Mitchell v. State Farm Fire and Casualty Company, No. 3:17cv00170-M, 2018 WL 4572664 (N.D. Miss. Sept. 24, 2018)

Lorine Mitchell submitted a claim to State Farm for damage to her property from a storm. Under the terms of Mitchell’s policy, State Farm paid benefits in stages. First, State Farm would pay the actual cash value (ACV) of the damaged part of the property up to the lesser of the limit of liability and the cost of repair. Then, after repairs were complete, State Farm would pay any additional amounts necessary to cover costs of repair paid by the insured in excess of the ACV. Accordingly, after determining that the storm damage was covered by Mitchell’s policy, State Farm’s adjuster calculated the cost of repair and State Farm notified Mitchell that she would be receiving an ACV of $646.19. State Farm calculated the ACV by taking the replacement cost value ($3,246.42) and subtracting estimated depreciation ($1,600.23) and Mitchell’s deductible ($1,000). 

Mitchell contended that State Farm’s method of calculating the ACV resulted in a payment significantly lower than the amount she should have received under her policy. In particular, Mitchell complained that the calculation improperly included the costs associated with labor in the depreciation value despite the fact that labor is not susceptible to aging or wear and tear. She also specifically challenged State Farm’s practice of applying a depreciation estimate to certain line items that grouped together labor and materials, while not subjecting other line items with purely labor costs to any depreciation.  

Mitchell sued State Farm for breach of contract, negligence, and bad faith and sought a declaratory judgment for class certification. In support of her bad faith claim, Mitchell alleged that State Farm failed to fully inform her and members of the proposed class of their rights under their policies; failed to properly adjust claims; and, by depreciating labor costs, deprived insureds of the true amounts owed under their policies. Mitchell further alleged that State Farm (1) did not disclose its depreciation practice in the policy or the cost estimate and (2) grouped together labor and material costs in a way that made it difficult for an ordinary person to understand that both labor and material were being depreciated. 

In response, State Farm filed a motion to dismiss Mitchell’s entire complaint. The district court granted State Farm’s motion to dismiss Mitchell’s request for declaratory judgment, but denied the motion as to the breach of contract, negligence, and bad faith claims, finding that Mitchell asserted sufficient facts to make each of these claims plausible. Although the court did not opine on the ultimate likelihood of success of Mitchell’s bad faith claim, its decision suggests at least the possibility that a failure to disclose the methodology for calculating depreciation could constitute bad faith.