In Re State Farm Fire & Casualty Co.

United States Court of Appeals
For the Eighth Circuit
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No. 16-3185
No. 16-3562
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In re: State Farm Fire and Casualty Company
lllllllllllllllllllllPetitioner/Defendant - Appellant
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Amanda LaBrier
lllllllllllllllllllllRespondent/Plaintiff - Appellee
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Chamber of Commerce of the United States; Liberty Mutual Fire Insurance
Company; Safeco Insurance Company of America; Lawyers for Civil Justice;
Allstate Insurance Company; American Family Mutual Insurance Company;
American Insurance Association; Property Casualty Insurers Association of
America;
lllllllllllllllllllllAmici on Behalf of Petitioner/Appellant
United Policy Holders
lllllllllllllllllllllAmicus on Behalf of Respondent/Appellee
Appeals from United States District Court
for the Western District of Missouri - Jefferson City
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Submitted: January 11, 2017
Filed: September 25, 2017
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Before WOLLMAN, LOKEN, and MURPHY, Circuit Judges.
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LOKEN, Circuit Judge.
A hailstorm struck Amanda LaBrier’s home in St. Louis, Missouri, damaging
the home’s exterior roof, siding, and gutters. LaBrier filed a property damage claim
with State Farm Fire and Casualty Company under the Coverage A - Dwelling section
of her State Farm Homeowners Policy. The policy provides “Replacement Cost”
property loss coverage, that is, “the cost to repair or replace . . . the damaged part of
[covered] property.” However, the policy’s Loss Settlement provisions state that,
“until actual repair or replacement is completed, we will pay only the actual cash
value at the time of the loss of the damaged part of the property . . . not to exceed the
cost to repair or replace the damaged part.” The policy does not define actual cash
value. State Farm provides insureds a “Building Estimate Summary Guide” that
explains, “Net Actual Cash Value Payment” means “[t]he repair or replacement cost
of the damaged part of the property less depreciation and deductible,” and defines
“depreciation” as “[t]he decrease in the value of property over a period of time due
to wear, tear, condition, and obsolescence.”
State Farm’s adjuster inspected LaBrier’s home, determined the dwelling had
suffered covered property damage, and estimated replacement cost by inputting each
damaged part into a computer program called Xactimate. The Xactimate estimate of
total cost to repair LaBrier’s home was $8,088.07. Consistent with State Farm’s
practice in Missouri at that time, Xactimate also estimated depreciation at $2,009.79
by multiplying each damaged item’s replacement cost by a depreciation factor that
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varied with the item’s age. State Farm subtracted this estimated depreciation and
LaBrier’s deductible ($1,421) from the estimated replacement cost and paid LaBrier
$4,657.28 for the actual cash value of the damaged property. In a statement attached
to the payment, State Farm explained, “[b]ased on our estimate, the additional amount
available to you for replacement cost benefits (recoverable depreciation) is
$2,009.79.”
Rather than seek an additional replacement cost benefit under the policy, or
challenge State Farm’s estimated actual cash value payment by an appraisal
proceeding or by an action in court -- remedies the policy expressly authorizes --
LaBrier paid a family friend $5,975 to repair her home and brought this putative class
action in Missouri state court, alleging that State Farm’s practice of deducting “labor
depreciation” from estimated replacement cost in determining actual cash value
breached the insurance contract. State Farm removed the case to federal court and
moved to dismiss. The district court denied the motion, concluding that “actual cash
value” and “depreciation” are ambiguous terms that must be construed in favor of
insureds under Missouri law and therefore State Farm breached the insurance contract
when it depreciated labor in estimating actual cash value. LaBrier v. State Farm Fire
& Cas. Co., 147 F. Supp. 3d 839, 846-47, 849-51 (W.D. Mo. 2015) (LaBrier I).
Based upon its decision denying State Farm’s motion to dismiss, the district
court ordered full discovery before a class was certified and appointed a special
master to supervise discovery disputes. After much wrangling over access to State
Farm’s claims-adjusting database and other issues, the special master in Special
Master Order No. 4 ordered State Farm to answer interrogatories asking it to identify
for all 144,900 putative class members (i) “labor depreciation that was actually
withheld,” (ii) the date labor depreciation was withheld, (iii) any labor depreciation
State Farm subsequently paid as replacement cost benefits, and (iv) any facts that
support State Farm’s affirmative defenses.
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The district court overruled State Farm’s objections to Order No. 4, concluding
that State Farm failed to establish that the Order caused an undue burden in light of
the discovery’s relevance and State Farm’s refusal to provide another method to
discover the information. LaBrier v. State Farm Fire & Cas. Co., 314 F.R.D. 637,
641-43 (W.D. Mo. 2016) (LaBrier II). State Farm petitioned for a writ of mandamus,
asking this Court to vacate what it alleges are overly-burdensome discovery orders.
On the day State Farm filed its mandamus petition, the district court certified a class
consisting of:
All State Farm Fire and Casualty Company . . . property insurance
policyholders who submitted a claim for structural damage to a property
in Missouri, and whose actual cash value . . . payment was reduced by
the withholding of labor depreciation, during the time period from
March 20, 2005 to the date of trial, inclusive.
The court excluded only insureds who were paid their policy limits and those whose
claims were the subject of appraisal or litigation. LaBrier v. State Farm Fire & Cas.
Co., 315 F.R.D. 503, 510-11 (W.D. Mo. 2016) (LaBrier III). We granted State Farm
leave to appeal the class certification, see Fed. R. Civ. P. 23(f), consolidated the
appeal with State Farm’s petition for a writ of mandamus, and now reverse.
I.
No class action may be certified unless the party seeking certification
“affirmatively demonstrate[s] his compliance with Rule 23.” Comcast Corp. v.
Behrend, 133 S. Ct. 1426, 1432 (2013) (quotation omitted). “Here, the district court
certified the class[] under Rule 23(b)(3), which requires finding ‘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.’” Powers v. Credit
Mgmt. Servs., Inc., 776 F.3d 567, 569 (8th Cir. 2015).
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“An individual question is one where members of a proposed class will need
to present evidence that varies from member to member, while a common question
is one where the same evidence will suffice for each member to make a prima facie
showing or the issue is susceptible to generalized, class-wide proof.” Tyson Foods,
Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1045 (2016) (quotation omitted). “What matters
to class certification . . . is not the raising of common ‘questions’ -- even in droves --
but, rather the capacity of a classwide proceeding to generate common answers apt
to drive the resolution of the litigation.” Wal-Mart Stores, Inc. v. Dukes, 564 U.S.
338, 350 (2011) (quotation omitted). This “preliminary inquiry . . . may require the
court to resolve disputes going to the factual setting of the case, and such disputes
may overlap the merits of the case.” Powers, 776 F.3d at 569 (quotation omitted); see
Comcast, 133 S. Ct. at 1432. To prove a breach of contract, LaBrier must show: (1)
the existence of a contract; (2) the rights and obligations of the parties; (3) State
Farm’s breach; and (4) the damages she suffered. See Kieffer v. Icaza, 376 S.W.3d
653, 657 (Mo. 2012). The preliminary predominance inquiry requires “rigorous
analysis” of whether “the same evidence will suffice for each member to make a
prima facie showing” that the insurance contract was breached, causing injury. Avritt
v. Reliastar Life Ins. Co., 615 F.3d 1023, 1029 (8th Cir. 2010) (quotation omitted);
see Comcast, 133 S. Ct. at 1433; Ebert v. Gen. Mills, Inc., 823 F.3d 472, 479-80 (8th
Cir. 2016).
On appeal, State Farm challenges the district court’s determination that
common issues predominate. In certifying the class, the district court noted (i) “the
overarching, undisputed, and common fact of State Farm’s practice of withholding
payment from all its insureds for the depreciated labor component,” and (ii) the
court’s prior resolution of “a central legal question . . . that the terms ‘actual cash
value’ and ‘depreciation’ as used in State Farm’s policy are ambiguous and must be
construed in favor of the insureds.” LaBrier III, 315 F.R.D. at 513. Therefore, the
court concluded, common questions predominate: “At a minimum, LaBrier has
presented facts and law that establish a prima facie claim for breach of contract for
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herself and the class . . . . [T]he theory of breach is the same for each class member --
State Farm wrongfully deducted labor depreciation from each [actual cash value]
payment.” Id. at 517. If we were to conclude, as we do, that State Farm’s method
of determining estimated “actual cash value” does not breach its replacement cost
contract, then there is no basis to certify a class of insureds who suffered unique,
individual covered losses, and therefore no basis to sustain the special master’s
burdensome classwide discovery orders. Accordingly, we will begin -- and ultimately
end -- with that issue.1
II.
The basic premise of traditional property insurance is the concept of indemnity.
The insured who suffers a covered loss is entitled to receive full, but not more than
full, value for the loss suffered, to be made whole but not be put in a better position
than before the loss. Policies that provide this level of coverage are universally
known as actual cash value policies. See, e.g., Travelers Indem. Co. v. Armstrong,
442 N.E.2d 349, 352 (Ind. 1982); 12 Couch on Insurance § 175.5 (3d ed. 2005 &
2017 Supp.). The limitation of property loss coverage to the insured’s actual loss
serves the public policy of preventing over-insurance, which can be an “inducement
to destroy property in order to procure the insurance upon it.” Daggs v. Orient Ins.
Co. of Hartford, 38 S.W. 85, 87 (Mo. 1896), aff’d, 172 U.S. 557 (1899).
In a standard property insurance policy, “damages are to be measured by the
difference between the reasonable values of the property immediately before and
immediately after the casualty.” Wells v. Mo. Prop. Ins. Placement Facility, 653
S.W.2d 207, 210 (Mo. 1983). “The value of the property . . . immediately before the
1
LaBrier argues that we should remand to the district court to resolve this
predominant, common question of contract interpretation. This contention is without
merit. Under Missouri law, we review the meaning of insurance policy language de
novo and need not give deference to the trial court’s interpretation. Porter v. Shelter
Mut. Ins. Co., 242 S.W.3d 385, 388 (Mo. App. 2007) (quotation omitted).
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loss is, of course, equivalent to the actual value of the property at the time of the
loss.” Id. at 214. “Thus, the insured bears the share of the loss resulting from
deterioration, obsolescence, and similar depreciation of the property’s value at the
time of the loss.” Dollard v. Depositors Ins. Co., 96 S.W.3d 885, 889 (Mo. App.
2002). Under Missouri law, “[a]ctual cash value means a depreciated sum, i.e., the
difference between the reasonable value of the property immediately before and
immediately after the loss.” Porter, 242 S.W.3d at 390, citing Wells and Dollard.
The district court erred in concluding that Missouri law does not define “actual cash
value” and therefore the term is ambiguous absent a definition in the policy. LaBrier
I, 147 F. Supp. 3d at 846.2
2
The district court rejected the Supreme Court of Missouri’s definition of actual
cash value in Wells because Wells “involved” statutes dealing with damage caused
by fire, Mo. Rev. Stat. §§ 379.140, 379.150, and we held that limitations in those
statutes do not apply when a loss is caused by risks such as a hailstorm, Cincinnati
Ins. Co. v. Bluewood, 560 F.3d 798, 803-04 (8th Cir. 2009). 147 F. Supp. 3d at 844-
45. That was a misreading of Bluewood, a case in which the policy defined “actual
cash value,” the district court instructed the jury in accordance with the policy
definition, and we rejected the insured’s contention that § 379.150 mandated a
different instruction. 560 F.3d at 802-04. In Wells, the Court concluded that an
insured who elects to take a cash payment is “entitled under § 379.150 [to] a sum
‘equal to the damage done on the property’ . . . [which] our courts have long held . . .
to be determined by the difference in value of the property immediately before and
immediately after the loss.” 653 S.W.2d at 214. Missouri courts have consistently
applied this principle in reviewing damage awards for real property losses resulting
from fire and other insured risks when the applicable policy did not contain a
different definition of actual cash value. See Warren Davis Props. V, L.L.C. v.
United Fire & Cas. Co., 4 S.W.3d 167, 173 (Mo. App. 1999) (sprinkler water
damage); Glasgow v. Cole, 168 S.W.3d 511, 516-17 (Mo. App. 2005) (partial fire
loss). If a claim requires valuing a real property loss, it may be reversible error not
to give mandatory jury instructions that adopt the “difference in value” standard in
Wells, MAI 4.02, and define “fair market value,” MAI 16.02. Under Missouri law,
“fair market value” and “actual cash value” are “substantially synonymous.” Pannell
v. Mo. Ins. Guar. Ass’n, 595 S.W.2d 339, 355 (Mo. App. 1980).
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While the term “actual cash value” has an unambiguous meaning under
Missouri law -- the difference in the fair market value of the damaged property
immediately before and after the loss -- it is a value that must be estimated.
Conflicting estimates must be determined by a jury, unless the parties agree as to the
amount of the damage or have it determined by an appraisal method agreed to in the
policy. See Dollard, 96 S.W.3d at 890. For example, if the insured installed a new
roof the day before a storm caused its total collapse, the immediately-before value and
the actual cash value of the loss will doubtless be the full cost paid to the contractor
to install the now-worthless roof (leaving aside other possible coverages such as loss
of use). But roofs deteriorate over time (some more than others), and under an actual
cash value policy the insured bears the share of the loss resulting from this
deterioration. Therefore, a reduction in the immediately-before value of the property
must be estimated. A “depreciation” deduction is the most common, but not the only
acceptable method of estimating the reduced fair market value of damaged property.
“Depreciation” is a concept with a well understood meaning -- “decline in an
asset’s value because of use, wear, obsolescence, or age.” Depreciation, Black’s Law
Dictionary (9th ed. 2004). Therefore, in Bluewood, we concluded that a policy
defining “actual cash value” as “replacement cost less a deduction that reflects
depreciation, age, condition and obsolescence” was unambiguous. 560 F.3d at 802.
As a means of estimating an asset’s value, the concept of depreciation is
unambiguous, the district court’s contrary conclusion notwithstanding. But the
method of calculating a depreciation deduction is subject to conflicting opinion as to
the reasonableness of the resulting estimate.
Black’s Law Dictionary lists no fewer than ten different depreciation methods
to estimate the decline in an asset’s value over time. All deduct depreciation from the
initial full cost of the damaged asset, because that was the insured’s investment. For
example, if the insured purchased a new roof at a fully-installed cost of $25,000
fifteen years before it was demolished by fire or other covered risk, and an expert
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opined that the roof had a twenty-five-year useful life when installed, the estimated
actual cash value of the roof immediately before the loss would be $10,000, using the
annual straight-line depreciation method. But unless the parties agreed to this
estimate (or this method of estimating), a jury could reject that estimate based on
other valuation evidence it found more probative. See, e.g., Sharaga v. Auto Owners
Mut. Ins. Co., 831 S.W.2d 248, 252-53 (Mo. App. 1992) (insured’s testimony as to
the value of real property before and after a covered loss can be sufficient evidence
supporting the jury’s damage award). As one commentator posed the issue:
Insurance law is not concerned with the estimated depreciation charged
off on the books of business establishment but rather with the actual
deterioration of a structure by reason of age and physical wear and tear,
computed at the time of the loss.
Note, Valuation & Measure of Recovery Under Fire Insurance Policies, 49 Colum.
L. Rev. 818, 823 (1949).
III.
By adhering to the core principle of indemnity, which limits the insured’s
covered loss to the value of the damaged asset at the time of the loss, actual cash
value policies work a hardship, particularly when the insured suffers a partial loss and
needs to repair or replace the damaged component with a more valuable new item in
order to restore use of the entire dwelling. As one court described this dilemma:
Since fire is an unwanted and unplanned for occurrence, why can’t the
owner of an older home buy insurance to cover the full cost of repair
even if those repairs make it a better or more valuable building? . . .
Instead of apportioning the cost of repair after a fire between the actual
cash value, to be paid by the insurer, and the betterment to be paid by
the insured, why can’t the policyholder simply pay a higher premium
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each year but not have to pay anything more to have his home fully
repaired in the event of fire?
Travelers v. Armstrong, 442 N.E.2d at 353. Spurred by post-World War II housing
shortages and inflation, the legislatures of many States authorized, and major property
insurers issued, policies that responded to this dilemma with replacement cost
coverage. Missouri did not enact legislation, but its courts enforced replacement cost
coverage provisions, with an important caveat reflecting the indemnity principle:
The purpose of the replacement cost coverage was to make funds
available that would enable plaintiffs to replace their destroyed or
damaged premises . . . notwithstanding that the value of those premises
before the loss had been lessened by depreciation. Plaintiffs were not,
however, entitled to more than the actual cash value of the destroyed or
damaged premises until repair, restoration or replacement of those
premises was completed.”
Miller v. Farm Bureau Town & Country Ins. Co., 6 S.W.3d 432, 438 (Mo. App.
2000); see Federated Mut. Ins. Co. v. Moody Station & Grocery, 821 F.3d 973, 977-
78 (8th Cir. 2016).
These judicial precedents establish that State Farm was obligated by Missouri
law to include an actual cash value payment option in its replacement cost coverage
policy, because actual cash value -- a true indemnity payment -- is all the law allows
an insurer to pay if the insured elects not to repair, even though she has paid an
increased premium for the additional benefit of replacement cost coverage -- a
repaired asset worth more than at the time of loss. Unless it contests coverage, State
Farm also has a contractual duty to efficiently determine and pay the estimated actual
cash value, in part to help the insured finance repair and replacement if she elects to
do so, since payment of the additional replacement cost coverage may not be made
until repairs are completed. To make the claims process work effectively for both
parties, the insurer’s claims adjuster needs to expeditiously estimate both the actual
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cash value it will initially pay and the replacement cost benefit it may ultimately pay,
and disclose those estimates to the insured. Again, unless the parties have agreed
otherwise, these estimates are not binding on the insured, even though State Farm has
agreed in the policy to make timely payments in accordance with its estimates.
Replacement cost insurance covers “the share of the loss resulting from
deterioration, obsolescence, and similar depreciation of the property’s value at the
time of the loss.” Dollard, 96 S.W.3d at 889. Replacement cost policies are often
referred to as covering “the cost of repair or replacement without deduction for
depreciation.” Alessi v. Mid-Century Ins. Co., Inc., 464 S.W.3d 529, 532 (Mo. App.
2015). But this formulation is imprecise -- what is depreciated to determine actual
cash value at the time of the loss is the asset’s full original cost, not its replacement
cost. Cf. Porter, 242 S.W.3d at 387 n.2. However, determining actual cash value by
depreciating replacement cost -- the method employed by State Farm in this case and
apparently by most property insurers nationwide -- is an eminently practical and
reasonable method for making an initial estimate of actual cash value at the time of
loss. The insurer’s adjuster must prepare an estimate of replacement cost, making that
figure readily available. Using it saves the insured from the potentially difficult and
burdensome task of determining the original cost of the damaged component.
Moreover, since inflation and other factors are likely to make the replacement cost
of a damaged component greater than its original cost, basing actual cash value on the
depreciated value of replacement cost produces a larger initial payment to the insured.
Not surprisingly, therefore, both LaBrier and the district court agree that “repair or
replacement cost minus depreciation” is a reasonable way to compute actual cash
value. LaBrier I, 147 F. Supp. 3d at 846. They assert that the method State Farm uses
to calculate replacement cost depreciation is a breach of contract every time State
Farm employs it.
In coming to this conclusion, the district court ignored what State Farm was
estimating -- the depreciated value of the damaged property at the time of loss. As
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previously explained, a more precise estimate of that value would depreciate the full
original cost of the asset to account for its decline in value over time. State Farm’s
depreciation method reasonably substitutes replacement cost for original cost because
that value is more readily available and to the insured’s advantage. But to avoid
further distorting the value estimate, State Farm depreciates the full replacement cost
of the asset, typically, the amount a contractor will charge to replace the roof and
other damaged parts, which includes the cost to install as well as the cost of materials.
In evaluating a depreciation method in this context, it matters not whether “labor” is
customarily depreciated in other business accounting contexts. The question is
whether depreciating what a contractor will charge to replace the partial loss is a
reasonable method of estimating “the difference in value of the property immediately
before and immediately after the loss.” Wells, 653 S.W.2d at 214. As the district
court never addressed this question, its decision in LaBrier I must be reversed.
An equally significant error was to ignore the fact that, while the policy’s
replacement cost coverage obligated State Farm to estimate actual cash value and
replacement cost and make an initial actual cash value payment, these estimates were
not agreed to by LaBrier and were therefore subject to review by a jury in a lawsuit
to determine the amount of her loss. As the Supreme Court of Minnesota observed
in responding to a labor-cost-depreciation question certified by a federal district
court, when the insurance policy does not define the term “actual cash value,”
embedded-labor-cost depreciation is one factor that the trier of fact may
consider and weigh among other factors to determine the actual cash
value of the damaged property . . . . We are not persuaded that
depreciation of embedded labor costs is so illogical that it may never be
considered. But whether embedded-labor-cost depreciation is logical or
helpful to the trier of fact is ultimately a question of fact, not law . . . .
Thus, arguments about whether labor-cost depreciation is “logical”
according to accepted methods of appraisal in a given case are best
presented to an appraisal panel or via expert testimony before a jury.
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Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780, 785 (Minn. 2016) (emphasis
in original). We agree with this analysis. More importantly, we conclude that the
Supreme Court of Missouri -- which will not accept certified questions of Missouri
law from a federal court -- would likewise conclude that this way of resolving the
issue is consistent with Missouri law as reflected in Wells and Missouri Court of
Appeals decisions applying Wells. Accordingly, although we do not rule out the
possibility that State Farm’s use of the Xactimate estimating methodology would
produce an unreasonable estimate of the actual cash value of some partial losses, this
issue may only be determined based on all the facts surrounding a particular insured’s
partial loss. Thus, there are no predominant common facts at issue, and the decision
certifying a class in LaBrier III must be reversed. See Halvorson v. Auto-Owners Ins.
Co., 718 F.3d 773, 779-80 (8th Cir. 2013). Likewise, the district court’s orders
upholding premature classwide discovery in LaBrier II must be vacated.
IV.
The orders of the district court denying State Farm’s motion to dismiss and
certifying a class under Rule 23(b)(3) are reversed, and the case is remanded with
directions to dismiss LaBrier’s complaint. In light of this disposition, State Farm’s
petition for a writ of mandamus is denied as moot.
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