Labor Depreciation Class Action Update: Decisions on Class Certification

Robinson+Cole Class Actions Insider

I have had a busy summer and am overdue in updating readers on recent decisions in class actions against insurers involving the “labor depreciation” issue. The issue involves whether, when insurers estimate the “actual cash value” of damage to real property under a property insurance policy, depreciation is properly applied to the full estimated replacement cost (as insurers have done for decades) or must only be applied to the materials component of the replacement cost and not the labor component (as plaintiffs’ lawyers have argued). For more background on this issue, see my February 10, 2016 blog post and January 18, 2016 blog post. This is currently the hottest issue in class actions against property/casualty insurers. It likely will get even hotter after these recent decisions.

There have been three recent federal district court decisions granting class certification in these cases. The first one was Labrier v. State Farm Fire & Cas. Co., 2016 U.S. Dist. LEXIS 96476 (W.D. Mo. July 25, 2016). The court found that the commonality requirement was satisfied because of “the overarching, undisputed, and common fact of State Farm’s practice of withholding payment from all its insureds for the depreciated labor component of mixed items of loss,” and because of the central legal issue, which had been decided (see my January 18, 2016 blog post for discussion of that decision). The court also found that the requirement that common issues of law or fact predominate was satisfied because “[t]he record shows that State Farm used the same method for calculating the ACV payment for each member of the class regardless of the type of casualty suffered or any other factor.” Id. at *16, 30.  The court also relied upon the testimony of a State Farm adjuster, who testified that State Farm used the Xactimate software to prepare estimates, and he “could not recall ever adjusting a claim without an Xactimate estimate, or any instance in which Xactimate was inaccurate.” Id. at *33. The court ultimately found that “[t]he putative class members’ damages are data driven and can be mechanically calculated.” Id. at *47. State Farm has filed a petition for permission to appeal this decision in the Eighth Circuit.

Following the decision in Labrier, two decisions granting class certification were issued by Judge Susan O. Hickey of the Western District of Arkansas, in Dennington v. State Farm Fire & Cas. Co., Case No. 4:14-cv-04001 (W.D. Ark. Aug. 24, 2016) and Green v. American Modern Home Ins. Co., Case No. 4:14-cv-04074 (W.D. Ark. Aug. 24, 2016). In Arkansas, the state supreme court had previously ruled that depreciation of labor costs was improper, as explained in my January 18, 2016 blog post. In Dennington and Green, the court found commonality satisfied based on the common legal issue of whether it is proper to apply depreciation to the entire estimated replacement cost value (including both the labor and materials components thereof). The court also found that the predominance requirement was satisfied because, although individual file reviews would be required, the court did not believe that “mini-trials” would be necessary on individual claims. The court noted that, to the extent that the estimates on some claims may have been overly generous and thus no additional amount would be owed under the Arkansas Supreme Court’s decision, or the class members were otherwise fully compensated by what was paid, the evidence did not establish that this would apply to a “significant portion” of the putative class claims. The court also concluded that identifying class members who were paid full replacement cost could be determined by common proof (although the court did not explain how this could be done). In Green, the court found that the amount of labor depreciation could be determined from a search of the insurer’s data on approximately 65% of the claims, and that the need for a file-by-file review on the remainder was not a sufficient basis to deny certification. The insurers likely will petition the Eighth Circuit for permission to appeal.

Assuming the Eighth Circuit decides to review some or all of these class certification decisions — and I expect it will, given that there are many labor depreciation class actions pending in that circuit (including ones I am involved in defending) – the Eighth Circuit will be faced with deciding issues of substantial importance to the insurance industry. If review is granted, the case potentially could have broad implications for insurance class action litigation, at least in that circuit. The key focus is likely to be on commonality and predominance. On commonality, other circuits have ruled that a legal issue that has already been decided (such as the “labor depreciation” issue here) cannot be a proper common issue. See Pipefitters Local 636 Ins. Fund v. Blue Cross Blue Shield, 654 F.3d 618, 630 (6th Cir. 2011). On predominance, as the Supreme Court recently explained, it would violate the Rules Enabling Act to “giv[e] plaintiffs and defendants different rights in a class proceeding than they could have asserted in an individual action.” Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1048 (2016). If one of these “labor depreciation” cases were tried individually, it seems likely that the insurer would be allowed to put on evidence that nothing more is owed on the claim. This would go to liability, not necessarily or exclusively an affirmative defense. Assuming that the right to put on this type of evidence cannot be taken away from the insurer simply because the proceeding is a class action (as Tyson Foods and other cases explain), then a key question should become how many individual trials will be needed and whether the district court could feasibly conduct them. If it would be hundreds or thousands of individual trials, a class proceeding would seem to be unworkable.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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