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Insurance Abstract
A class action settlement is funded by obtaining an insurance contract
that is adapted to pay a benefit depending on the claims for cash
payments made by class members. In one embodiment of the invention,
an amount of cash sufficient to satisfy an estimated fraction of
the total possible claims is deposited into a settlement fund, and
a policy of insurance or similar contract is obtained that is adapted
to pay a benefit sufficient to pay claims made in excess of the
cash deposited into the fund.
Insurance Claims
1. A class action settlement fund for paying valid demands by class
members for settlement awards, comprising an insurance contract
adapted to pay a benefit sufficient to pay at least some of the
total amount of the demands if the total amount of the demands exceeds
a predetermined amount.
2. The fund of claim 1 further comprising an amount of cash.
3. The fund of claim 2 wherein the predetermined amount is equal
to or less than the amount of cash.
4. The fund of claim 1 wherein the insurance contract is adapted
to pay a benefit equal to all or substantially all of the total
amount of the demands in excess of the predetermined amount.
5. The fund of claim 1 wherein the predetermined amount is equal
to or less than an estimate of the total amount of settlement claims
that class members are likely to demand.
6. The fund of claim 1 wherein the insurance contract is a first
insurance contract, and wherein the fund further comprises a second
insurance contract adapted to pay a benefit if the total amount
of demands exceeds the predetermined amount and the the first insurance
contract fails to pay a benefit sufficient to pay all demands in
excess of the predetermined amount.
7. The fund of claim 1 wherein an amount of potential excess claims
equals the total amount of all potential demands for settlement
benefits by class members, minus the predetermined amount, and the
insurance contract is adapted to pay the benefit up to a limit,
the limit being a predetermined percentage of the potential excess
claims.
8. The fund of claim 3 wherein the amount of cash is a first amount
of cash and the fund further comprises a second amount of cash.
9. The fund of claim 1 wherein the insurance contract has a beneficiary,
and the fund is the beneficiary.
10. A method of funding a class action settlement in which awards
will be delivered to class members making valid demands for awards,
the method comprising the step of obtaining an insurance contract
adapted to pay out a benefit, the amount of the benefit depending
on a total amount of the demands.
11. The method of claim 10 further comprising the step of depositing
an amount of cash into a fund and wherein the insurance contract
is adapted to pay out a benefit if the total amount of the demands
exceeds of the amount of cash.
12. The method of claim 11 wherein the insurance contract is adapted
to pay out a benefit equal to all or substantially all of the demands
made in excess of the amount of cash.
13. The method of claim 11 wherein the amount of cash is equal
to or greater than an estimate of the total amount of awards that
class members are likely to validly demand.
14. The method of claim 10 wherein the insurance contract is a
first insurance contract, and wherein the method further comprises
a step of obtaining a second insurance contract adapted to pay a
benefit if the first insurance contract fails to pay a benefit.
15. The method of claim 11 wherein the amount of cash is a first
amount of cash, the insurance contract is adapted to pay a benefit
equal to at least some of the demands in excess of the first amount
of cash, and the method further comprises the step of depositing
a second amount of cash into the fund.
16. An insurance contract adapted to insure against the risk that
demands for class action settlement awards by members of a class
will exceed a predetermined amount, by paying a benefit if said
demands exceed said predetermined amount.
17. A method of providing a settlement of a class action involving
cash payments to class members making valid demands for said cash
payments, the method comprising the steps of (a) providing an amount
of cash; (b) obtaining an insurance contract adapted to pay a benefit
sufficient to satisfy at least some of the demands if a predetermined
condition is met; (c) receiving at least one valid demand from a
class member; (d) determining whether the predetermined condition
is met; (e) if the predetermined condition is met, collecting the
benefit from the insurance contract; (f) responding to the at least
one demand by paying at least part of the amount of cash to the
class member.
18. The method of claim 17 further comprising the step of (g) responding
to the at least one demand for a cash payment by paying at least
part of the benefit to the class member.
19. The method of claim 17 wherein the predetermined condition
is that the total amount of the at least one demand exceeds a predetermined
amount.
20. A method of providing a settlement of a class action involving
cash payments to class members making valid claims for said cash
payments, the method comprising the steps of (a) depositing an amount
of cash into a settlement fund, the first amount of cash being at
least equal to an estimate of the total amount of valid claims that
are likely to be made; (b) obtaining an insurance contract adapted
to pay a benefit if the total amount of valid claims exceeds the
amount of cash; (c) receiving at least one valid claim; (d) determining
the total amount of valid claims; (e) if the total amount of valid
claims exceeds amount of cash, obtaining the benefit; (f) paying
at least one of the valid claims from the fund.
Insurance Description
CROSS-REFERENCE TO RELATED APPLICATION
[0001] This application claims priority from provisional application
Ser. No. 60/749,514, filed Dec. 12, 2005.
BACKGROUND OF THE INVENTION
[0002] The present invention relates to a novel method of funding
a class action settlement, and a novel class action settlement fund.
[0003] A class action is a litigation in which one or more representative
plaintiffs represent the legal interests of a large number of similarly
situated persons against one or more defendants. Class actions are
provided for by the Federal Rules of Civil Procedure and the rules
and laws of the States.
[0004] Class actions are often, but not always, aggregations of
a large number of small claims, that is, claims for a relatively
small sum of money. Because of the costs of litigation, it is often
not worthwhile to litigate a small claim. A class action enables
the small claims of many persons to be aggregated, such that the
amount at issue is large enough to justify litigation. Thus, class
actions enable the vindication of the rights of small claimants
that would not otherwise be vindicated.
[0005] Many class actions are resolved by settlement, a process
in which the parties compromise the claims and defenses made in
the litigation to reach a negotiated resolution. When participating
in settlement, the representative plaintiffs represent the interests
of the entire class including the absent class members (i.e., those
who are not named plaintiffs in the litigation). To protect the
interests of the absent class members, settlements of class actions
are subject to judicial supervision and approval.
[0006] The terms of a settlement agreement may include the following
matters: the total amount of the judgment (i.e., the total amount
of money that will be divided amongst the class members); a scheme
of distribution (for example, it may be agreed that every class
member will be entitled to an equal share of the judgment, or some
other formula may be agreed upon); the details of settlement administration,
including appointment of a claims administrator; and details of
class notice and claims processing procedures and policies. There
may be a need to identify the class members. In some cases class
members can be identified by a review of the defendant's business
records. In other cases, class members may have to identify themselves
by providing, for example, proof of purchase. These are some of
the matters that are routinely negotiated, agreed upon, and approved
by the court in the settlement of class actions, and become terms
of the settlement.
[0007] When a class action is settled on terms that call for payment
of money to class members, provision must be made for funding the
payments. Conventionally, a settlement fund is created, from which
the payments to class members will be made. The settling defendant
funds the settlement fund by depositing therein a sum of cash equal
to the total amount of the claims payable to the class. For example,
if the class has 500,000 members, and the settlement provides for
payment of $20 to each class member, the fund would be funded with
a cash deposit of $10,000,000. The cash deposit may be made all
at once or in installments over time. The settling defendant may
deposit additional cash into the fund to cover an award of attorneys'
fees, plaintiffs' cost of litigation, and/or costs of administering
the settlement. A third-party claims administrator is often appointed
to hold the settlement fund and/or administer the settlement process.
[0008] After settlement, and at some time before or after the settlement
fund is created, the members of the class are notified that a settlement
has been reached and that they may make claims against the settlement
fund during a predetermined claim period. Notice to the class is
usually by first-class mail when the mailing addresses of class
members are known. Notice can also be by means of electronic mail
or publication. Methods of notice may be combined to achieve the
goal of alerting the members of the class that their claims against
the defendant have been settled. Class members may be provided with
claim forms that may be filled out by the class members and returned
to the claims administrator. Each class member who submits a valid
and timely claim form would be paid a sum of money from the settlement
fund by the claims administrator according to the plan of distribution.
Usually, class members who do not return a valid claim form in time
do not receive a payment from the settlement fund, although sometimes
exceptions are made. Eventually, the claim period finally elapses
and no further claim forms will be honored.
[0009] Thus, it remains a possibility that some of the cash in
the settlement fund will not be claimed by class members. According
to an empirical study of class action settlement response rates,
in the majority of cases studied fewer than 20% of class members
filed claims. 2 Newberg on Class Actions, Appendix 8-4 (3d ed. 1992).
Another empirical study found class action settlement response rates
ranging from 3 to 33%. Gail Hillebrand & Daniel Torrence, Claims
Procedures in Large Consumer Class Actions and Equitable Distribution
of Benefits, 28 Santa Clara L. Rev. 747 (1988). Thus, in most class
action settlements, most of the money deposited in the settlement
fund to finance payments to the class is left unclaimed. Usually,
the money reverts back to the settling defendant after the claim
period elapses, according to the agreed-upon terms of the settlement.
SUMMARY OF THE INVENTION
[0010] According to the invention, a class action settlement is
funded by depositing into a settlement fund an amount of cash or
other property sufficient to satisfy an estimated fraction of the
total possible claims, and by obtaining a policy of insurance or
similar contract that is adapted to pay any claims made in excess
of the cash deposited into the fund.
[0011] According to another aspect of the invention, a class action
settlement fund comprises an amount of cash and an insurance policy
or similar contract that is adapted to pay claims made in excess
of the cash deposited into the fund.
[0012] The invention provides a great advantage in settling class
actions because the settling defendant or defendants are not required
to put up 100% of the total claimable amount in cash, as in a conventional
settlement. Rather, they put up only a fraction (preferably based
on an estimate of the claims likely to be made) of the total claimable
amount, and pay the costs of obtaining a policy of insurance or
similar contract. This enables the defendant or defendants to settle
the litigation at a much lower out-of-pocket cost, greatly facilitating
settlement. Payment of claims made above the amount of the cash
deposit is guaranteed by the policy of insurance or similar contract.
Even if an unusually large percentage (even up to 100%) of the class
members file timely and valid claims, all of their claims will be
paid in full. Thus, the interests of the class members are not impaired,
even while the cost of settling the case is greatly reduced.
[0013] The invention enables settlement of class actions for a
higher total amount (and thus a higher pro rata claim per member)
than the prior art method that requires 100% cash funding of the
settlement. Consider, for example, a class action involving 100,000
class members which the settling defendant or defendants wish to
settle for a total of $3 million exclusive of attorneys' fees and
costs. Under the prior art method, the entire $3 million would be
deposited into a fund and each class member's equal share of the
fund would be $30. According to the invention, a portion of the
$3 million would be deposited as cash in the settlement fund and
the remainder used to purchase a policy of insurance to cover any
excess claims on the fund. The total of the cash deposit and the
costs of obtaining the insurance policy might total, perhaps, 30%
of the total possible claims (that amount will depend on the willingness
of the insurance market to provide the insurance sought). In that
case, the fund can satisfy up to $10 million in claims and each
member can be offered $100 as his or her share of the fund instead
of only $30. Thus, according to the invention the settlement provides
a greatly enhanced benefit to the class members. This enhanced benefit
comes at no additional cost to the settling defendants and at no
cost to the class members who fail to make claims against the fund.
It is made possible, according to the instant invention, by exploitation
of the fact that most class members will not be expected to make
claims on the fund, which provides an opening for a insurer to take
the risk (for a price) that claims will be made in excess of expectations.
[0014] A class action settlement is subject to approval by the
court with jurisdiction over the action. It was not known prior
to the invention whether courts would approve a settlement according
to the present invention.
DETAILED DESCRIPTION OF THE INVENTION
[0015] According to one aspect of the invention, a novel method
is used to fund a class action settlement. The method comprises
the steps of depositing into a settlement fund an amount of cash
sufficient to satisfy some of the total possible claims, and by
obtaining a policy of insurance or similar contract that is adapted
to pay any claims made in excess of the cash deposit ("excess
claims"). The cash deposit may be made all at once or in installments
over time. The order in which the steps are performed is not important.
When both steps are complete, a settlement fund is created from
which all claims made on the fund by class members can be paid.
[0016] With respect to the step of depositing an amount of cash
into the settlement fund, it is preferable to estimate the fraction
of the claims that are likely to be made against the fund by class
members and to deposit at least enough cash or other property to
enable payment of that estimated fraction of claims. The estimation
may be performed in any reasonable manner, and may include consideration
of numerous factors specific to the class action being settled and
the terms and administrative details of the settlement. Factors
to be considered may include: the number of class members, the nature
of the underlying class action, the amount each class member can
expect to receive upon making a claim, the age demographics of the
class members, the gender demographics of the class members, the
amount of publicity the case has received, the amount of publicity
the settlement will receive, the timing of notices that will be
provided to the class, the number of notices that will be provided
to the class, the form of notices that will be provided to the class,
the amount of time class members will have to submit claim forms,
whether the class member must provide proof of purchase or some
other evidence to have a valid claim, the relative difficulty of
making a valid claim, the proportion of the claim amount to the
price of the product (if any) underlying the class action, and historical
data and experience regarding redemption rates from similar settlements.
[0017] In making an estimate it is not essential to predict with
exactness the total amount of claims that will be made against the
fund. Rather, it is more to the point to estimate a ceiling that
the total amount of claims is unlikely to exceed. Estimates of this
nature are known to be made in the context of providing insurance
against over-redemption of promotional offerings such as coupons
that could be redeemed for cash off the purchase price of a product
or service, or rebate coupons that could be redeemed for a rebate
of cash following the purchase of a product or service.
[0018] The policy of insurance may be a traditional insurance policy,
having a deductible and premium, provided by an insurance company
or underwriter. Also suitable would be a contract in which a company
agrees to bear the risk of excess claims. The deductible may be
approximately equal or exactly equal to the sum of cash deposited
into the settlement fund. The cost of obtaining the policy of insurance
or other contract may include an insurance premium, taxes, and brokerage
fees. Preferably, the insurance policy or other contract is drafted
to be free of exclusions and exceptions that would unreasonably
impair the security of the class members. Preferably, the settlement
fund itself is the beneficiary (or the payee of any proceeds) of
the insurance policy or similar contract.
[0019] As a practical matter, in order to obtain the policy of
insurance from the insurance market, the amount of cash deposited
in the settlement fund will have to be sufficient to satisfy the
insurer writing the policy that taking on the risk of paying excess
claims is a reasonable risk. The cash is essentially the deductible
on the insurance policy, and for a price (the premium on the policy)
the insurer takes the risk that claims will be made in excess of
the deductible.
[0020] In the event that excess claims are made against the settlement
fund, a party (preferably the claims administrator) will notify
the company or underwriter that wrote the insurance policy or similar
contract of the fact of excess claims and their amount. The company
would then pay out, according to the terms of the insurance policy
or similar contract, a sum of cash at least equal to the excess
claims, which sum of cash would be deposited into the settlement
fund by the claims administrator or other party. Thus, all of the
claims against the settlement fund would be payable from the cash
in the fund, part of which was deposited initially by the defendant
and part of which was paid out according to the terms of the insurance
policy. In the event that no excess claims are made, there would
be no payout on the insurance policy, and all claims would be payable
from the cash that was deposited initially. In the event that the
claims made are less than the amount of cash initially deposited,
there could still be cash left over in the fund after all claims
made against it are paid. In such an instance, the leftover cash
in the fund could revert to the possession of the defendant or could
be applied to some other use, such as a donation to a charitable
purpose or other public purpose, according to the terms of the settlement
agreement.
[0021] In a preferred embodiment of the invention, the insurance
policy provides sufficient coverage to guarantee payment of all
excess claims, even if up to 100% of the class members made valid
claims. For example if, according to the terms of a settlement,
the total claimable amount is $10 million and the cash deposit is
$3 million, the insurance policy would be adapted to pay if claims
exceeded $3 million, with a coverage limit of $7 million (sufficient
to ensure that all claims are paid). Policies covering less total
risk would likely be available from the insurance market at a lower
cost. In view of the extreme unlikelihood that 100% of the class
members would make valid claims, in alternative embodiments of the
invention, the insurance policy may be adapted to guarantee payment
of the excess claims (i.e. the claims in excess of the cash deposited
into the fund) up to a maximum that is less than 100% of the total
possible excess claims. According to these alternative embodiments,
the insurance policy may be adapted to guarantee payment of excess
claims in the ranges of 20 to 30 percent, 30 to 40 percent, 40 to
50 percent, 50 to 60 percent, 60 to 70 percent, 70 to 80 percent,
80 to 90 percent, or 90 to 100 percent of the excess claims.
[0022] The security of the class members can be further improved
obtaining a second policy of insurance, or a surety bond, adapted
to pay excess claims against the fund that the original policy of
insurance fails to pay.
[0023] In an alternative embodiment of the invention, several insurance
policies could be obtained, each covering a different portion of
excess claims. For example, a first policy could cover the first
20% of excess claims, and a second policy could cover the remaining
80%.
[0024] In addition to the cash deposited into the settlement fund
to cover claims made against it by class members, additional cash
might be deposited to pay attorneys' fees, the plaintiffs' costs
of litigation, and/or the cost of administering the fund and claims
processing. According to another aspect of the invention, a novel
class action settlement fund is created according to one of the
methods described above.
[0025] According to another aspect of the invention, a class action
settlement fund comprises an amount of cash and an insurance policy
or similar contract that is adapted to pay claims made in excess
of an estimated fraction of the total possible claims. The settlement
fund might be held in a bank account, in an escrow account, or in
a trust. The fund may be held by or in the name of an independent
claims administrator appointed to administer the class action settlement.
Preferably, the amount of cash is at sufficient to cover at least
an estimated amount of claims likely to be made against the settlement
fund. The estimation may include consideration of various factors
as described above in connection with the novel method of the invention.
The settlement fund may further comprise a second policy of insurance
adapted to pay any claims that the policy of insurance fails to
pay. The settlement fund may further comprise a surety bond that
will be payable if the policy of insurance fails to pay claims.
Preferably, the policy of insurance, second policy of insurance
if any, and surety bond if any are adapted to make the settlement
fund itself the beneficiary or payee of the policy or bond. Alternatively,
the claims administrator might be made the beneficiary or payee.
[0026] According to another aspect of the invention, an insurance
policy is adapted to pay all claims against a class action settlement
fund in excess of an amount of cash deposited in the fund. Alternatively,
an insurance policy is adapted to pay claims against a class action
settlement fund in excess of an amount of cash deposited in the
fund up to a maximum amount equal to a predetermined percentage
of the excess claims. Preferably the amount of cash deposited in
the fund is at least sufficient to cover an estimated fraction of
the claims likely to be made on the settlement fund by class members.
The cash deposited in the fund may be considered the deductible
for the insurance policy.
[0027] It is to be understood that when reference is made herein
to an insurance contract paying claims against a class action settlement
fund, the payment of claims may be made indirectly by paying a lump
sum benefit into the fund, from which the payments of claims will
be made to class members by, for example, mailing checks drawn on
the settlement fund. Alternatively, the insurance contract may pay
claims directly to class members instead of to the fund.
Guidelines to Interpretation and Construction
[0028] Claim terms shall have their ordinary English meaning unless
expressly defined otherwise herein or during prosecution of the
application.
[0029] No claim element is intended to be interpreted as a means-plus-function
or step-plus-function claim element.
[0030] No claim includes a step of estimating, unless expressly
specified in the claim. In carrying out the invention an estimate
could be adopted from elsewhere, e.g. the Santa Clara Law Review
article cited in the Background of the Invention suggests that it
is highly unlikely that more than 33% of the members of any class
action will respond to an offer to claim a benefit from the settlement
fund. That could be a reasonable estimated fraction and could be
adopted directly.
[0031] This application for patent is not intended to dedicate
any subject matter to the public. In particular, an apparent failure
to claim a disclosed subject matter is not intended to dedicate
any subject matter to the public for doctrine of equivalents purposes
or otherwise.
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