Ontario judge refuses to certify a class action against insurers alleged to have repaired cars with generic parts

June 27, 2007

Justice Cullity's refusal to certify a class proceeding in Risorto v. State Farm Mutual Automobile Insurance Co. (Feb. 22, 2007), may represent a renewed approach to evidentiary requirements on a certification motion, and should give some hope to defendants.

At issue in Risorto was the use of non-original equipment manufacturer (or "non-OEM") parts in the repair of vehicles under insurance policies. Under the Insurance Act, an insurer is not liable for more than the actual cash value of a car or for the cost of repairs or replacement of parts 'of like kind and quality' with those being replaced. An insurer also has the option to repair or replace damaged parts with those 'of like kind and quality' instead of making payment, under certain conditions.

This type of claim was first advanced in Ontario in Hague v. Liberty Mutual Insurance Co., an earlier class proceeding based on similar facts to those in Risorto.1 Hague was certified by Justice Nordheimer, but subsequently settled. The plaintiffs in Risorto, represented by the counsel who had won certification in Hague, alleged that non-OEM parts are not 'of like kind and quality' for the purposes of the Insurance Act, and that the insurer, in directing repairs using such parts, was in breach of its contractual obligations with policyholders. Justice Cullity noted in his reasons in Risorto that the pleadings were essentially the same as those in Hague, the two cases having their genesis in a composite action which was later split into separate ones against individual insurers (several other cases are still pending).

While recognizing the similarity in the two situations, Justice Cullity also noted some important developments that had occurred in the years since Hague had been certified. First, there was a reversal of the certification of Avery v. State Farm, an Illinois class action against State Farm Automobile Insurance Co. on the non-OEM issue that had resulted in a jury award of over $1 billion at trial. The plaintiffs in Hague had relied heavily on the trial court decision in that case. Second, an "expert" the plaintiffs in Risorto suggested they might use had been severely criticized by a Washington state court in a case called Schwendeman as lacking the relevant expertise.2

In Risorto, Justice Cullity concluded the plaintiffs had not met the test for certification despite the Hague certification. He had little difficulty with the class as proposed, holding that, while potentially numerous, it was sufficiently clearly defined. That the class included persons who might not have suffered damages was not especially problematic either, in his view, being a matter that could be dealt with in the assessment of damages. Additionally, the pleadings adequately disclosed a cause of action founded in breach of contract and breach of a duty of good faith as an independent actionable wrong.

The problem arose, in Justice Cullity's view, with the proposed common issues. Acceptable for certification purposes were common issues related to the uniformity of class members' policies, the scope of the defendant's contractual obligations and its obligations under the insurance policy, the existence of a policy on the part of State Farm to require the use of non-OEM parts, and damages. Where the plaintiffs ran into difficulties, however, was with respect to the central issue of whether non-OEM parts were of like kind and quality to the parts being replaced.

In Hague, Justice Nordheimer concluded that while the plaintiffs' claim was aggressive, it represented a formulation of the common issues according to a kind of 'all or nothing' approach predicated on the uniformity or universality of knowledge and damages. The plaintiffs in Risorto argued that, under the 'all or nothing' approach, their claim could proceed on the basis that they would seek to prove that deficiencies in the processing of parts were universal. In Justice Cullity's view, however, 'an issue of fact that will determine whether there is commonality cannot itself be a common issue' (at para. 45). Manufacturing deficiencies would at some point need to be determined on an individual basis, and evidence by the defendants that even some of the parts were not deficient would be sufficient to rebut the plaintiffs' case.

Also fatal to the plaintiffs' motion was the factual basis for the claim with respect to the inadequacy of non-OEM parts. In a stark departure from the Hague case, Justice Cullity found the evidence to be insufficient, even by the low standard of scrutiny applied of late on certification motions. Justice Cullity found that the testimony of an 'expert' adduced by the plaintiffs (although not the one from the Schwendeman case in Washington) with respect to non-OEM deficiencies was inadmissible because the so-called expert's knowledge with respect to them had not been established from his training and experience. Testimony from the same expert had been admitted in Hague, but Justice Cullity was satisfied that the judge in that case had been unaware of the expert's subsequent recantation of a critical conclusion on reverse engineering in a second affidavit filed by him in Risorto. Justice Cullity pointed out that certification motions should not weigh the merits of expert testimony or determine its correctness, but thought it appropriate to reject an expert who did not have the requisite credentials, as had been done in Schwendeman. As stated by Justice Cullity (at para. 73), "an issue of fact does not arise simply by reason of a plaintiff's assertion that the fact exists."

In the end, the plaintiffs' reliance on a theory of the categorical inferiority of non-OEM parts was their undoing: the factual basis for such a claim could not be established, and an inquiry into the replacement parts of individual vehicles would be inevitable. The judge also doubted that the state of class members' knowledge about the quality of non-OEM parts could be determined on a class-wide basis. But for the issue of categorical inferiority, a class proceeding would have been the preferable procedure, but could not be under the circumstances.

A final nail in the coffin of the plaintiffs' case was the inadequacy of the proposed representative plaintiffs, who had not even delivered affidavits with respect to their suitability. There was no real basis for their solicitor's affidavit that they would fairly and adequately represent the class.

In sum, the Risorto case provides some hope for defendants in class proceedings that plaintiffs cannot simply craft complex common issues and assert to the certification motion judge that those issues will be proved at the trial (arguably what happened in Hague) without providing some evidentiary basis that the assertions can be proved. While the conclusion reached by Justice Cullity certainly isn't new (the Ontario Court of Appeal in Chadha v. Bayer and the Supreme Court of Canada in Hollick both enunciated the same principles) we have seen a departure from that standard in recent cases (including Hague). The Court of Appeal will again have an opportunity to consider the issue of what - and how much - evidence is required on certification; the plaintiffs in Risorto have appealed.

FOOTNOTES

1]  [2004] O.J. No. 3057 (S.C.J.)

2] Avery v. State Farm, 321 Ill. App. 3d 269, rev'd 216 Ill. (2d) 100 (2005), rehearing denied 2005 Ill. LEXIS 970 (Ill., Sept. 26, 2005), cert. denied 126 S. Ct. 1470 (Mar. 6, 2006); Schwendeman v. USAA Casualty Ins. Co., 65 P.3d 1 (Wash. C.A. 2003).

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