State Farm Settles Alabama Class Action Charging it Underpaid Claims

Did State Farm Insurance employ a clever device to reduce its payout – sometimes to zero – on thousands of property claims in Alabama?

The insurance company has denied underpaying claims and other wrongdoing, but has agreed to settle a class-action lawsuit brought by homeowners in Alabama. Policyholders who want to object to the settlement have until Aug. 24. A final approval hearing is set for Sept. 23 at the federal courthouse in Mobile, Alabama.

In Annie Arnold et al vs. State Farm Fire and Casualty, the class of plaintiffs alleged that between 2011 and 2017, the insurance giant systematically depreciated the cost of labor and other non-material costs on repairs to insureds’ property. In some cases, the depreciation reduced the bill so much that the cost fell below the homeowners’ deductible amount.

The depreciation was not allowed under the policies and non-material costs cannot be depreciated, anyway, the lawsuit said.

“The stipulation and settlement are preliminarily approved as fair, adequate, and reasonable, and the motion of plaintiff and additional class representatives for preliminary approval of the settlement is hereby granted in all material respects, subject to further consideration at the final approval hearing,” U.S. District Judge Terry Moorer wrote in his order.

A State Farm public affairs official released a statement about the settlement: “While we are confident that we upheld our commitment to our policyholders and believe we ultimately would have prevailed in court, to avoid further litigation expenses and uncertainty, we determined that settlement in this case was in the best interests 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 plaintiff attorneys’ fees will be limited to about $9 million, suggesting that the total payout may be roughly three or four times that amount. If 5,000 policyholders are in the class, the payout could amount to an average of $7,200 each.

Attorneys for the plaintiffs declined to comment and State Farm attorneys could not be reached Thursday. But the lawsuit and the insurer’s answer to the complaint explain the scenario involved.

Annie Arnold said that her home in Selma, in central Alabama, was damaged in 2013. State Farm paid her under its actual cash value provision but depreciated the labor on the repair, leaving the homeowner under-indemnified and unable to “pick up the pieces during a period of great need and tremendous stress,” her lawyers said in the suit.

A State Farm adjuster determined that the Arnold house had sustained a covered loss of $95,720, including labor and material for restoration. After deducting the $2,000 deductible and $21,486 for depreciation, the payment to the insured was $72,233.

The suit gave this example of the depreciation practice: On gutter replacement State Farm estimated the cost would be about $106 for material and labor. But after depreciation, the payout was just $64, the suit said.

Alabama law allows the insurer to depreciate the value of building materials but does not allow the depreciation of the cost of labor, the suit noted. Materials used in the repair or replacement of damaged property, such as roofing shingles or metal, diminish in value over time, due to wear and tear,
obsolescence and age, the suit said, quoting from Black’s Law Dictionary. “As such these are assets that can be depreciated. In contrast, labor is not susceptible to aging or wear. Its value does not diminish over time.”

The practice was widespread across the state, plaintiffs said.

“As a result, … by depreciating labor costs from its ACV calculations throughout Alabama, State Farm has engaged, and continues to engage, in a systematic and unlawful pattern of underpayment of insurance claims,” the complaint argued.

State Farm disagreed that labor costs are not subject to depreciation calculations and it denied the allegations.

More information about the settlement can be found on the claims administrator’s website, here.

This is not the first time State Farm has been accused of artificially reducing claims payments. In March, policyholders in Illinois filed a class-action lawsuit against State Farm Automobile Insurance Co., charging that 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 valuation estimators to include the adjustment, which reduced the payout by 4% to 11%, the suit argues. 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 have said.

In Georgia, the state insurance commissioner last spring directed auto insurers to stop under-calculating tax amounts for totaled vehicles. Some carriers were paying the actual value of the vehicle but basing the sales tax, also owed to the insurer, on a lower value, calculated from a combination of retail and wholesale prices.