Kramer v. Fergus Farm

10/13/2020
DA 19-0682
Case Number: DA 19-0682
IN THE SUPREME COURT OF THE STATE OF MONTANA
2020 MT 258JACK KRAMER and KEN KRAMER, individually and
on behalf of all others similarly situated,
Plaintiffs and Appellees,
v.
FERGUS FARM MUTUAL INSURANCE COMPANY,
Defendant and Appellant.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and For the County of Yellowstone, Cause No. DV-19-0360
Honorable Michael G. Moses, Presiding Judge
COUNSEL OF RECORD:
For Appellant:
Matthew B. Hayhurst, Christopher L. Decker, Boone Karlberg P.C.,
Missoula, Montana
For Appellees:
Sean M. Morris, Jesse C. Kodadek, Martin Rogers, Worden Thane, P.C.,
Missoula, Montana
Submitted on Briefs: July 22, 2020
Decided: October 13, 2020
Filed:
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__________________________________________
Clerk
Justice Jim Rice delivered the Opinion of the Court.
¶1 Plaintiffs-Appellees, Jack and Ken Kramer (Kramers) brought this action against
Defendant-Appellant, Fergus Farm Mutual Insurance Company (FFM), alleging breach of
contract and violation of Montana’s Unfair Trade Practices Act (UTPA), §§ 33-18-101,
et. seq., MCA. FFM appeals the order of the Thirteenth Judicial District Court,
Yellowstone County, granting class certification. See M. R. Civ. P. 23(f); M. R. App.
P 6(3)(d).
¶2 We restate the issues on appeal as follows:
1. Did the District Court abuse its discretion in its class certification by determining
that common questions of law predominate under M. R. Civ. P. 23(b)(3)?
2. Did the District Court abuse its discretion in its class certification by entering
incorrect conclusions of law and clearly erroneous findings of fact?
¶3 We affirm in part, reverse in part, and remand for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
¶4 On May 21, 2016, the Kramers’ house, detached garage, and small shed were
damaged during a hailstorm. At that time, Kramers owned a homeowner’s insurance policy
insuring their property, issued by FFM. Under the policy, for covered losses Kramers were
entitled to payment of “Actual Cash Value” (ACV),1 less a deduction for depreciation,
following an adjuster’s determination of the amount needed for repairs or replacement
1
Defined, in pertinent part, as the smallest of either “the cost to repair or replace the property with
materials of like kind and quality to the extent practical” or “the actual cash value of the [damaged]
property at the time of loss.”
2
value. Even if the insured chooses to forego repairs, FFM pays the ACV amount to the
insured. FFM paid Kramers $35,966.63 in ACV payments, which did not include an
amount for General Contractor Overhead and Profit (GCOP).2
¶5 Under the policy, if the insureds repair the property, they are entitled to payment of
Replacement Cost Value (RCV),3 which is essentially the amount withheld for depreciation
under the ACV payment. In a policy endorsement issued prior to Kramers’ loss, FFM
expanded the definition of “Replacement Cost Terms” to state, “[t]he smaller of the
following amounts is used in applying the ‘terms’ under Our Limit: 1) the cost to repair or
replace the damage on the same premises using materials of like kind and quality, to the
extent practical; or 2) the amount actually and necessarily spent to repair or replace the
damage.”
¶6 FFM follows an internal practice to pay GCOP if an adjuster determines a general
contractor is “reasonably necessary” for repairs. The District Court found, “this
‘reasonably necessary’ standard is widely used in the insurance industry when calculating
possible GCOP payments,” but the standard or practice is not stated in FFM’s insurance
policy. The parties disputed whether FFM’s “reasonably necessary” inquiry included
consideration of the “three-trade rule.” As used by the parties in the litigation, the
2
A general contractor bills GCOP for coordinating repairs among subcontractors. The District
Court found, in its class certification order, that the GCOP charge “typically reflects an amount
equal to 10% for overhead costs and 10% for profit combining for a total additional charge of
20%.”
3
Defined as “the cost to repair or replace the property with new property of equivalent kind and
quality to the extent practical, without deduction for depreciation.”
3
“three-trade rule” is a practice of determining that a general contractor and, accordingly,
payment of GCOP costs, is reasonably necessary when three trades are employed to
complete the repairs.
¶7 Kramers hired Jon Hooley of Big Sky Contractors to complete the repairs to their
property. Although FFM disputed Hooley’s general contractor service as reasonably
necessary for completion of the repairs, FFM agreed to include GCOP charges in the RCV
payment, on the condition that Kramers submit subcontractor invoices and photos of the
completed repairs. Kramers did not provide the requested documentation, and FFM
refused to pay GCOP charges.
¶8 In March 2019, Kramers filed an action against FFM alleging breach of contract and
violation of Montana’s UTPA. The complaint alleged FFM breached the insurance
contract with the Kramers and all other insureds by failing to include GCOP in the “cost to
repair or replace” the Kramers’ property. Further, Kramers alleged FFM “systematically
refus[ed] to pay its insureds the reasonable value of general contractor overhead and profit”
in violation of the UTPA, which constituted actual fraud and actual malice. The complaint
also sought certification of a class of insureds. FFM’s answer denied the complaint’s
assertions about the policy, asserting the policy “speaks for itself,” and denied it had
refused to pay profit and overhead, asserting the documentation requested from
subcontractors was “necessary to determine the amount, if any, owed under the terms of
the policy.”
4
¶9 After briefing and hearing, the District Court granted Plaintiffs’ motion for class
certification, stating that “[a]ll class members’ insurance policies contain similar loss
settlement provisions making these questions applicable as the policies do not directly
address the question of GCOP.” The District Court certified two classes, the “ACV Class”
and the “RCV Class,” as submitted by Plaintiffs. The ACV Class was defined as:
All Fergus Farm Mutual policy holders a) who made an actual cash value
claim for residential and associated structural loss under a farm owner or
homeowner policy; b) from March 28, 2009 to the present; c) where Fergus
Farm Mutual accepted liability, and its own records show that at least three
subcontractors would be required to complete the repairs; but d) where the
actual cash value payment did not include an additional 20% payment for
general contractor overhead and profit, unless the insured was paid that full
amount as part of the replacement cost value payment.
The RCV Class was defined as:
All members of the ACV Class a) who have replacement cost value policies;
b) received an initial actual cash value payment; c) went on to complete the
identified repairs and were paid the previously held back replacement cost
value payment; but d) who were not paid an additional 20% for general
contractor overhead and profit as part of their replacement cost value
payment.
The District Court reasoned that two questions predominate in the action:
1) whether the Defendant’s policy language regarding the insurer’s duty to
tender GCOP payments at both the ACV and RCV stages is so ambiguous as
to be unfair; and 2) whether the Defendant’s claim settlement practices with
regard to GCOP fees are or are not in conformance with those practices of
other Montana insurers as to be in violation of Montana’s Unfair Trade
Practices Act.
¶10 FFM appeals.
STANDARD OF REVIEW
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¶11 This Court reviews a district court order granting class certification for an abuse of
discretion. Knudsen v. Univ. of Mont., 2019 MT 175, ¶ 6, 396 Mont. 443, 445 P.3d 834(citing Sangwin v. Montana, 2013 MT 373, ¶ 10, 373 Mont. 131, 315 P.3d 279). “The
question is not whether this Court would have reached the same decision, but whether the
district court acted arbitrarily without conscientious judgment or exceeded the bounds of
reason.” Sangwin, ¶ 10 (citing Chipman v. N.W. Healthcare Corp., 2012 MT 242, ¶ 17,
366 Mont. 450, 288 P.3d 193). When reviewing a decision on class certification, this Court
affords the trial court the broadest discretion because it “is in the best position to consider
the most fair and efficient procedure for conducting any given litigation.” Sangwin, ¶ 10
(citing Jacobsen v. Allstate Ins. Co., 2013 MT 244, ¶ 25, 371 Mont. 393, 310 P.3d 452).
¶12 A district court abuses its discretion if its certification order is premised on legal
error. Mattson v. Mont. Power Co., 2012 MT 318, ¶ 17, 368 Mont. 1, 291 P.3d 1209(internal citation and quotation marks omitted). Likewise, when a district court’s decision
is not supported by findings as to the applicability of Rule 23 criteria, it is not entitled to
the traditional deference given to determinations of class status. Mattson, ¶ 17 (internal
citation and quotation marks omitted). To the extent that the ruling on a Rule 23
requirement is supported by a finding of fact, that finding, like any other finding of fact, is
reviewed under the clearly erroneous standard; and to the extent that the ruling involves an
issue of law, review is de novo. Jacobsen, ¶ 25 (internal citation and quotation marks
omitted).
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¶13 This Court is reluctant to interfere with discretionary orders in the early stages of
litigation. Diaz v. State, 2013 MT 219, ¶ 20, 371 Mont. 214, 308 P.3d 38. The trial court
has flexibility to modify its certification orders, which are made at an early stage in the
case, when the facts are disputed and discovery incomplete. M. R. Civ. P. 23(c)(1)(C);
Diaz, ¶ 20.
DISCUSSION
¶14 Class action lawsuits are an exception to the “usual rule that litigation is conducted
by and on behalf of the individual named parties only.” Mattson, ¶ 18 (citing Califano v.
Yamasaki, 442 U.S. 682, 700 –01, 99 S. Ct. 2545, 2557 (1979)). Class actions seek to
conserve resources and further economy—both judicially and that of similarly-situated
parties—by allowing the single litigation of common issues of fact and law. Knudsen, ¶ 7
(citing Roose v. Lincoln Cty. Emp. Grp. Health Plan, 2015 MT 324, ¶ 14, 381 Mont. 409,
362 P.3d 40). Class actions must meet four preliminary requirements of M. R. Civ. P
23(a)—numerosity, commonality, typicality, and adequate representation—and satisfy any
subsection of M. R. Civ. P 23(b) to be certified. Knudsen, ¶ 7 (citing Roose, ¶ 14).
¶15 The four requirements of M. R. Civ. P. 23(a) ensure the “named plaintiffs are
appropriate representatives of the class whose claim they wish to litigate and effectively
limit the class claims to those fairly encompassed by the named plaintiff’s claims.”
Mattson, ¶ 18 (citing Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 349, 131 S. Ct. 2541,
2550 (2011)) (internal quotations omitted). Once a party has demonstrated the preliminary
requirements of M. R. Civ. P. 23(a), then M. R. Civ. P. 23(b) must be satisfied, “which sets
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forth additional requirements depending on the type of class action sought.” Worledge v.
Riverstone Residential Grp., LLC, 2015 MT 142, ¶ 41, 379 Mont. 265, 350 P.3d 39 (citing
Mattson, ¶ 18). The party seeking class certification must prove “in fact” the requirements
of 23(a) and “satisfy through evidentiary proof” any individual provision of 23(b).
Comcast Corp. v. Behrend, 569 U.S. 27, 33, 133 S. Ct. 1426, 1432 (2013) (citing Wal-Mart,
569 U.S. at 350, 131 S. Ct. at 2551).
¶16 1. Did the District Court abuse its discretion in its class certification by determining
that common questions of law predominate under M. R. Civ. P. 23(b)(3)?
¶17 FFM’s arguments center on the certification requirement of predominance. M. R.
Civ. P. 23(b)(3). FFM argues “[t]he only question the putative class members might share
in this case is whether a general contractor’s services were ‘reasonably necessary,’ thus
requiring payment of GCOP,” which FFM contends is a question not capable of classwide
resolution because it is dependent upon the facts of each class member’s loss, and requires
individualized assessment of damages. FFM cites cases that have rejected class
certification for questions regarding “the necessity of a general contractor” or whether an
insurer “should apply the three-trade rule.” However, FFM’s arguments bypass its policy
contract, and focus on its internal practices, which are not stated in the policy, and which
FFM improperly assumes are valid. Rather, a threshold question here is whether FFM’s
internal practices are themselves consonant with the policy issued to its insureds, or
whether they constitute a breach of the policy. That is a question of law shared by all class
members, regardless of whether their individual repairs required three trades or otherwise
8
reasonably necessitated a general contractor, and is different than the questions rejected for
class certification in the cases cited by FFM.
¶18 Under M. R. Civ. P. 23(b)(3), the court must find that “questions of law or fact
common to the class members predominate over any questions affecting only individual
members.” As we have explained:
The predominance inquiry focuses on the relationship between the common
and individual issues and tests whether proposed classes are sufficiently
cohesive to warrant adjudication by representation. Rule 23(b)(3)’s
predominance and superiority requirements were added to cover cases in
which a class action would achieve economies of time, effort, and expense,
and promote . . . uniformity of decision as to persons similarly situated,
without sacrificing procedural fairness or bringing about other undesirable
results. Accordingly, a central concern of the Rule 23(b)(3) predominance
test is whether adjudication of common issues will help achieve judicial
economy.
Mattson, ¶ 39 (citing Vinole v. Countrywide Home Loans, Inc., 571 F.3d 935, 944 (9th Cir.
2009)).
¶19 In Sangwin, we reasoned that a common question of contractual breach could not
be answered unless individual assessments were first made to determine whether an
individual’s claims were properly denied and, thus, the common question was not
predominant. See Sangwin, ¶ 37 (“Because factual questions must be answered on an
individual basis before the plaintiffs will be in a position to establish liability, the
predominance requirement under Rule 23(b)(3) is not met”). Here, the reverse is true.
Before any individual inquiry would be necessary, FFM’s duty under the policy regarding
GCOP expenses must first be determined as a matter of law, including whether its internal
practices, unstated in the policy, constitute a breach of that duty.
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¶20 Further, individualized questions of damages typically do not negate class
certification as to contractual liability. Knudsen, ¶ 22 (internal citations omitted);
Worledge, ¶ 45 (citing 2 William B. Rubenstein, Alva Conte & Herbert Newberg, Newberg
on Class Actions § 4:54 206–09 (5th ed. 2011)). In Knudsen, this Court rejected the
University of Montana’s argument that individual questions of damage calculations
predominate over a common issue of liability. Knudsen, ¶ 22. Determining whether the
University was liable for allowing excessive fees and transmitting personal information
would “move the litigation forward and be answered the same for all class members,”
regardless of individualized calculations of damages. Knudsen, ¶ 24.
¶21 The circumstances here are similar, requiring a common threshold determination
about FFM’s duty to the insureds under the policy. About the issue of commonality, the
District Court concluded as follows:
a standard and uniform insurance policy applies to all members of the
would-be classes. These policies all contain settlement loss provisions which
were silent on the matter of the GCOP charges and how those costs would
be dealt with at the ACV or RCV stages in claim processing. The questions
of whether these policies conveyed a duty on the Defendant to include a
payment for GCOP in the ACV payment and RCV payment present and will
resolve a common issue at the heart of each claim raised by the class
members. Therefore, the Plaintiffs have satisfied their burden in
demonstrating commonality under Rule 23(a)(2).
¶22 As in Knudsen, an answer to this common question will move the litigation forward.
The question of FFM’s liability to insureds under the policy, including whether a
“reasonably necessary” inquiry is appropriate thereunder, predominates over individual
assessments that would be subsequently conducted. Likewise, FFM’s arguments
10
challenging commonality, superiority and typicality, which are also premised on the
ultimate necessity of individual assessments, are not persuasive. Clear and common issues
of law predominate the litigation and support certification of the class.
¶23 2. Did the District Court abuse its discretion in its class certification by entering
incorrect conclusions of law and clearly erroneous findings of fact?
¶24 During the course of its assessment of predominance, the District Court appeared to
rule on issues of law and fact that bear heavily upon, if not resolve, ultimate determinations
on the merits, while at the same time acknowledging that factual conflicts remain to be
resolved about these issues. Appellant argues the rulings were not only incorrect, but also
undermine the court’s granting of class certification.
¶25 Prior to certifying a class, the court must make a “rigorous analysis” that the
preliminary requirements of Rule 23 are satisfied. Sangwin, ¶ 15 (citing Comcast, 569 U.S.
at 33, 133 S. Ct. at 1432). This analysis frequently “overlaps” with the merits of the
underlying claim because class determinations are “enmeshed in the factual and legal
issues comprising the plaintiff’s cause of action.” Sangwin, ¶ 15 (citing Comcast, 569 U.S.
at 33-34, 131 S. Ct. at 1432). The court may look beyond the pleadings in assessing the
merits related to Rule 23 requirements. Sangwin, ¶ 15 (citing Comcast, 569 U.S. at 33,
131 S. Ct. at 1432). Two standards guide this analysis. First, the court must have “some
evidentiary basis” for finding each Rule 23 requirement as properly satisfied. Byorth v.
USAA Cas. Ins. Co., 2016 MT 302, ¶ 17, 385 Mont. 396, 384 P.3d 455 (citing Comcast,
569 U.S. at 33, 131 S. Ct. at 1432). Second, the court has broad discretion at the
certification stage. Byorth, ¶ 18 (internal citations omitted). This Court will defer to a trial
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court’s determinations regarding satisfaction of Rule 23 requirements if evidence supports
that determination. Byorth, ¶ 18.
¶26 The District Court concluded the policy was ambiguous with regard to the
processing of GCOP payments, citing conflicting testimony about FFM’s use of the
“three-trade rule”4 in the claim settlement process:
The evidence presented by Plaintiffs regarding the Defendant’s
representations during the claim settlement process initiated in May 2016
further supports this ambiguity. While the Defendant states that it does and
has included GCOP fees in ACV payments when those fees are reasonably
necessary but does not use a mechanical “three-trade rule” to determine that
necessity, the communications between Plaintiffs and the Defendant’s claim
representative repeatedly references the presence of three trades. . . . These
representations point to the prominence the number of trades involved plays
in the Defendant’s settlement practice and presents a factual dispute between
what the Defendant states is its practice regarding GCOP fees and what was
represented to Plaintiffs as to that practice. [(Emphasis added)].
Although the District Court acknowledged that factual conflicts remained regarding FFM’s
claim processing practices, it proceeded to declare the policy ambiguous, in part, because
of evidentiary conflicts. Then, reasoning that an ambiguity in a contract must be construed
against the drafter, the court held that the entirety of any “reasonably necessary” inquiry
conducted by FFM is invalid and must be discarded, without distinguishing its apparent
contrary finding that “[t]his ‘reasonably necessary’ standard is widely used in the insurance
industry when calculating possible GCOP payments.” While a court may consider the
merits of the underlying action in determining the propriety of class certification, we must
4
As noted by FFM, the “three-trade rule” is not mandated by any legal requirement. FFM further
contends the rule is not an industry practice.
12
conclude these particular conclusions reached by the District Court were “a bridge too far”
at this stage of the litigation.
¶27 We interpret an insurance policy, a question of law, according to its plain language,
giving terms and words their usual meaning and construing them with common sense.
Associated Dermatology & Skin Cancer Clinic of Helena v. Mountain West Farm Bureau
Mut. Ins. Co., 2017 MT 30, ¶¶ 10-11, 386 Mont. 298, 389 P.3d 1027 (internal citations
omitted). The Court must enforce insurance contracts as written. American States Ins. Co.
v. Flathead Janitorial & Rug Serv., 2015 MT 239, ¶ 12, 380 Mont. 308, 355 P.3d 735(internal citation omitted). “An ambiguity exists where the language of a contract, as a
whole, reasonably is subject to two different interpretations.” West v. The Club at Spanish
Peaks L.L.C., 2008 MT 183, ¶ 53, 343 Mont. 434, 186 P.3d 1228 (internal citation omitted).
“[W]hen a contract term is ambiguous, interpretation of the term involves determining a
question of fact regarding the intent of the parties to the contract.” Spanish Peaks, LLC,
¶ 53 (internal citation omitted).
¶28 While differing interpretations may render a contract ambiguous, factual disputes
about what those interpretations are—how the contract has been applied by the parties—
must be resolved as an initial consideration. Of course, “[t]he practical interpretation of a
contract, which the parties placed upon it by their course of conduct, is entitled to a great,
if not controlling influence in ascertaining what they understood by its terms.” First Nat’l
Props., LLC v. Joel D. Hillstead Trust, 2020 MT 211, ¶ 35, 401 Mont. 59, ___ P.3d ___
(internal citation omitted). Here, the identified factual conflicts about the parties’ conduct
13
bearing on the policy’s interpretation must be resolved before a determination of contract
ambiguity can be made, including whether the “reasonably necessary” inquiry conducted
by FFM by internal practice must be rejected as inconsistent with the policy.5
¶29 The District Court’s focus on ambiguity may have led to a lack of clarity within its
articulation of the predominate issues in the litigation. As noted above, the District Court
stated the predominate issues as:
1) whether the Defendant’s policy language regarding the insurer’s duty to
tender GCOP payments at both the ACV and RCV stages is so ambiguous as
to be unfair; and 2) whether the Defendant’s claim settlement practices with
regard to GCOP fees are or are not in conformance with those practices of
other Montana insurers as to be in violation of Montana’s Unfair Trade
Practices Act.
¶30 Given that factual conflicts remain about the interpretation of the policy, the first
predominate issue, as recognized under Issue 1 above, is whether FFM’s processing of
claims for GCOP costs constituted a breach of the insurance contract. The question of
ambiguity, as well as the factual contentions over industry practices, will certainly factor
into the resolution of this contract issue. The second predominate issue is whether FFM’s
claim settlement practices with regard to GCOP costs constituted a violation of Montana’s
UTPA, § 33-18-101, et. seq., MCA, as being “unfair or deceptive.” Again, the unresolved
factual conflicts regarding ambiguity and industry practice will affect the resolution of this
question.
5
FFM notes that, in invalidating the “reasonably necessary” inquiry, as well as the requirement of
subcontractor documentation, the District Court did not provide an alternative mechanism for
determining when and how GCOP is to be paid under the policy.
14
¶31 While FFM points to these errors to argue against class certification altogether, we
agree with the District Court that the identified remaining factual conflicts do not leave
Rule 23 unsatisfied. A sufficient factual basis, detailed by the District Court and set forth
in the factual and procedural ground herein, has been established to justify certification of
the classes. The class definitions themselves are premised upon objectively identifiable
claim characteristics that are uncontested.
¶32 With these corrections to the District Court’s certification order, we affirm in part,
reverse in part, and remand for further proceedings consistent herewith.
/S/ JIM RICE
We concur:
/S/ MIKE McGRATH
/S/ LAURIE McKINNON
/S/ BETH BAKER
/S/ JAMES JEREMIAH SHEA
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