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8th Cir. Holds Property Damage Insurer Improperly Withheld ‘Labor Depreciation’ from Claim Payments

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a trial court’s order certifying a class of Arkansas homeowners against an insurer that improperly withheld amounts for labor depreciation when paying covered property damage claims under their insurance policies.

A copy of the opinion in Stuart v. State Farm Fire and Casualty Company is available at:  Link to Opinion.

A putative class of Arkansas homeowners (“insureds”) sued their insurer alleging that between Nov. 21, 2008 and Dec. 6, 2013 the insurer improperly withheld labor depreciation costs when paying insureds for covered property damage under their insurance policies.

The insureds based their claims on an Arkansas Supreme Court ruling which held that an insurer may not depreciate labor when determining the actual cash value (“ACV”) “of a covered loss under an indemnity insurance policy that does not define the term ‘actual cash value.’”  A statute that permitted this practice after Aug. 1, 2017 later superseded this holding.

The insurer’s policy provided its insureds with replacement cost value (“RCV”) benefits for covered property damage.  The insurer agreed to first pay the ACV “of the loss of the damaged part of the property” before their insureds made any repairs so long as paying this benefit did not exceed the policy limit or the actual cost “to repair or replace the damaged part of the property.”

The insurer calculated the ACV payments by estimating “the amount it would cost to repair or replace damaged property” and then subtracting the depreciation.

The policy does not require the insured “to use this ACV payment to actually make repairs to the property.” If the insured elected not to repair the property damage or repaired the damage for less than the ACV payment, then the policy did not require the insured to return any overpayment to the insurer.  If the insured repaired the property and could document that they “incurred costs greater than the ACV payment,” then the policy required the insurer to pay the insured the actual RCV amount.

The trial court certified the class under Rule 23(b)(3) and this appeal followed.

As you may recall, before a trial court may certify a class under Rule 23(b)(3), it must find that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed. R. Civ. P. 23(b)(3).

The insurer argued that the insureds could not meet the predominance and superiority requirements because individual issues of liability and damages for each plaintiff precluded using common evidence to prove liability and damages.  The Eighth Circuit rejected this argument finding that the trial court did not abuse its discretion because whether the insurer violated its contractual obligations by depreciating labor when calculating ACV “is a common question well suited to classwide resolution.”

The insurer also argued that the Eighth Circuit’s recent ruling in LaBrier demonstrated that the insureds could not show predominance, as required.  In re State Farm Fire & Casualty Co. (LaBrier), 872 F.3d 567 (8th Cir. 2017).

A class of plaintiffs in LaBier sued the same insurer under Missouri law alleging that the insurer “breached its contracts by deducting labor depreciation from their ACV payments.”  Missouri law defined ACV “as the difference between the reasonable value of the property immediately before and immediately after loss.” The plaintiffs in LaBier did not demonstrate predominance because the insurance policy did not specify how to calculate ACV payments.  Thus, whether the insurer used a methodology that “produced a reasonable estimate of the difference in a property’s value before and after a loss was a question for the jury to determine on a case-by-case basis.”

The Eighth Circuit distinguished LaBrier because the policy here defined ACV payments as “the amount it would cost to repair or replace damaged property, less depreciation.”  The relevant Arkansas law at the time prohibited depreciating labor “when using this formula.”

Thus, certification under Rule 23(b)(3) was appropriate because “the only dispute is over including labor depreciation in the calculation, which is a discrete portion of the formula that is easily segregated and quantified.”

The insurer argued that class certification was inappropriate because plaintiffs that “completed their repairs at or below the cost of the ACV payment, or who ultimately received RCV payments,” lacked standing because they could not show an injury-in-fact.  The Eighth Circuit rejected this argument because “all individuals who received an improperly-depreciated ACV payment suffered a legal injury — breach of contract — regardless of whether the ACV payment was more than, less than, or exactly the same as the ultimate cost of repairing or replacing their property.”

The Eighth Circuit therefore found that this is a merit question that does not defeat certification because the trial court may amend the class definition at any time before judgment.

The insurer also argued that res judicata bars some of the plaintiffs’ claims because they are parties to a separate class settlement. The Eighth Circuit dealt with this by instructing the trial court to modify the certification order to exclude any plaintiffs that are parties to the settlement from the class definition.

Accordingly, the Eighth Circuit affirmed in part and reversed in part, the trial court’s judgment and remanded for further proceedings consistent with its opinion.

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Ernest Wagner practices in Maurice Wutscher's Commercial Litigation and Consumer Litigation groups, and leads the firm’s Insurance Recovery and Advisory group. Based in Chicago, he also supports the firm’s litigation matters in its Miami office. Ernest has substantial experience in various types of commercial and insurance recovery litigation. He has conducted more than 35 jury trials, and more than 150 arbitrations for plaintiffs and defendants. He has also successfully represented clients in numerous appeals, in various jurisdictions. Ernest earned his Juris Doctor from Emory University School of Law in Atlanta, Georgia, and his Bachelor of the Arts from the University of Iowa.

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