Property insurance policies typically provide for an initial payment on an actual cash value (ACV) basis, which is often calculated as the replacement cost less depreciation. After the repairs are completed, under many policies the insured can recover an additional payment up to the full replacement cost value (RCV) of the loss. Insureds have brought numerous class actions against insurers alleging that ACV payments on homeowners’ insurance claims were insufficient because particular items were not included in an ACV payment. If the named plaintiff’s claim is paid on a RCV basis and the policy provides that RCV payments are capped at the actual costs of repair, the insurer may have no obligation to make further payments regardless of whether there was an underpayment at the ACV stage. State Farm successfully obtained the dismissal of a putative class action in the Eastern District of Tennessee because the named plaintiffs’ claim was paid on an RCV basis and thus nothing more was owed even if there had been a deficiency in the ACV calculation.
In Stiers v. State Farm Insurance, No. 3:11-CV-437, 2012 U.S. Dist. LEXIS 87591 (E.D. Tenn. June 25, 2012), the complaint alleged that State Farm improperly failed to include general contractor overhead and profit in its ACV payment to the plaintiffs, and also improperly withheld from the ACV payment what State Farm described as “Paid When Incurred” items. It appears that the only “Paid When Incurred” item on the plaintiffs’ estimate was “roof tear off and felt.” Id. at *4. State Farm later made a RCV payment which included the roof tear off and felt, but did not include general contractor overhead and profit. Id. at *5.
State Farm’s policy provided that “when the repair or replacement is actually completed, we will pay the covered additional amount you actually and necessarily spend to repair or replace the damaged part of the property, or an amount up to the applicable limit of liability shown in the Declarations, whichever is less . . . .” Id. at *6. The court dismissed the breach of contract claim based on this provision, explaining that “the Stiers cannot claim a breach of contract relating to the PWI items in the May 23 ACV estimate when they ultimately received payment for those items” and “[e]ven if there is some dispute with the amount of the ACV payment, such as an alleged failure to include O&P, the actual costs of repair cap the insurer’s obligation when a replacement cost adjustment has been made.” Id. at *9-10 (emphasis added). The court further explained that, under the terms of the State Farm policy, “a full replacement cost payment will render moot any ACV underpayment . . . .” Id. at *13 (emphasis added).
This decision will be particularly useful to property insurers defending against putative class actions that assert underpayments of ACV. If a named plaintiff’s claim was paid on an RCV basis, the insurer should have a strong defense to that claim. Even if there is a named plaintiff who was paid only on an ACV basis, this decision provides a strong argument for reducing the size of any putative class that the named plaintiff could properly represent, so that, even if class certification were granted, any class would have to be limited to insureds paid on an ACV-only basis.