One theory that has been raised by plaintiffs’ lawyers in some insurance class actions is that policyholders should receive a partial refund of their premiums because they are not receiving the coverage they paid for, or coverage purchased is illusory. A recent Michigan federal district court opinion rejected this theory on the grounds that: (1) unless a valid claim for insurance coverage is made, no performance is due from the insurer, and thus there can be no breach of contract; and (2) where the insurer assumed the risk by accepting the premium, there is no basis for a partial refund of the premium. This decision will be useful to insurers in defending putative class actions raising this type of theory – given its novelty, there is not much law addressing it. (Another line of argument that it appears was not raised here is that setting premiums is typically a matter that is within the primary or exclusive jurisdiction of the department of insurance.)
In Monteleone v. Auto Club Group, Case No. 13-CV-12716, 2015 U.S. Dist. LEXIS 510 (E.D. Mich. Jan. 6, 2015), the plaintiffs claimed that the defendant insurer was improperly limiting coverage for what they described as “overflows” of water from plumbing systems. The insurer treated these events as “backups” through a sewer or drain, which were excluded from coverage, except where limited coverage for such a backup was provided by endorsement. The plaintiffs filed suit on behalf of a proposed “property damage” subclass of policyholders who made claims which were not fully paid, and a “premium” subclass of policyholders who did not suffer any losses. The “premium” subclass sought to recover “a uniform percentage of premiums associated with the promised-but-not-provided overflow coverage.” Id. at *7. In a prior decision (which I discussed in a May 2014 blog post), the court denied certification of the “property damage” subclass because individual issues would predominate over common issues.
In granting the defendants’ motion to dismiss the premium-related claims, the court explained that “[u]nless plaintiffs filed a claim with their insurer, performance was not due and plaintiffs cannot establish a breach under the policy. In the absence of a duty, there can be no breach.” Id. at *9-10. In other words, “Defendants duty to perform under the insurance contracts does not arise unless a homeowner submits a valid claim.” Id. at *11. The court noted that, if plaintiffs’ interpretation of the policy were correct and they had a loss, their avenue for relief would be to sue for breach of contract and have the court interpret the policy. Id. After the insurer had assumed the risk, “[w]hether the insurers had an internal policy of denying claims in contravention of the policy language is irrelevant, as in any coverage dispute, it is the court that will ultimately construe the policy language and determine its meaning.” Id. at *16. The court further explained that “[b]ecause defendant-insurers were at risk for any legitimate claims once the insurance contract was executed, there is no basis for the return of any premiums.” Id. at *17.
Another point left out of the court’s analysis (assuming it applies in Michigan) is that premiums for homeowners’ insurance generally must be approved by the department of insurance, and to the extent that the plaintiffs are challenging their premium, that may have to be pursued first in a regulatory proceeding in the department of insurance. Any challenge to the premium also may be barred by the filed rate doctrine.