Nelson v. Am. Family Mut. Ins. Co., Case No. 13–cv–607 (SRN/SER)

CourtUnited States District Courts. 8th Circuit. United States District Court of Minnesota
Writing for the CourtSUSAN RICHARD NELSON, United States District Judge
Citation262 F.Supp.3d 835
Parties Charles P. NELSON and Darlene F. Nelson, on behalf of themselves and all other similarly situated, Plaintiffs, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant.
Docket NumberCase No. 13–cv–607 (SRN/SER)
Decision Date26 June 2017

SUSAN RICHARD NELSON, United States District Judge

This matter is before the Court on Defendant's Motion for Summary Judgment on Plaintiffs' Individual Claims ("Def.'s Mot. for Summ. J.") [Doc. No. 221], Plaintiffs' Motion to Certify the Class ("Pls.' Class Cert. Mot.") [Doc. No. 208], and various Daubert challenges to expert witnesses made by both parties (collectively, the "Daubert Mots.") [Doc. Nos. 203, 214, 227, 232]. For the reasons set forth below, Defendant's Motion for Summary Judgment is granted, Plaintiffs' Class Certification Motion is denied as moot, and the Daubert Motions are denied as moot.

A. Facts

Plaintiffs Charles and Darlene Nelson (the "Nelsons") allege that they paid excessive insurance premiums on their home in Monticello, Minnesota (the "Nelson Home") because Defendant American Family Mutual Insurance ("American Family") failed to accurately estimate the proper replacement cost of their home from 2007 through 2010. On behalf of a putative class, they allege breach of contract, negligent misrepresentation, and violations of Minnesota's deceptive trade practices and consumer fraud statutes.

1. Estimated Replacement Costs and Insurance Coverage

To assist homeowners in determining the appropriate amount of property insurance coverage required for their homes, insurers attempt to estimate the replacement cost of the property in question. (See Decl. of Elizabeth R. Odette in Supp. of Pls.' Mot. for Class Cert. ("First Odette Decl.") [Doc. No. 215], Ex. 5 ("Olson Dep.") at 27–281 [Doc. No. 215–2].) The replacement cost of a property is the cost to construct a home with similar utility and function using modern materials and building standards. (Decl. of Deborah A. Ellingboe in Supp. of American Family's Mot. for Summ. J. ("First Ellingboe Decl.") [Doc. No. 225], Ex. 6 ("Strachota Dep.") at 133, 177; see First Ellingboe Decl., Ex. 7 ("Stockness Dep.") at 102, 107–08 [Doc. No. 225–7].) This is a measurement that is distinct from the reproduction cost or market value of the same property. (See Strachota Dep. at 133–34, 144–47, 177–78; Stockness Dep. at 104, 109.) However, estimating replacement costs "is not an exact science" for at least two reasons: (1) it is an attempt to anticipate a future event (i.e., what it would actually cost to rebuild a similar property in the event of a loss) that involves numerous unknown and regularly changing variables, (see Olson Dep. at 126–28; Stockness Dep. at 234–35; First Odette Decl., Ex. 7 ("Tutt Dep.") at 99–101 [Doc. No. 215–2] ); and (2) it involves assessments that are inherently subjective and vary depending on the assessor.

2. Auto Valuation Programs and the Quality Grade Input

To generate replacement cost estimates, insurers and appraisers use auto-valuation software or other written guides or indexes. Some examples are 360Value (produced by Xactware), Marshall Swift Valuation Service ("Marshall"), and Robert Morris. (Strachota Dep. at 47–48.) American Family has at all relevant times used 360Value. (Olson Dep. at 126.) The Nelsons' experts2 employ the Marshall program. (Strachota Dep. at 46–48, 79–80; Stockness Dep. at 19–20.) However, the Nelsons' experts express no criticism of 360Value or American Family's use of that valuation software. (Strachota Dep. at 48–52, 167–68; Stockness Dep. at 29–31, 111.) In fact, they were unfamiliar with 360Value until their involvement in this litigation, but they generally agree that an insurer's responsible use of this software is reasonable. (See Strachota Dep. at 48–50, 247–48, 289; Stockness Dep. at 30–31, 219–20.)

To produce an estimated replacement cost, an insurer/appraiser gathers information about the property3 —by talking to the property owner, inspecting the property, and/or researching public databases (e.g., tax records, Google images, building permits, etc.)—and enters it into the valuation software. (Decl. of Daniel R. Olson in Opp. to Pls.' Mot. for Class Cert. ("Olson Decl.") at ¶ 4 [Doc. No. 251–6]; Olson Dep. at 30, 38; see Strachota Dep. at 135–36, 154 (describing a similar system for the Marshall program); Stockness Dep. at 222–23 (same).) The software, with these property-specific inputs as well as stored data (e.g., building cost indexes based on geographic location, labor rates, environmental factors, etc.), then generates an estimated replacement cost. (Olson Dep. at 38, 53; First Ellingboe Decl., Ex. 26 ("360Value Product Overview") at Am. Fam. 1626–374 [Doc. No. 226–5]; see Strachota Dep. at 175–76, 228–29, 235 (describing a similar system for the Marshall program).)

Although the various valuation programs share many similarities, there are differences between them. Accordingly, they can generate different replacement cost estimates for the same property. For example, 360Value and Marshall can generate different replacement cost estimates for the same property despite using approximately the same property-specific information. (See Stockness Dep. at 151–53, 186; Strachota Dep. at 211, 221; First Ellingboe Decl., Ex. 5 ("Dismeier Dep.") at 221 [Doc. No. 225–5].) The precise reason for, and the extent of, these differences is unclear. (See Stockness Dep. at 151–53, 221.) However, there is no evidence in the record suggesting that 360Value's estimated replacement costs are unreliable or inaccurate due to some inherent defect or inaccuracy in the way that program processes the information it receives, or in its stored data. Rather, 360Value appears to be widely used and trusted within the insurance and appraisal industries. (See Strachota Dep. at 48–51, 167–68; Dismeier Dep. at 212–13.) Again, the Nelsons' experts do not dispute that 360Value is an acceptable way to generate replacement cost estimates. (See Strachota Dep. at 48–52, 167–68, 247–48, 289; Stockness Dep. at 29–31, 111, 219–20.)

Not surprisingly, the more information about a property entered into the valuation program, the more refined and precise the estimated replacement cost. (Olson Dep. at 121, 136–37.) However, some inputs are particularly consequential because they dictate assumptions the program makes about a property. Relevant here is the "quality grade" (sometimes referred to as the "quality of construction" or "condition") assigned to a property. (See Stockness Dep. at 197 (describing the quality grade as a "key characteristic" in estimating replacement costs).) The quality grade is meant to capture the general type and condition of various fixtures and finishes in a particular property, as compared to other homes of a similar age in that geographic area. (See 360Value Product Overview at Am. Fam. 1628; Strachota Dep. at 127–28, 171–73; Pls.' Mem in Opp. to Summ. J. ("Pls.' Mem. in Opp.") at 105 [Doc. No. 240].) For instance, 360Value uses the quality grade to set default assumptions—that may be manually altered—about the type and cost of certain construction materials (e.g., kitchen counter tops, bathroom tub/shower and vanity, flooring, exterior siding, interior paint, etc.). (360Value Product Overview at Am. Fam. 1628; First Ellingboe Decl., Ex. 8 ("2006 360Value Report") [Doc. No. 225–8] and Ex. 24 ("2010 Millennium 360Value Report") [Doc. No. 226–4]; Dismeier Dep. at 232; see Strachota Dep. at 171–73, 186–88, 199 (describing a similar system for the Marshall program); Stockness Dep. at 129, 202–04 (same).) The higher the quality grade, the higher the estimated replacement cost. (See Strachota Dep. at 199–200; Stockness Dep. at 90, 235–36; Pls.' Mem. in Opp. at 10.)

"360Value sets the initial Quality Grade based on Zip/Postal Code, Year Built, and Total Finished Square Feet. The Quality Grade is then adjusted as more information is gathered about the structure."6 (360Value Product Overview at Am. Fam. 1628.) The Nelsons' experts do not provide a precise explanation as to how a quality grade is assigned using the Marshall system. (See Strachota Dep. at 127–32, 155–63 (generally describing how the expert arrived at the quality grade for the Nelson Home in 2015).) However, they agree that determining the quality grade for a property involves the subjective judgment of the appraiser/insurer. (Strachota Dep. at 127–30, 154–55, 164, 247–48, 264–65; Stockness Dep. at 68, 87–89, 91, 119, 236–37.) As one of the Nelsons' experts explained: "The [condition or quality grade] is our interpretation of the physical presence of that property. It doesn't relate, really, to Marshall Valuation. Marshall Valuation doesn't make a judgment as to the physical condition of the property." (Strachota Dep. at 129; see id. at 155 ("I'm looking at the features about the property that cause me to make a judgment of whether we are an average home or we're a little better than average and [sic] we're good and so on.").) Appraisers, insurers, and property owners may legitimately disagree about what the "correct" quality grade is for a particular property, especially when the property contains characteristics that fall into different quality categories. (Strachota Dep. at 164; Stockness Dep. at 87–89, 198–99.) Of particular importance here, the Nelsons' experts do not offer any criticism of the...

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