Lammert v. Auto-Owners (Mutual) Ins. Co.
| Decision Date | 22 December 2017 |
| Docket Number | No. 3:17–cv–00819,3:17–cv–00819 |
| Parties | Gregory J. LAMMERT, Jamie Lammert, Larry Reasons, and Susan Reasons, Plaintiffs, v. AUTO–OWNERS (MUTUAL) INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — Middle District of Tennessee |
David McMullan, Don Barrett, Don Barrett, P.A., Lexington, MS, J. Brandon McWherter, Gilbert Russell McWherter PLC (Jackson TN Office), Jackson, TN, T. Joseph Snodgrass, Larson King, LLP, St. Paul, MN, for Plaintiffs.
Charles C. McLaurin, Baker, John S. Hicks, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (Nash), Nashville, TN, Jeff Mason, Todd A. Noteboom, Zane Gilmer, Minneapolis, MN, for Defendant.
Chief Judge CrenshawUnder an insurance policy that (1) defines actual cash value as "the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss," or (2) states that "actual cash value includes a deduction for depreciation," can the insurer depreciate not only materials, but also a portion of the labor costs? Because the answer to that question is central to resolution of this case and has not been definitively answered by the Tennessee courts, and because the answer could affect thousands of policy-holders in this state, the Court will grant Plaintiffs' Motion to Certify Question to the Tennessee Supreme Court. (Doc. No. 46). The Court will also deny without prejudice the remaining pending Motions (Doc. Nos. 27, 32 & 35) because they all hinge to a greater or lesser extent on the answer to the certified question.
The named Plaintiffs in this putative class action are two married couples: Gregory and Jamie Lammert, and Larry and Susan Reasons. Both couples had property insurance through Auto–Owners. Both also sustained covered losses to their property and received (or were offered) payments for those loses that depreciated not only materials, but also labor.
The Lammerts own a dwelling and other structures in Nashville, Tennessee Those properties are insured under a standard form "Dwelling Insurance Policy" issued by Auto–Owners.
Hail damaged some of the Lammerts' residential buildings on May 10, 2016, and they filed a claim. Auto–Owners determined that coverage existed, and informed the Lammerts that the claim would be settled on an actual cash value basis. The policy at issue defined actual cash value as "the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss." (Doc. No. 28–3 at 12).
Auto–Owners calculated its obligation to the Lammerts to be $9,986.36. It did so by first estimating the cost to repair or replace the damage with new materials ($12,146.55) and then subtracting for depreciation ($2,160.19). Both labor and materials were depreciated for certain line items.
After receipt of the calculation, Cornerstone Public Adjusting contacted Auto–Owners on behalf of the Lammerts, and questioned the depreciation. Cornerstone was advised via email that "Auto–Owners standard operating procedure is to apply depreciation to the replacement of the damaged item, which would include labor and materials." (Doc. No. 28–6 at 2).
The Reasons own a home and other structures (including a pool house) in Jackson, Tennessee. Those structure were insured under Auto–Owners' standard form "Homeowners Insurance Policy." That policy, however, did not contain the same language as the Lammerts' policy defining actual cash value, but did provide: (Doc. No. 24–3 at 24).
On November 18, 2016, some of the structures on Reasons' property suffered wind damage. The Reasons also suffered losses on March 9, 2017, as a result of a hail storm that damaged their residence and four other structures. Auto–Owners accepted both claims.
With regard to the November 2016 claim, Auto–Owners calculated the cost to replace the wind-damaged roofs and then deducted an amount to account for pre-loss depreciation. In response to the Reasons' complaint about depreciation for labor costs, Auto–Owners wrote:
As to our applying depreciation to the full cost of repair to reach the actual cash value loss amount, we have always done this and know of no Tennessee law that would prohibit this from being done. It is a common practice with insurance carriers and complies with policy language to arrive at an actual cash value loss amount to be paid initially with recoverable depreciation to be paid once repairs have been completed.
With regard to the March 2017 claim, the Reasons' policy provided for full replacement cost coverage, but the Reasons opted for the actual cash value under the policy. Accordingly, Auto–Owners again calculated the costs to repair or replace the damage property, and then deducted pre-loss depreciation, including labor.
According to Plaintiffs, many insurers licensed to do business in Tennessee pay full labor costs to both remove and reinstall damaged building material when making an actual cash value payment. This would include Farm Bureau Insurance–Tennessee, the state's largest domestic property insurance company. Other insurers do not. In fact, Auto–Owners' standard operating procedure is to depreciate labor cost when calculating actual cash value, and this is accomplished through Xactimate®, a claims estimating software utilized by most insurance companies.
When using Xactimate®, the adjuster has the option to calculate deductions by changing the programs' default settings. With the click of a mouse, the adjuster can check boxes to depreciate for "material," "non-material," "removal," "overhead and profit," "sales tax," and any combination of these items. Thus, by clicking the box "depreciate removal" the adjustor depreciates the cost of removal labor; clicking the box "depreciate non-material" results in the labor for reinstallation being depreciated. The ensuing payments vary markedly, depending upon which boxes are checked.
To illustrate the point, Plaintiffs rely on a hypothetical claim for indemnity involving laminate flooring that was damaged by a sewer backup when two-thirds of its useful life remained. Under this hypothetical, and without depreciation for either removal of the old floor or reinstallation of the new floor, the actual cash value is $6,640.58. If, however, the cost of reinstallation labor is depreciated, the actual cash value becomes $4,414,83. If both reinstallation and removal labor are depreciated, the value drops $3,757.83. (Doc. No. 28 at 7–8).
Where a state supreme court has a certification process available, the decision of whether to certify a question to that court "rests in the sound discretion of the federal court." Lehman Bros. v. Shein, 416 U.S. 386, 391, 94 S.Ct. 1741, 40 L.Ed.2d 215 (1974). That discretion, however, must be exercised only after taking into account competing principles.
"[T]he federal courts generally ‘will not trouble our sister state courts every time an arguably unsettled question of state law comes across our desks." Pennington v. State Farm Mut. Auto. Ins. Co., 553 F.3d 447, 450 (6th Cir.2009) (citation omitted). In fact, "[t]he state court need not have addressed the exact question, so long as well-established principles exist to govern a decision." State Auto Prop. & Cas. Ins. Co. v. Hargis, 785 F.3d 189, 194 (6th Cir. 2015) ; see George v. Haslam, 112 F.Supp.3d 700, 715 (M.D. Tenn. 2015) (citation omitted) ( that "federal courts often answer state law questions, just as state courts answer federal questions" and hence "the practice of certifying questions can be overused and add unnecessary burden on the answering court, particularly when the certification involves routine, run-of-the mill legal questions").
Instead, "[n]ovel, unsettled questions of state law...are necessary before federal courts may avail themselves of state certification procedures.’ " Arizonans for Official English v. Arizona, 520 U.S. 43, 79, 117 S.Ct. 1055, 137 L.Ed.2d 170 (1997) (citation omitted). In such circumstances, "[t]aking advantage of certification made available by a State may ‘greatly simplif[y]’ an ultimate adjudication in federal court,’ " id., while at the same time "help[ing] build a cooperative judicial federalism," Lehman Bros., 416 U.S. at 391, 94 S.Ct. 1741.
The Tennessee Supreme Court specifically allows for the certification of questions, and "frequently accepts certified questions of law." Seals v. H & F, Inc., 301 S.W.3d 237, 241 n.3 (Tenn. 2010). In this regard, Rule 23 of the Rules of the Tennessee Supreme Court provides, in part:
The Tennessee Supreme Court may, at its discretion, answer questions of law certified to it by the Supreme Court of the United States, a Court of Appeals of the United States, a District Court of the United States in Tennessee, or a United States Bankruptcy Court in Tennessee. This rule may be invoked when the certifying court determines that, in a proceeding before it, there are questions of law of this state which will be determinative of the cause and as to which it appears to the certifying court there is no controlling precedent in the decisions of the Supreme Court of Tennessee.
Tenn. Sup. Ct. R. 23 § 1. Thus, for certification to be proper, (1) resolution of the question at hand must be "determinative of the cause" and (2) there must be "no controlling precedent" from the Tennessee Supreme Court. Both prongs are satisfied in this case.
Auto–Owners concedes that "if (as Plaintiffs contend) the question of whether Tennessee law prohibits labor-cost...
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