Esurance Insurance Company v. Lukus Keeling

Filing

Filed opinion of the court by Chief Judge Easterbrook. We grant the petition for leave to appeal and summarily reverse the district court's decision. The case is remanded for decision on the merits.Frank H. Easterbrook, Chief Judge; Richard D. Cudahy, Circuit Judge and Michael S. Kanne, Circuit Judge.--[Edited 09/26/2011 by KH to correct text] [6340394-3] [6340394] [11-8018]

Case: 11-8018

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In the

United States Court of Appeals
For the Seventh Circuit
No. 11-8018
L UKUS K EELING, on behalf of a class,
Plaintiff-Respondent,
v.
E SURANCE INSURANCE C OMPANY,
Defendant-Petitioner.
Petition for Permission to Appeal from
the United States District Court
for the Southern District of Illinois.
No. 10-0835-DRH—David R. Herndon, Chief Judge.

S UBMITTED S EPTEMBER 2, 2011—D ECIDED S EPTEMBER 26, 2011

Before E ASTERBROOK, Chief Judge, and C UDAHY and
K ANNE, Circuit Judges.
E ASTERBROOK, Chief Judge.
A class action filed in a
state court of Illinois on behalf of Esurance’s policyholders contends that the company committed fraud
by charging for uninsured or underinsured motorist
coverage that is worthless in light of the policy’s restrictions. Esurance removed the suit to federal court under
28 U.S.C. §1453, part of the Class Action Fairness Act.

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The proposed class has more than 100 members, and
minimal diversity of citizenship has been established,
but Lukus Keeling, the representative plaintiff, argued
that the amount in controversy is less than $5 million,
the statutory threshold. The district court agreed and
remanded the action. 2011 U.S. Dist. L EXIS 80634 (S.D. Ill.
July 25, 2011). Esurance has asked us to allow an interlocutory appeal under §1453(c)(1).
Esurance has issued more than 50,000 automobile
insurance policies containing the contested clause.
During the period of limitations before the suit began
(five years), it collected a net premium of $613,894 on
these coverages and paid no claims. The district court
treated this as the principal amount in controversy
(the class wants the money repaid). The court next
stated that prospective relief would be costless to
Esurance, because that relief would require changing
only a few words on a printed form. Finally, the court
declared that it would be “legally impossible” for the
class to receive $4.4 million in punitive damages, the
amount required to put the stakes over $5 million. This
is the correct legal standard, see St. Paul Mercury
Indemnity Co. v. Red Cab Co., 303 U.S. 283, 289 (1938);
Back Doctors Ltd. v. Metropolitan Property & Casualty Insurance Co., 637 F.3d 827 (7th Cir. 2011); Rising-Moore v.
Red Roof Inns, Inc., 435 F.3d 813 (7th Cir. 2006); Brill v.
Countrywide Home Loans, Inc., 427 F.3d 446 (7th Cir.
2005), but the district court did not apply that standard
correctly.
Start with the value of the injunctive relief that the
class demands. The district court wrote that the cost to

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Esurance would be trivial: just reprint the forms. But
this suit is about money, not ink. If the class is right
and Esurance must either stop charging a premium or
change the terms so that policyholders receive indemnity more frequently, it will suffer a financial loss.
Suppose it were to comply with an injunction by eliminating this coverage and its premium. Its current profit
on this coverage in Illinois is about $125,000 a year.
The present value of foregoing this stream of profits is
about $1.5 million. (That is the present value of $125,000
a year for 20 years, discounted at 5% per year.) The alternative means of complying with an injunction would
be to change the policy’s terms so that it paid more
claims; that form of compliance would have an uncertain
cost—presumably something less than $1.5 million
(Esurance would not knowingly offer a coverage on
which it loses money), but still far from trivial. The cost
of prospective relief cannot be ignored in the calculation
of the amount in controversy.
The expense of restitution plus the cost of prospective
relief would be about $2 million. That leaves Esurance
$3 million short of the jurisdictional minimum. Would it
be “legally impossible” for the class to receive $3 million
in punitive damages?
Punitive damages are available under both the common law of fraud and the Illinois Consumer Fraud and
Deceptive Business Practices Act, 815 ILCS 505/1 to 505/12,
the two principal bodies of law that the complaint invokes. When calculating punitive damages, Illinois
likely would ignore the cost to the defendant of prospec-

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tive relief, because that sum is not part of any class member’s injury. Thus the question is whether it is “legally
impossible” in Illinois for policyholders to obtain
$3 million in punitive damages on account of a fraud
that cost them a little more than $600,000. (We do not
mean that the terms of Esurance’s policy are fraudulent;
that remains to be determined. But to determine the
amount in controversy between the parties we must
accept the class’s characterization.)
A punitive award of $3 million would amount to a
multiplier of five. Courts in Illinois have affirmed
awards for fraud or violations of the Consumer Fraud
and Deceptive Business Practices Act that reflect higher
multipliers. See, e.g., Gehrett v. Chrysler Corp., 379 Ill. App.
3d 162 (2008) (multiplier of seven); Bates v. William Chevrolet/GEO, Inc., 337 Ill. App. 3d 151 (2003) (same). Although
the Supreme Court once suggested that a multiplier of
four is close to the constitutional limit, Pacific Mutual
Life Insurance Co. v. Haslip, 499 U.S. 1, 23–24 (1991), more
recently it suggested that a larger (but still single-digit)
ratio could be allowable. State Farm Mutual Automobile
Insurance Co. v. Campbell, 538 U.S. 408, 425 (2003).
Plaintiffs’ claim arises from the policy’s written terms.
Any tort therefore is not concealable. This implies a
low multiplier (if any is appropriate). See A. Mitchell
Polinsky & Steven Shavell, Punitive Damages: An Economic
Analysis, 111 Harv. L. Rev. 869 (1988). On the other hand,
each policyholder’s loss is small, which could justify
a substantial multiplier—at least if this were individual
rather than class litigation. See Mathias v. Accor Economy

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Lodging, Inc., 347 F.3d 672 (7th Cir. 2003) (describing the
tradeoff between the punitive-damages multiplier
and class litigation when per-person stakes are small).
Considerations such as these are properly part of the
damages determination after the merits have been resolved. They should not be smuggled into the jurisdictional inquiry, which is supposed to be simple and mechanical. See Empress Casino Joliet Corp. v. Balmoral Racing
Club, Inc., No. 09-3975 (7th Cir. July 8, 2011) (en banc). We
therefore do not think it “legally impossible” for the
class to recover more than $3 million in punitive damages. Improbable, perhaps, but not impossible.
We grant the petition for leave to appeal and summarily reverse the district court’s decision. The case is
remanded for decision on the merits.

9-26-11