Insurers typically adjust (or propose to adjust) the policy limits on a homeowners’ policy every year to take into account changes in the cost of construction. This is intended to help insureds make sure that sufficient coverage is available if there is a total loss. At the same time, this can result in an increase in the policy limit, and an increase in premium, when construction costs go up with inflation. But some insureds sometimes believe that their insurer has gone too far, and has proposed or required a policy limit that significantly exceeds the actual cost of rebuilding their house from the ground up.  This issue is the subject of a class action in Ohio against State Auto, in which an Ohio federal court recently denied (in large part) a motion to dismiss. This is an issue and a case that I think the insurance industry at large will want to watch closely as it moves forward.

In Schumacher v. State Auto. Mut. Ins. Co., No. 1:13-cv-00232, 2014 U.S. Dist. LEXIS 130952 (S.D. Ohio Sept. 18, 2014), the plaintiffs allege that they bought their home for $234,000 in 2001. They have not made improvements to it and its market value, they allege, has remained about the same. They have been insured with State Auto for years, and they allege that State Auto has increased the policy limit substantially, to over $500,000 on the dwelling as of 2013, which they claim far exceeds what it would cost to rebuild or replace their home. Id. at *5-7. (One interesting aside here is that there are two different costs that a policyholder might want to take into account – the cost of rebuilding from the ground up on the same lot, and the cost of simply buying a similar, older replacement home nearby. Those costs may be quite different in some markets, and some people will want enough insurance to rebuild on the same lot, while others might prefer to buy enough insurance to buy a similar home elsewhere, although the land is not insured and not included in any loss payment.)

The court largely denied State Auto’s motion to dismiss.  It dismissed the breach of contract claim because all of the allegedly-improper conduct by State Auto occurred before each new policy was issued, and “[a]n act or omission that occurs before a contract is formed cannot later be evidence of a[n] alleged breach.” Id. at *15.  The tort and statutory claims, however, were not dismissed. The court found Ohio law applicable to those claims, regardless of where the plaintiffs resided, because the alleged misconduct occurred at State Auto’s headquarters in Ohio. Id. at *17. (This is contrary to some other decisions and has significant potential implications for class certification, if the choice of law determination remains in place.) The court found that the plaintiffs had plausibly stated a claim for breach of the implied covenant of good faith and fair dealing by alleging that State Auto had “conconcted a plot . . . to sizably increase their premium revenue by selling an overpriced and superfluous product to their insureds . . . .” Id. at *18. Based on similar allegations of a purported plan by State Auto to raise rates by raising policy limits, the court also denied the motion to dismiss with respect to the claims for fraud, negligent misrepresentation and violation of the Ohio Deceptive Trade Practices Act.

This case is definitely one worth watching.  Stay tuned.