D'Ella Irvin v. State Farm

NOT RECOMMENDED FOR PUBLICATION
File Name: 21a0307n.06

Case No. 20-5930

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

FILED
) Jul 01, 2021
D’ELLA IRVIN, CLARA ARREBATO
) DEBORAH S. HUNT, Clerk
PEDROSO, and KATHERINE
)
HERNANDEZ ARREBATO,
)
Plaintiffs-Appellants, ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
v. ) THE WESTERN DISTRICT OF
) KENTUCKY
STATE FARM MUTUAL AUTOMOBILE )
INSURANCE COMPANY, )
Defendant-Appellee. )
)

BEFORE: SUTTON, Chief Judge; COLE and READLER, Circuit Judges.

SUTTON, Chief Judge. State Farm Mutual denied D’Ella Irvin and other individuals car

insurance benefits based on what are known as “paper reviews” of their claims. After the Kentucky

Supreme Court invalidated this process, State Farm paid Irvin and the other policyholders their

benefits plus 12 percent interest. The policyholders sued State Farm, seeking additional interest

and fees on the ground that the insurance company acted unreasonably. The district court

disagreed. We affirm.

I.

State Farm provides car insurance to Kentucky drivers. Consistent with Kentucky law, it

offers personal-injury-protection benefits, including no-fault coverage, to reimburse “reasonably

needed” medical expenses caused by car accidents. K.R.S. § 304.39-020(5)(a). For some claims,
Case No. 20-5930 Irvin et al. v. State Farm

State Farm once used an expedited paper-review process. Under this process, a medical

professional would review the case records and determine whether the medical expenses were

caused by the car accident and reasonably needed.

D’Ella Irvin, Clara Arrebato Pedroso, and Katherine Hernandez Arrebato obtained car

insurance from State Farm. After they each were involved in car accidents, they filed claims for

their medical expenses. Medical professionals reviewed their records, concluding that their

treatment had been “excessive” rather than “reasonable and necessary.” R.1-2 at 7–8. They

recommended rejecting the claims, and State Farm denied them.

In 2018, the Kentucky Supreme Court ended paper reviews of no-fault insurance claims.

It held that the Commonwealth’s Motor Vehicle Reparations Act prohibits insurers from denying

no-fault benefits solely on that basis. See Gov’t Emps. Ins. Co. v. Sanders, 569 S.W.3d 923, 928

(Ky. 2018). The court rooted its decision in the Act’s “presumption that any medical bill submitted

is reasonable.” K.R.S. § 304.39-020(5)(a).

In response to the decision, State Farm paid benefits to these three individuals. It also paid

them 12 percent interest, which the Act calls for when an insurance company delays payment. See

K.R.S. § 304.39-210(2).

Irvin, Pedroso, and Arrebato remained dissatisfied. They sued State Farm on behalf of

themselves and other like-treated policyholders. In addition to what they had already received,

they sought attorney’s fees and 6 percent more in interest on the ground that State Farm had

unreasonably denied their claims based on the paper-review process.

State Farm removed the case to federal district court under the Class Action Fairness Act,

28 U.S.C. § 1332(d), then filed motions to dismiss for lack of subject matter jurisdiction and failure

to state a claim. The district court held that the policyholders lacked standing for their claim for

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Case No. 20-5930 Irvin et al. v. State Farm

unpaid benefits and 12 percent statutory interest and remanded those claims to state court. See

28 U.S.C. § 1447(c) (“If at any time before final judgment it appears that the district court lacks

subject matter jurisdiction, the case shall be remanded.”). As for the claim for additional interest

and attorney’s fees, the district court dismissed it for failure to state a claim under Civil Rule

12(b)(6).

The policyholders appeal the 12(b)(6) ruling.

II.

Civil Rule 12(b)(6) allows a party to move to dismiss a case for “failure to state a claim

upon which relief can be granted.” To survive a motion to dismiss, “a complaint must contain

sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation omitted).

The policyholders root their claim for statutory interest and attorney’s fees in Kentucky

law. The Motor Vehicle Reparations Act permits attorney’s fees and 18 percent interest (rather

than the standard 12 percent) when “[o]verdue” benefit payments are “delay[ed]” “without

reasonable foundation.” K.R.S. §§ 304.39-210(2), 304.39-220(1). An insurer’s “legitimate and

bona fide” defense counts as a “reasonable foundation” for delaying payments. Auto. Club Ins.

Co. v. Lainhart, 609 S.W.2d 692, 695 (Ky. Ct. App. 1980). If an insurer could reasonably conclude

that the law allows a delayed payment, the 18 percent provision does not apply. An insurer lacks

a “reasonable foundation” for such delays if case law clearly contradicts its position. Ky. Farm

Bureau Mut. Ins. Co. v. McQueen, 700 S.W.2d 73, 74 (Ky. Ct. App. 1985).

At stake is whether State Farm acted reasonably in delaying payment based on paper

reviews of these claims. We think it did.

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Start with the Act. It does not mention paper reviews by name or refer to them by concept.

All it does is limit recoverable medical expenses to “reasonable charges incurred for reasonably

needed products, services, and accommodations,” K.R.S. § 304.39-020(5)(a), and require

“reasonable proof of the fact and amount of loss,” id. § 304.39-210(1). Although there is a

“presumption that any medical bill submitted is reasonable,” id. § 304.39-020(5)(a), “insurance

companies [have the] opportunity to investigate [a] claim and to make an intelligent estimate of

the company’s rights and liabilities before becoming obligated to pay the claim.” State Auto Mut.

Ins. Co. v. Outlaw, 575 S.W.2d 489, 493 (Ky. Ct. App. 1978). As part of this investigation, an

insurer may ask for a medical examination of the claimant. See K.R.S. § 304.39-270(1). State

Farm could have reasonably read these provisions to authorize a paper review as one way to

“investigate” a claim and one way to make an “intelligent estimate” of liability.

Turn to the case law on the books at the time. Before Sanders, no Kentucky appellate court

had held, or suggested, that paper reviews violate state law. Several Kentucky appellate courts

had ruled on cases involving paper reviews without suggesting that this frequently used practice

violates state law. See, e.g., Neurodiagnostics, Inc. v. Ky. Farm Bureau Mut. Ins. Co., 250 S.W.3d

321, 325 (Ky. 2008); Allstate Ins. Co. v. McDowell, No. 2002-CA-001949-MR, 2003 WL

22319462, at *2, *5 (Ky. Ct. App. Oct. 10, 2003). On top of that, several Kentucky and federal

trial courts had held that a denial of benefits based on a paper review counts as a legitimate defense

and reasonable foundation for withholding payment. See Cope v. Gov’t Emps. Ins. Co., No.

12-CI-2847, at *5 (Ky. Cir. Ct. July 9, 2014); Risner v. State Farm Mut. Auto. Ins. Co., No.

14-41-HRW, 2015 WL 3857092, at *4–5 (E.D. Ky. June 22, 2015).

Now consider Sanders. In that case, the parties and trial court debated the meaning of

K.R.S. § 304.39-270(1), which allows an insurer to request a medical examination as part of its

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claim investigation. Sanders, 569 S.W.3d at 924. Consistent with State Farm’s position, the trial

court reasoned that, if the Act does not require a medical examination, a paper review suffices to

deny a claim. Id. The Kentucky Supreme Court reversed. In doing so, it determined that the

parties and trial court were “barking up the wrong tree.” Id. It reasoned that § 304.39-270(1)

governs only how an insurer investigates a claim, not how it denies one. Sanders, 569 S.W.3d at

924–25. As to this point, the court looked to the “presumption that any medical bill submitted is

reasonable,” K.R.S. § 304.39-020(5)(a), construing it to mean that insurers could not “deny[]

medical treatment or bills based upon a paper review of the medical record” and could rebut the

presumption that care was reasonable only through litigation, Sanders, 569 S.W.3d at 928. That

interpretation broke new ground. State Farm had no obligation to predict this decision, particularly

when several trial courts had approved the practice and the appellate courts had not hinted it was

illegal.

Precedent since Sanders points the same way. Two other courts have held that pre-Sanders

paper reviews established a reasonable foundation for delaying benefit payments. See Byrd v.

Progressive Direct Ins. Co., No.3:20-cv-119-DJH-CHL, 2021 WL 1225961, at *3–4 (W.D. Ky.

Mar. 31, 2021); Hack v. State Farm Fire & Cas. Ins. Co., No. 3:20-CV-134-CRS, 2020 WL

4803284, at *4 (W.D. Ky. Aug. 18, 2020). In neither case did the plaintiff clear Civil Rule

12(b)(6).

As a matter of law, State Farm acted reasonably in using the paper-review process before

Sanders.

The policyholders push back. They claim that the district court ignored the Act’s goal of

“providing for prompt payment of needed medical care” for “motor vehicle accident victim[s].”

K.R.S. § 304.39-010(3). But no statute pursues its purpose at all costs. CTS Corp. v. Waldburger,

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Case No. 20-5930 Irvin et al. v. State Farm

573 U.S. 1, 12 (2014). And this purpose was not necessarily inconsistent with paper review

anyway. That the Act does not permit or prohibit paper reviews amounts to the kind of statutory

silence that the insurance company was entitled to fill with a reasonable interpretation.

The policyholders also contend that, because the insurer in Sanders was liable for

18 percent interest, State Farm should be too. But Sanders never mentioned this issue, let alone

analyzed the interest provision. If it silently approved an 18 percent interest award, it never

explained why nor indicated that the parties joined this debate. Perhaps it approved the award

because GEICO’s paper-review process had other flaws, such as these: It used physicians

unlicensed in Kentucky, employed surgeons to review therapy claims, and failed to provide

adequate credentials for the reviewing physicians. Sanders, 569 S.W.3d at 927. None of these

defects exists here. Absent any reasoning on this score, Sanders offers no handhold for showing

that State Farm acted unreasonably.

The policyholders add that pre-Sanders case law suggests that paper reviews did not

comply with the Act. But the cases show no such thing. Take Shelter Mutual Insurance Co. v.

Askew, 701 S.W.2d 139 (Ky. Ct. App. 1985). It did not address paper reviews. An insurer denied

coverage based on the company’s own review of the insured’s medical records, not a medical

professional’s review. Id. at 140. The court held that a trial expert’s testimony that he could have

provided cheaper treatment to the insured did not retroactively create a reasonable foundation for

the insurer’s initial decision to deny coverage. Id. at 141–42. That is not this case. As for Wilson

v. State Farm Mutual Automobile Insurance Co., No. 1999-CA-001438-MR (Ky. Ct. App. Feb.

25, 2000), and Allstate Insurance Co. v. McDowell, No. 2002-CA-001949-MR, 2003 WL

22319462 (Ky. Ct. App. Oct. 10, 2003), the Kentucky Court of Appeals rejected paper reviews

because they each were defective in those instances, not because they were defective in all

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instances. One review was unverified, Wilson, slip op. at 3, and one was based on inaccurate

information provided by the insurer, McDowell, 2003 WL 22319462, at *5. By holding particular

forms of paper review ineffective, Wilson and McDowell implied that the practice could

legitimately be used in other circumstances.

Two of the policyholders claim that their reimbursements did not include the requisite

12 percent interest. But the policyholders did not raise the point below and thus have forfeited it

here.

Last of all, the policyholders claim that the district court should have remanded their claim

under 28 U.S.C. § 1447(c), thereby eliminating jurisdiction for the district court to dismiss their

claims under Civil Rule 12(b)(6). They contend that claims for statutory interest and attorney’s

fees by themselves do not meet the Class Action Fairness Act’s $5 million amount-in-controversy

threshold. But the amount in controversy is set at the time of removal, and subsequent events that

“reduce the amount recoverable below the statutory limit do not oust jurisdiction.” St. Paul

Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 289–90 (1938). The same rule applies to the

Class Action Fairness Act. See Amoche v. Guarantee Trust Life Ins. Co., 556 F.3d 41, 51 (1st Cir.

2009); Rea v. Michaels Stores Inc., 742 F.3d 1234, 1237 (9th Cir. 2014). So even if there is “a

subsequent reduction of the amount at issue below jurisdictional levels, . . . a federal court will

keep a removed case.” Wisconsin Dept. of Corr. v. Schacht, 524 U.S. 381, 391 (1998); see also

14AA Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3702.4

(“[E]ven if part of [a] claim is dismissed . . . thereby reducing the plaintiff’s remaining claim

below the requisite amount in controversy, the district court retains jurisdiction to adjudicate the

balance of the claim.”). That is what happened here.

We affirm.

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