Is State Farm Insurance using a clever device to reduce its payout — sometimes to zero — on thousands of Alabama property claims?
The insurance company denied unpaid claims and other wrongdoing, but agreed to settle a class-action lawsuit brought by Alabama homeowners. Policyholders who want to object to the settlement have until August 24. A final approval hearing is scheduled for September 23 in federal court in Mobile, Alabama.
In Annie Arnold et al vs. The State Farm Fire and Casualty class of plaintiffs alleges that between 2011 and 2017, the insurance giant systematically amortized the cost of labor and other intangibles to repair the insured’s property. In some cases, depreciation reduced the bill so much that the cost fell below the homeowner’s deductible.
Amortization is not allowed under the policies and intangible costs cannot be amortized anyway, the lawsuit says.
“The stipulation and settlement are preliminarily approved as fair, adequate and reasonable, and Plaintiff’s and additional class representatives’ motion for preliminary approval of the settlement is granted in all material respects, subject to further consideration at the final approval hearing,” U.S. District Judge Terry Moorer writes in his order.
A State Farm public affairs official released a statement regarding the settlement: “While we are confident that we are honoring our commitment to our policyholders and believe that we would have ultimately prevailed in court to avoid additional legal costs and uncertainty, we we decided that the settlement in this case was in the best interest of our current and past policyholders.”
The dollar amount of the settlement agreement was not disclosed, nor was the estimated number of policyholders in the class. But the plaintiff’s attorneys’ fees will be capped at about $9 million, suggesting the total payout could be roughly three or four times that amount. If 5,000 policyholders are in the class, the payout could average $7,200 each.
Attorneys for the plaintiffs declined to comment, and attorneys for State Farm could not be reached Thursday. But the lawsuit and the insurer’s response to the complaint explain the scenario.
Annie Arnold said her home in Selma, in central Alabama, was damaged in 2013. State Farm paid her actual cash value but depreciated the repair labor, leaving the homeowner undercompensated and unable to “collect the pieces during a period of great need and tremendous stress,” her lawyers said in the lawsuit.
A State Farm regulator found Arnold’s house suffered a covered loss of $95,720, including labor and materials to restore. After deducting a $2,000 deductible and $21,486 in depreciation, the insured’s payment was $72,233.
The suit gave the following example of the depreciation practice: In replacing gutters, State Farm estimated the cost would be about $106 for materials and labor. But after amortization, the payout was only $64, the suit says.
Alabama law allows the insurer to depreciate the value of construction materials, but does not allow the cost of labor to depreciate, the suit notes. Materials used in the repair or replacement of damaged property, such as roofing shingles or metal, decrease in value over time due to wear and tear,
obsolescence and age, the lawsuit says, cited by Black’s Law Dictionary. “As such, these are depreciable assets. In contrast, labor is not subject to aging or wear and tear. Its value does not diminish with time.”
The practice is widespread across the state, the plaintiffs said.
“As a result … by amortizing labor costs from its ACV calculations throughout Alabama, State Farm engaged and continues to engage in a systematic and unlawful pattern of underpaying insurance claims,” the complaint alleges.
State Farm disagreed that labor costs were not depreciable and denied the charges.
More information about the settlement can be found on the claims administrator’s website here.
This isn’t the first time State Farm has been accused of artificially reducing claims payouts. In March, policyholders in Illinois filed a class-action lawsuit against State Farm Automobile Insurance Co., alleging the insurer arbitrarily applied a “typical negotiation adjustment” to improperly reduce the value of a car deemed a total loss in an accident.
State Farm instructed its appraisers to include the adjustment, which reduced the payout by 4% to 11%, the suit alleges. A California lawsuit in 2008 required the insurer to stop using the tactic in that state, the complaint noted.
Other insurance companies have engaged in similar practices, regulators said.
In Georgia, the state insurance commissioner last spring ordered auto insurers to stop understating total vehicle tax amounts. Some carriers paid the actual value of the vehicle, but based the sales tax, which is also owed to the insurer, on a lower value calculated from a combination of retail and wholesale prices.