Ninth Circuit Finds Insurance Claims Adjusters Exempt from Overtime Under Fair Labor Standards Act

October 27, 2006

In an appeal handled by Gibson, Dunn & Crutcher LLP, the Ninth Circuit yesterday reversed a $52.5 million judgment awarded to Farmers Insurance Exchange claims adjusters who alleged that they had been misclassified as exempt and denied overtime. See In Re Farmers Insurance Exchange, Claims Representatives’ Overtime Pay Litigation, ___ F.3d ___, 2006 U.S. App. LEXIS 26671 (9th Cir. Oct. 26, 2006). The decision involves claims adjusters in seven (7) states – Colorado, Illinois, Michigan, Minnesota, New Mexico, Oregon and Washington – and will have broad implications for claims adjusters in various industries all across the country. As is frequently the case in matters handled by Gibson Dunn, leaders of several of the firm’s practice groups - in this case Theodore J. Boutrous, Jr., from the Appellate and Constitutional Law practice group and Deborah J. Clarke from the Labor and Employment practice group - teamed up to work on the appeal, which was argued by Mr. Boutrous. 

The Ninth Circuit, in a published decision authored by Judge Barry G. Silverman, held that Farmers’ claims adjusters, handling claims such as automobile damage claims, property damage claims, personal injury claims and combinations of these, were all exempt from the overtime requirements of the Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 201 et seq. The Ninth Circuit noted that "[f]or more than 50 years, the Department of Labor has considered claims adjusters exempt from the Fair Labor Standard[s] Act’s overtime requirement." The Court further noted that the DOL recently reiterated this view in 2004 when it promulgated the new "white collar" overtime regulations, one of which provides that "[i]nsurance claims adjusters generally meet the duties requirements for the administrative exemption" if their duties include activities such as inspecting property damage and determining liability. See 29 C.F.R. § 541.203. Although the new regulation was not in effect when the plaintiffs filed their suit in late 2001 and early 2002, the Ninth Circuit emphasized that the new regulation did not represent a change in the law but "is consistent with" existing law. Thus, the Court noted that the new regulation "bears directly on our analysis."

Despite ruling that some claims adjusters were exempt (e.g., personal injury adjusters) and others were non-exempt (e.g., automobile-damage adjusters), the District Court made numerous factual findings that plaintiffs failed to show were clearly erroneous.  The District Court found that all of the claims adjusters in the case: (1) determine whether the policy covers the loss; (2) recommend a reserve upon estimating Farmers’ exposure on the claim; (3) interview the insured and assess his or her (or others’) credibility; (4) advise Farmers regarding any fraud indicators or the potential for subrogation and underwriting risk; (5) negotiate settlements; (6) seek additional authority from their supervisors, which is granted 75-100% of the time, when the recommended settlement exceeds their established authority; and (7) communicate with opposing counsel and Farmers’ counsel.  In reviewing these factual findings, the Ninth Circuit stated that "[a]s far as we are concerned, that says it all."  According to the Court, "[t]he district court’s findings almost track word for word the language in § 541.203, and thus establish that [Farmers’] claims adjusters are exempt from the FLSA."

Of industry importance, the Ninth Circuit also noted that "the use of computer software to estimate claims does not eliminate the need for discretion and judgment any more than does resort to other reference works or to the opinions of appraisers and other experts."  The Ninth Circuit also rejected the adjusters’ argument that they were "production" workers who made "routine and unimportant" decisions that placed them outside the scope of the administrative exemption.  According to the court, the adjusters exercised discretion and independent judgment in "matters of significance," such that, for example, Farmers "bears the financial consequences of its adjusters’ coverage determinations, whether in the form of insufficient reserves or court judgments."  Notably, in its discussion of state-law issues, the Court put to rest any doubt that the FLSA requires only that employees’ work "include the exercise of discretion and independent judgment" rather than requiring that exempt employees regularly or customarily exercise independent judgment and discretion. 

With respect to the District Court’s creation of a $3,000 test (holding that some adjusters were non-exempt if more than 50% of their pay-outs in any given month were less than $3,000), the Ninth Circuit ruled that not only did it lack support in the record, it was, as both parties argued, practically unworkable.  Section 541.203 "says that adjusters are exempt if they determine coverage and liability, prepare estimates and negotiate settlements," but, the court noted, "[n]othing in the regulation suggests that ‘smaller’ claims – however that term would be defined – should be treated differently."  Significantly, the Court emphasized that certain decisions by claims adjusters even on claims of relatively low value may expose Farmers to liability and damages, thus requiring the exercise of sufficient discretion and judgment to render them exempt administrative employees.  Further, the Ninth Circuit recognized that under the $3,000 rule, Farmers would not know whether a particular claims adjuster was exempt "until months or years down the road when the claim is finally resolved, because only then would [Farmers] be able to calculate the average value of the claims on the adjuster’s desk during any given pay period."

The Farmers decision is an important recognition that "[t]he DOL’s position on claims adjusters . . . has been consistent over the years."  The Court discussed in detail various reports and opinion letters issued by the DOL dating back to 1940.  It showed great deference to the DOL’s interpretation of its own regulations and relied heavily on the Wage and Hour Division’s November 19, 2002 Opinion Letter enumerating the duties typically establishing that claims adjusters perform work that is administrative in nature.  In relying on the criteria set forth in the DOL’s 2002 letter, like the duties described in Section 541.203, the Ninth Circuit has adopted the agency’s clear guidance in this area.  The Farmers decision also demonstrates that it is the duties and responsibilities common to most claims adjusters that are determinative of the exemption, not the subject matter or dollar amount of the claims.

Gibson, Dunn & Crutcher’s Appellate and Constitutional Law Practice Group has played a leading role in a number of recent significant cases in the Supreme Court, and also handles appellate matters in federal and state courts throughout the country. The firm’s Labor and Employment Practice Group has particular expertise in ERISA, employee benefits, and other labor and employment matters. We also handle a range of other labor and employment litigation and counseling matters nationwide.

For more information on developments in the Supreme Court or courts of appeals, please contact the Gibson Dunn attorney with whom you work or any member of the firm’s Appellate and Constitutional Law Practice Group, or call practice group Co-Chairs Miguel A. Estrada (202-955-8500; [email protected]) or Theodore B. Olson (202-955-8500; [email protected]) in Washington, D.C., Theodore J. Boutrous, Jr. (213-229-7000; [email protected]) in Los Angeles, or Daniel M. Kolkey (415-393-8200; [email protected]) in San Francisco.

To learn more about the firm’s ERISA litigation, please contact the Gibson Dunn attorney with whom you work or William J. Kilberg (202-955-8573; [email protected]) or Eugene Scalia (202-955-8206; [email protected]) in Washington, D.C., or Labor and Employment Practice Group Co-Chair Deborah J. Clarke in Los Angeles (213-229-7903; [email protected]). 

© 2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.