action context. By reinforcing established case law providing that the McCarran-Ferguson antitrust exemption encompasses activities constituting “an integral part of the policy relationship between the insurer and insured,” the Eleventh Circuit’s decision effectively removes virtually any potential dispute between a policyholder and insurer from the antitrust arena. In so doing, the Eleventh Circuit has upheld the legislative intent of the McCarran-Ferguson Act to minimize the interference of federal law upon the fundamental role of states to regulate the insurance industry.

The Court’s opinion may be viewed at: http://www.ca11.uscourts.gov/opinions/ops/200310799.pdf

[2] State Farm Mutual Automobile Insurance Co., Allstate Insurance Co., Nationwide Mutual Insurance Co., and GEICO.