Rios v. State Far Fire and Cas. Co.

• Decision Date: 09 January 2007
• Docket Number: No. 3:05-cv-00146.,3:05-cv-00146.
• Citation: 469 F.Supp.2d 727
• Parties: Luis R. RIOS, and Liovigilda R. Rios, et al., Plaintiffs, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — Southern District of Iowa

469 F.Supp.2d 727

Luis R. RIOS, and Liovigilda R. Rios, et al., Plaintiffs, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant.

No. 3:05-cv-00146.

United States District Court, S.D. Iowa, Davenport Division.

January 9, 2007.

COPYRIGHT MATERIAL OMITTED

Barbara C. Frankland, Rex A. Sharp, Gunderson, Sharp, Walke LLP, Prairie Village, KS, Jason D. Walke, Joseph R. Gunderson, David K. Basler, Gunderson, Sharp, Walke LLP, Des Moines, IA, Jeffrey S. Bittner, Bittner Law Office PC, Davenport, IA, for Plaintiffs.

James P. Gaughan, Joseph A. Cancila, Jr, Lawrence H. Heftman, Schiff Hardin & Waite, Chicago, IL, J. Michael Weston, Moyer & Bergman, PLC, Cedar Rapids, IA, for Defendant.

ORDER ON DEFENDANT'S COMBINED MOTION FOR JUDGMENT ON THE PLEADINGS ON PLAINTIFFS' CLAIMS FOR PREMIUM DAMAGES AND MOTION TO STRIKE AND DISMISS PLAINTIFFS' NATIONWIDE CLASS ALLEGATIONS

PRATT, Chief Judge.

Before the Court is Defendant, State Farm Fire and Casualty Company's ("State Farm") Combined Motion for Judgment on the Pleadings on Plaintiffs' Claims for Premium Damages and Motion to Strike and Dismiss Plaintiffs' Nationwide Class Allegations ("Combined Motion"), filed on March 10, 2006 (Clerk's No. 43). Instead of filing a Resistance, Plaintiffs, Luis R. Rios¹ et al. ("Plaintiffs") responded to State Farm's Combined Motion by filing a Motion to Stay (or. Deny Without Prejudice) State Farm's Partial Motions to Dismiss and for Certain Alternative Relief ("Motion to Stay") on May 12, 2006.² Clerk's No. 58. State Farm filed a Reply in support of its Combined Motion (Clerk's. No. 80) due to the contents of Plaintiffs' Motion to Stay concerning State Farm's Combined Motion. See Clerk's No. 165 (State Farm's Surreply Ex. A). Plaintiffs subsequently filed their Resistance on October 2006 (Clerk's No. 141), and State Farm filed its Surreply on November 16, 2006 (Clerk's No. 165). The matter is fully submitted. For the reasons discussed below, the motion is GRANTED in part and DENIED in part.

I. PROCEDURAL AND FACTUAL BACKGROUND

Plaintiffs' case is before the Court for the third time. Plaintiffs initially filed a Class Action Petition in the Iowa District Court in and for Scott County on August 27, 2004. State Farm removed the case to federal court on the basis of diversity of citizenship jurisdiction pursuant to 28 U.S.C. § 1332(a). The Court remanded the case back to state court for lack of jurisdiction because State Farm failed to demonstrate that the amount in controversy met the $75,000.00 statutory minimum. See Varboncoeur v. State Farm Fire & Cas. Co., 356 F.Supp.2d 935 (S.D.Iowa 2005). Subsequently, Plaintiffs filed a Motion to Amend their petition in state court. In their original petition, Plaintiffs limited class membership to citizens of Iowa, while the amended petition proposed to open class membership to affected individuals nationwide. Before the state court ruled on Plaintiffs' Motion to Amend, State Farm removed the case to federal court pursuant to the Class Action Fairness Act of 2005 ("CAFA"), codified in pertinent part at 28 U.S.C. § 1332(d). The Court then remanded the case, for a second time, back to state court. The. Court explained that, because the state court did not rule on Plaintiffs' Motion to Amend, the Court lacked jurisdiction to entertain, the amended petition. See Varboncoeur v. State Farm Fire & Cas. Co., No. 3:05-cv-00095, slip op. at 5-8 (S.D.Iowa Oct. 13, 2005). After the state court granted Plaintiffs' Motion to Amend, State Farm removed this case for the third and final time pursuant to § 1332(d) on December 8, 2005. Clerk's No. 1.

In their Third Amended Complaint,³ Plaintiffs, "for their individual claims as well, as in the form of a representative action," allege fraudulent inducement/rescission, unjust enrichment, and breach of contract. Third Am. Compl. ¶¶ 38-55. Plaintiffs allege that, on or about, 1996 through 2000 or early 2001, State Farm offered a "standard" homeowner's insurance policy for roof repairs. Id. ¶ 12. Under the standard policy, State Farm would pay policyholders the cost of roof repairs in two parts. State Farm would first pay the policyholder the cost of a roof "overlay"⁴ (less depreciation) upfront, and then pay the cost of a roof "tear-off"⁵ (plus depreciation) as a reimbursement once the policyholder completed the roof repair/replacement, and sought reimbursement for such repairs. Id. For example, if a policyholder incurred roof damage that was covered under the policy, and the total replacement cost of the roof damage was $3,000.00,⁶ then under the standard policy, State Farm would only pay the policyholder the cost to overlay the roof (hypothetically $1,800.00) upfront, and withhold the rest of the replacement cost (hypothetically $1,200.00), i.e., tear-off costs plus depreciation,⁷ until actual repairs were made on the roof. Thus, State Farm would pay the policyholder $1,800.00 as the overlay payment upfront (payment to lay new roof shingles on top of the existing roof shingles), and pay the remaining $1,200.00 as tear-off costs (the cost to tear off the damaged roof shingles to install a new single layer of roof shingles) only after the policyholder completed the roof repairs/replacements and sought reimbursement from State Farm. If the policyholder did not make the, tear-off repairs within the two-year time period provided under the policy, then State Farm would not have to pay the $1,200.00 tear-off costs to the policyholder. See id. Thus, under State Farm's two part payment ("holdback") system, a policyholder would recover the full value of the total roof replacement costs ($3,000.00) only if the policyholder initially incurred the tear-off costs ($1,200.00) to complete the repairs within two-years, and then sought reimbursement for the repairs. See id. Otherwise, the policyholder would, only be paid for the overlay costs ($1,800.00). See id. Apparently, this type of holdback claim practice for roof repairs is typical in the insurance industry. See id. Some states, however, apparently do not allow such holdback claim practice and require insurers to pay the total replacement costs ($3,000.00) upfront. See id ¶¶ 2 n. 1, 12-13.

On or about 2000, State Farm evaluated their "experience" in states where it offered total replacement coverage upfront as required by state laws, and determined that offering upfront total replacement cost coverage for roof repairs for all policyholders would yield a significant marketing opportunity. Id. ¶ 13. In essence, State Farm would no longer pay the overlay cost ($1,800.00) upfront and monitor the policyholder's repair process to reimburse the tear-off costs ($1,200.00) if the repairs were completed within two-years, but rather, State Farm would pay the total replacement costs of the roof repair ($3,000.00) upfront. State Farm, in effect, would have been the first major insurance company to offer upfront total replacement cost coverage nationwide. Id. State Farm concluded that agents could easily market the "upfront" policies, gain customer satisfaction, and save money by not having to monitor the often lengthy repair/replacement process for each insured with a roof damage claim. Id. State Farm believed that the benefits of marketing and implementing the "upfront" coverage outweighed the risks presented by any increased loss payments paid upfront. Id. Thus, in 2000 and early 2001, State Farm gained the approval of state regulators where required, and introduced upfront coverage for roof repairs ("Upfront Endorsement") nationwide. See id.

Unfortunately, State Farm experienced historic pay-out losses in 2001 and 2002. Id. ¶ 14: In 2001 alone, State Farm paid out approximately $115 million more in replacement cost claims than in previous years due to the Upfront Endorsement policies. Id. ¶ 15. In response, State Farm stopped selling Upfront Endorsement policies to new policyholders in some states, and took immediate steps to withdraw the Upfront Endorsement policies where feasible. Id. ¶ 16. However, State Farm was contractually bound to existing policyholders to provide the Upfront Endorsement for a year or more, depending on the life of the homeowner's policy and applicable renewal dates. Id. ¶ 17. Moreover, in many states, State Farm was required to obtain approval from state regulators to withdraw the Upfront Endorsement policies. Id. Instead of seeking regulatory approval to withdraw the Upfront Endorsement policies, according to Plaintiffs, State Farm continued to sell Upfront Endorsement policies, while never intending to honor the contracts, and fraudulently reverted to the holdback claim practice, i.e., the two part payment system. Id.

Specifically, in the summer of 2002, State Farm stopped paying the total replacement cost of roof repairs upfront and implemented the holdback claim practice in Wisconsin, North Dakota, South Dakota, Nebraska, Iowa, and Minnesota. Id. ¶¶ 3 n. 3, 18. That is, instead of paying for the total replacement cost of the roof damage ($3,000.00 from the hypothetical above) upfront pursuant to the terms of the Upfront Endorsement policy, State Farm reverted to the two part payment system and only paid for the overlay costs, less depreciation ($1,800.00) upfront and only reimbursed the policyholder for the tear-off costs, plus depreciation ($1,200.00) if the policyholder completed the repairs within two-years and sought reimbursement for such repairs. By reverting to the holdback claim practice, State Farm intended to save money on those policyholders that would not complete the necessary tear-off repairs to collect the holdback monies ($1,200.00), and to accrue interest on holdback monies for policyholders who did complete the necessary tear-off repairs by delaying their payment. Id. ¶ 18. According to Plaintiffs, State Farm "perpetrated this fraud on its policyholders from 2001 through 2004, effectively absconding with potentially over $100 Million Dollars per year from its Upfront Endorsement...