Class Action Defense Cases-In re Farmers Insurance Exchange: Employer Properly Classified Insurance Claims Adjusters As Exempt From Overtime Requirements Of Federal Fair Labor Standard Act (FLSA) Ninth Circuit Holds

Nov 1, 2006 | By: Michael J. Hassen

Ninth Circuit Directs District Court to Enter Judgment in Favor of Defense in Overtime Class Action Because 29 C.F.R. § 541.203 Exempts Insurance Claims Adjusters from FLSA Overtime Requirements

Insurance claims adjusters filed several overtime class action lawsuits against Farmers Insurance Exchange alleging failure to pay overtime under the federal Fair Labor Standard Act (FLSA). Defense attorneys argued that claims adjusters are exempt from FLSA’s overtime provisions. The district court created a “$3,000 in claims paid per month rule” and, under this new rule, found that some of the adjusters were exempt from overtime while others were not. On appeal, plaintiff and defense attorneys agreed that this rule “is neither workable nor supported by the evidence.” The Ninth Circuit agreed, holding that FLSA expressly exempts claims adjusters and directing that judgment be entered in favor of the defense in the class action. In re Farmers Ins. Exch., 466 F.3d 853, 855-56 (9th Cir. 2006).

In its capacity as an inter-insurance exchange, Farmers “performs all the functions of a typical insurance company,” including adjusting claims. In re Farmers Ins. Exch., at 856. In fact, approximately half of its 10,000 employees are claims adjusters categorized into five different types, which the Ninth Circuit summarized at pages 856 and 857 as:

those who handle automobile property damage claims (“automobile damage adjusters”), those who handle homeowners’ claims for property and contents damage (“property adjusters”), those who handle personal injury claims (“liability adjusters”), those who handle unique physical damage claims (e.g., RVs, mobile homes) and personal injury claims (“Foremost adjusters”) and another hybrid claims adjuster who handles two or more types of claims (“multi-line adjusters”).

Most Farmers adjusters work out of their homes and spend substantial time traveling to the site of an accident or loss; they do not supervise others. In re Farmers Ins. Exch., at 856. Farmers pays salaries to its claims adjusters; it did not pay them an hourly rate, and it did not pay them overtime. Id., at 857. The overtime class action litigation involved both federal and state actions. Plaintiff and defense lawyers stipulated to a bench trial bifurcated into liability and damages phases. Id., at 857-58. “The sole issue at the liability phase was whether [Farmers] properly classified its adjusters as exempt under federal and state overtime laws, and if not, whether [Farmers] could assert any defenses to liability or damages.” Id., at 858. Following a three-week bench trial, the district court issued a creative ruling that found some employees non-exempt and others exempt only under certain circumstances, and awarded in excess of $50 million in damages. The Circuit Court summarized the district court’s judgment at page 858 as follows:

… [T]he district court concluded that: (i) automobile damage adjusters are non-exempt; (ii) property adjusters are nonexempt if more than 50 percent of their pay-outs in any one month are less than $3,000; (iii) Foremost adjusters are nonexempt if they spend more than 38-34 hours per week handling residential property claims on which the pay-out averages, on a monthly basis, less than $3,000; (iv) multi-line adjusters are non-exempt if they spend more than 38-34 hours per week handling automobile damage claims in any amount and/or residential property claims on which the payout averages, on a monthly basis, less than $3,000; (v) all other adjusters, including liability adjusters, are exempt and (vi) Michigan’s overtime law applied to FIE.

FLSA generally requires overtime pay for employees who work more than 40 hours per week, 29 U.S.C. § 207(a)(1), but exempts those employed in an “administrative” capacity, 29 U.S.C. § 213(a)(1). For employees who earn more than $250 per week, this exemption requires that the “primary duty” must involve “performance of office or nonmanual work directly related to management policies or general business operations of [the] employer,” and must require the employee exercise “discretion and independent judgment.” 29 C.F.R. § 541.2 (2004). Appellate courts “independently review the record, without deference to the district court’s conclusions” in determining whether this test is met. In re Farmers Ins. Exch., at 859.

In 2004, the Department of Labor (DOL) promulgated 29 C.F.R. § 541.203, which expressly provides that insurance claims adjusters generally fall within the administrative exemption “if their duties include activities such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claims; negotiating settlements; and making recommendations regarding litigation.” The Ninth Circuit held that this regulation was relevant even though it was not in effect at the time the class action was filed because the DOL declared that the regulation was “consistent with existing [law].” In re Farmers Ins. Exch., at 860. The Circuit Court discussed also opinion letters supporting the conclusion that insurance claims adjusters are generally exempt from FLSA’s overtime requirements. Id., at 860, and held that it “must give deference to the DOL’s interpretation of its own regulations,” id., at 860-61 (citation omitted).

Having determined that the regulation applies to its determination of whether the administrative exemption test is satisfied, the Ninth Circuit summarized the district court’s findings at page 861 as follows:

The district court found that all claims adjusters in this case: (i) determine whether the policy covers the loss, (ii) recommend a reserve upon estimating FIE’s exposure on the claim, in accordance with state law requirements, (iii) interview the insured and assess his (or others’) credibility, (iv) advise FIE regarding any fraud indicators or the potential for subrogation and underwriting risk, (v) negotiate settlements, (vi) seek additional authority from their supervisors, which is granted “75-100 percent of the time,”6 when the recommended settlement exceeds their established authority and (vii) communicate with opposing counsel and FIE’s counsel.

In the words of the Ninth Circuit, “As far as we are concerned, that says it all.” In re Farmers Ins. Exch., at 861. The administrative exemption applied, id., at 861-64, and the Circuit Court directed that judgment be entered in favor of the employer.

NOTE: The Ninth Circuit rejected the district court’s decision to create an exception for claims adjusters who work on “small” claims, defined by the district court as settlements under $3000 stating “we see no reason … why the insured’s lifestyle could not be just as relevant for losses less than $3,000,” In re Farmers Ins. Exch., at 862. Moreover, this rule was “unworkable in practice,” as it would not permit calculation of payments owed “until months or years down the road when the claim is finally resolved,” id., at 864. Most importantly, if the DOL intended to create an exception for “small claims handlers,” it could have done so. Id.

We note also that the Ninth Circuit’s treatment of the state claims may be found at pages 17945-48.

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