Hicks v. State Farm Fire & Cas. Co.
| Decision Date | 10 July 2020 |
| Docket Number | No. 19-5719,19-5719 |
| Parties | Susan HICKS ; Don Williams, Plaintiffs-Appellees, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Defendant State Farm Fire and Casualty Company appeals the district court's ruling certifying a class of Kentucky homeowners who allege that State Farm improperly withheld labor depreciation from payments due to them under their insurance policies. Because the district court did not abuse its discretion in certifying the class, we AFFIRM the class certification order and REMAND for further proceedings.
State Farm and named Plaintiffs Susan Hicks and Don Williams entered into replacement-cost homeowner insurance contracts. State Farm's standard-form policy provides a two-step settlement process, obligating the insurer to pay for property damage. First, before the insured makes any repairs, State Farm must pay the "actual cash value at the time of the loss of the damaged part of the property," up to the policy's liability limit, "not to exceed the cost to repair or replace the damaged part of the property." The "actual cash value" (ACV) is calculated under the policy by estimating the amount it will cost to repair or replace damaged property and subtracting depreciation and the deductible. Hicks v. State Farm Fire & Cas. Co. , 751 F. App'x 703, 707–08 (6th Cir. 2018) (). If a policyholder owned a house with a ten-year-old roof that was destroyed by hail, "it is not feasible" for the insurer "to buy a ten-year-old roof (or ten-year-old roofing materials) to install on an existing building," id. at 709 ; thus, insurers subtract depreciation to arrive at ACV estimates.
During the class period, State Farm determined the ACV first by sending an adjuster to inspect the damage and estimate the reconstruction cost. Id. at 704. Using Xactimate, software State Farm has exclusively used since 1990, State Farm then input the adjuster's reconstruction cost estimate—the "replacement cost value" or RCV—and depreciated costs for both materials and labor. Id. Xactimate produced an ACV calculation (RCV minus material and labor cost depreciation), subtracted the insured's deductible, and then State Farm paid that Xactimate estimate to the insured.
Insureds did not have to spend this ACV payment or make repairs on their property; if they made no repairs or made repairs for less than the ACV payment, they did not have to return any of the ACV payment to State Farm. If an insured made repairs and incurred costs exceeding the ACV payment, however, the individual could seek further payment from State Farm. In this second stage, the insured could seek repayment of replacement cost benefits based on documentation showing the repairs made and the costs incurred.
Fires destroyed Plaintiffs’ homes in 2014. Id. at 704. State Farm accepted coverage and issued ACV payments to Plaintiffs. Using Xactimate, State Farm estimated Williams's RCV as $206,068.88, including material and labor costs; subtracted Williams's $500 deductible, $40,627.34 for depreciation of materials and labor, and $8,125.54 for "general contractor overhead & profit on recoverable and non-recoverable depreciation"; and issued a $156,316.00 ACV payment.
Williams chose not to rebuild his home and instead purchased a new home for $75,000. He did not need to return any of his ACV payment, and he recovered none of the depreciated costs. State Farm used Xactimate to estimate Hicks's RCV as $273,306.97, including costs for materials and labor; subtracted Hicks's $500 deductible, $60,751.32 in depreciation of materials and labor, and $12,150.68 for "general contractor overhead & profit on recoverable and non-recoverable depreciation"; and issued Hicks a $199,904.97 ACV payment. Hicks repaired her home and later recovered the withheld depreciation.
Plaintiffs filed this putative class action, alleging that their ACV payments were miscalculated because State Farm, in violation of Kentucky law, included labor costs in its depreciation deduction. State Farm moved to dismiss Plaintiffs’ contract claims, which the district court denied, concluding that State Farm could only depreciate costs for materials, not labor, under Kentucky law.
State Farm filed its first appeal. We affirmed, holding that in an insurance contract that incorporates Kentucky's "replacement cost minus depreciation" formula, the insurer cannot depreciate costs of labor when determining ACV payments. 751 F. App'x at 711. "A layperson confronted with State Farm's policy," which incorporated Kentucky's ACV formula, "could reasonably interpret the term depreciation to include only the cost of materials" and not the costs of labor. Id. at 709. And Kentucky law dictates that courts resolve ambiguity in insurance contracts in favor of the insured. Id. Thus, under Kentucky law, it was improper for State Farm to subtract depreciated labor costs from Plaintiffs’ ACV payments.
On July 25, 2015, State Farm changed its practice to conform to the district court's decision. It also created a program to send refunds to those who had received ACV payments between March 25, 2015 and July 25, 2015, the gap between the district court's decision on labor depreciation and the date State Farm stopped deducting labor depreciation costs. State Farm manager John MacMillan, who oversaw the refund program, explained that the process involved finding those claimants who had not already been reimbursed for depreciation and unchecking a box in Xactimate so that "the parameters on the estimate would ... no longer be depreciating" labor costs. (Sealed R. 115-3, MacMillan Dep., PageID 4432, 22:12-23:11) For the 1,854 claimants that State Farm identified as needing refunds during that period, it simply changed the Xactimate parameters for calculating the claimants’ ACV payments (by unchecking a box) so that labor depreciation was no longer subtracted from their RCV estimates. The corrected formula was a mouse-click away, as reflected in this screenshot of Xactimate's depreciation options:
Depreciation Options
[?] Depreciate Material
[?] Depreciate Non-Material
[?] Depreciate Removal
[?] Depreciate Overhead and Profit
[?] Depreciate Sales Tax
After Xactimate revised the estimates using the updated formula (RCV – material costs depreciation), State Farm issued payments to the insureds to refund the previously depreciated labor costs. No one at State Farm questioned the accuracy of the disbursed payments, and MacMillan testified that he was pleased by the program's efficiency. State Farm records show that it took an average of "15 minutes" to complete each review. Most policyholders refunded by the program received payments of less than $1,000, and many received payments for amounts less than the fee for filing suit in state court.
The district court held a hearing on Plaintiffs’ pending motion for class certification in which Plaintiffs proposed calculating damages with the following formula:
DAMAGES = (WITHHELD LABOR DEPRECIATION AMOUNT NOT RESULTING IN TOTAL CLAIM EXCEEDING POLICY LIMITS - RECOVERED LABOR DEPRECIATION) + PREJUDGMENT INTEREST
The inputs used in this damages formula, save "prejudgment interest," are the same inputs State Farm used (by unchecking a box in Xactimate) to refund insureds for depreciated labor costs during the gap period.
The district court granted the motion for class certification, amending the class definition as follows:
All persons and entities that received "actual cash value" payments, directly or indirectly, from State Farm Fire and Casualty Company ("State Farm") for loss or damage to a dwelling or other structure located in the Commonwealth of Kentucky, such payments arising from events that occurred from February 28, 2013 through July 25, 2015, where the cost of labor was depreciated. Excluded from the class are: (1) all persons and entities that received payment from State Farm in the full amount of insurance shown on the declarations page; (2) State Farm and its affiliates, officers, and directors; (3) members of the judiciary and their staff to whom this action is assigned; and (4) Plaintiffs’ counsel.
(R. 191, Order, PageID 8263) In this second appeal, State Farm challenges the certification order.
A "district court has broad discretion to decide whether to certify a class." Glazer v. Whirlpool Corp. (In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig.) , 722 F.3d 838, 850 (6th Cir. 2013). Appellate review of a certification order is "narrow" and "very limited." Id . (quoting Olden v. LaFarge Corp., 383 F.3d 495, 507 (6th Cir.2004) ). We will "reverse the class certification decision in this case only if [State Farm] makes a strong showing that the district court's decision amounted to a clear abuse of discretion." Id . "An abuse of discretion occurs if the district court relies on clearly erroneous findings of fact, applies the wrong legal standard, misapplies the correct legal standard when reaching a conclusion, or makes a clear error of judgment." Zehentbauer Family Land, LP v. Chesapeake Expl., L.L.C. , 935 F.3d 496, 502 (6th Cir. 2019).
A party seeking class certification must demonstrate compliance with Federal Rule of Civil Procedure 23. Wal-Mart Stores, Inc. v. Dukes , 564 U.S. 338, 350, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011). To do so, the putative class must meet Rule 23(a) ’s "four requirements—numerosity, commonality, typicality, and adequate representation." Id. at 349, 131 S.Ct. 2541 ; Fed. R. Civ. P. 23(a). And the...
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