Back in May of 2011, I wrote on this blog about a new class action in California against Farmers involving claims of improper application of depreciation on property insurance claims, allegedly in violation of a California statute and regulation that govern application of depreciation (see my May 17, 2011 blog post).  In a similar case against State Farm, a California Superior Court judge has now certified a class.  This class certification ruling potentially could result in the filing of additional class action lawsuits on this issue, and insurers may want to review their practices with respect to the issue presented.

In Doan v State Farm General Insurance Company, Case No. 1-08-CV-129264 (Cal. Superior Ct., Santa Clara County, Mar. 18, 2013), the plaintiffs allege that State Farm failed to comply with a California statute and regulation with respect to adjustment of personal property (contents) claims, by failing to take into account the actual condition of contents items in calculating depreciation.  The plaintiffs allege that State Farm adjusters use a depreciation guide that measures depreciation based on age alone, without taking into account condition or even asking insureds about the condition of their items. 

The California statute and regulation at issue provide as follows:

In case of a partial loss to the structure, or loss to its contents, [actual cash value is] the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less. In case of a partial loss to the structure, a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.

Cal. Ins. Code § 2051(b) (emphasis added).

When the amount claimed is adjusted because of betterment, depreciation, or salvage, all justification for the adjustment shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment, depreciation, or salvage. Any adjustments for betterment or depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property. The basis for any adjustment shall be fully explained to the claimant in writing.

10 C.C.R. § 2695.9(f) (emphasis added).

In its ruling on class certification, the California Superior Court found that certification of an injunctive relief class was appropriate because “Defendant does not adequately address Plaintiffs’ showing that insureds are not provided with a written explanation of how Defendant calculates depreciations for purposes of § 2695.9(f), which requires that the basis for any depreciation adjustment ‘be fully explained to the claimant in writing.’”  (Slip op. at 13.)  With respect to the proposed damages class, the court found that State Farm did not make an attempt to seek information about the physical condition of contents items.  The court found it significant that, based on a small sample of claim files, the plaintiff’s expert concluded that somewhere between 65% to 92% of claim files would have some items that were depreciated solely based on the depreciation guide.  (Id. at 14.)  The court rejected State Farm’s argument that individualized inquiries would be necessary in determining the appropriate depreciation on individual items, on the theory that the plaintiffs could seek to recover only for items that were depreciated solely based on the depreciation guide (and if this turned out to be not doable, the class could be decertified later).  The court also certified a bad faith claim, explaining only that “[a]ssuming commonality on the use of the Depreciation Guide, the issue of bad faith would flow from it.”  (Id.)   The court further concluded that State Farm had failed to present specific evidence that individualized defenses would predominate.  (Id.)

While I expect this decision will be appealed, insurers writing property policies in California might want to pay close attention to this case.  Insurers may also wish to review how they are handling depreciation in California in light of the issues raised in this case.