A hot issue in recent years in property insurance class actions, an issue I’ve defended a number of cases on, is general contractor overhead and profit.  The issue is under what circumstances insurance companies are required to include in their estimates on property damage claims a fee for the services of a general contractor.  For those readers not well-versed in construction terminology, a general contractor is a person or company that typically does not perform any of the work themselves but is involved in selecting, coordinating and/or supervising the work of the tradespersons or companies that do the repairs.  They get paid a fee for that coordination and supervision work that is above and beyond the cost of the repairs.  Plaintiffs’ attorneys have taken the position that there is or should be a uniform “three trade rule” under which insurers must always include a general contractor fee if there are three or more “trades” involved in the loss (what exactly constitutes a “trade” in their view varies and is typically quite debatable).  Insurers frequently take the position that a general contractor fee is appropriate only if, on a case-by-case, totality of circumstances type of test, a general contractor is reasonably necessary in making the repairs.  The vast majority of courts have agreed with insurers on the standard and have denied class certification.  A few courts, largely in Oklahoma, have found class certification appropriate. 

In the new decision, National Security Fire & Casualty Company v. DeWitt, No. 1091225, 2011 Ala. LEXIS 196 (Ala. Nov. 18, 2011), the Alabama Supreme Court reversed a trial court’s grant of class certification.  The court held that, putting aside the parties’ debates about the plaintiff’s proposed “three trade rule” and what the insurer’s practices were, adjudicating the case would require evidence on numerous individual claims.  Predominance and superiority therefore were not satisfied.  Here is the heart of the opinion:

In reaching our decision to vacate the class-certification order, we are not addressing the merits of DeWitt’s argument that National Security engaged in a standard practice of not paying GCOP [general contractor overhead and profit] in cases where a general contractor was not hired or the merits of National Security’s assertion that its policy  was to pay GCOP when it was reasonably foreseeable that a contractor would be necessary and that it determined whether to pay GCOP on a case-by-case basis. Nor do we address the merits of the three-trade rule. Rather, we base our determination on the fact that the litigation of these issues will likely involve the presentation of evidence regarding numerous individual claims. Although this case will involve issues that are common to all class members, it is highly likely that it will also involve individualized evidence regarding whether it was reasonably foreseeable that the services of a general contractor would be necessary in each of those claims. Also, it is likely that the case will also involve evidence as to whether some of the estimates actually indicate that three or more trades would be involved in the repairs. Additionally, as the United States District Court for the Middle District of Florida noted in Mills, National Security would also be able to raise any affirmative defenses it might have against individual insureds. Finally, although DeWitt has presented a mechanical method for calculating the damages of each insured, as was the case in Mills an individual review of each claim file would still have to be undertaken to determine the damages in each case.

. . .

[One of the defendant’s witnesses] testified that [the case] would involve between 30,000 and 40,000 files and that each file contained between 20 and 40 pages. Therefore, a class action in this case could potentially involve National Security’s presenting evidence regarding thousands of individual claims. Therefore, in this case, common questions of law and fact do not predominate. 

The Alabama Supreme Court’s opinion conducts a thorough survey of the law that has developed around the country on this issue.  For that reason alone, it is a good read for those who are unfamiliar with overhead and profit class actions.  It seems likely this decision will now become one of the leading appellate decisions nationwide on this issue.  The principles articulated here are also of general applicability to many insurance claim-related class actions.  As I’ve noted before, a central question a court looks at on class certification should be an examination of how the case is going to be tried, by both sides, and whether it reasonably can be tried as one case or not.  That is the lens through which the Alabama Supreme Court viewed this case.