SAN FRANCISCO (CN) – Claims that State Farm Insurance conspired with software makers to undervalue fire victims’ homes in an antitrust scheme are unlikely to advance, a federal judge signaled Thursday, dashing hopes that victims will recoup the full cost of rebuilding.
“I don’t understand what the antitrust injury is,” U.S. District Judge Edward Chen said during a motion to dismiss hearing.
Lead plaintiff Brian Sheahan, of Santa Rosa, sued State Farm and three other companies in October 2018, one year after a series of deadly wildfires raged through Northern California’s wine country, destroying nearly 9,000 buildings and damaging more than 750 others.
Sheahan claims when customers signed up for policies, State Farm used an unreliable valuation tool called 360 Value, provided by Insurance Services Offices Inc. and Verisk Analytics. The tool allegedly estimated property values at 30 to 40 percent of their actual worth based on zip code and square footage. The insurer did not account for the homes’ architecture, design elements, building materials, building code requirements and other factors, according to the complaint.
Following a loss, State Farm turned to another tool, Xactimate, provided by Xactware Solutions and Verisk, which often estimated construction costs 50% below the actual market rate for rebuilding, according to the complaint.
For Sheahan, 360 Value estimated his property at $509,000 and Xactimate estimated the cost of rebuilding at $804,000, far below the actual reconstruction cost of $2.2 million, according to the plaintiffs.
On Thursday, plaintiffs’ attorney Julia Donoho, of Policyholder Pros in Santa Rosa, said Verisk Analytics has monopolized the market by providing these flawed valuation tools to every major insurer. She called State Farm one spoke of an anticompetitive hub that has pushed down insurers’ valuations for homes.
“Nobody can get out of this system, and it’s taking away people’s life savings,” Donoho said. “If they make the policy so it doesn’t work and people cannot rebuild their homes, that’s an injury to the whole community, and it’s affecting the whole wine country, not just the individuals in this case.”
Chen was dubious on whether the insurance industry’s use of allegedly unreliable valuation tools caused homeowners to suffer an antitrust injury.
Comparing State Farm to a merchant, Chen said if a consumer was harmed by a retailer’s “crummy product” provided by a monopolist, that could be legally actionable but not necessarily for anticompetitive conduct.
“That may be a product liability claim, negligence claim or something else,” Chen said. “I don’t see how it’s an antitrust claim.”
Donoho and her co-counsel argued that the harm stems from a conspiracy that impacts an entire market of homeowners, meeting the requirements for pleading an antitrust claim.
Chen disagreed. He said the harm comes from the nature of the valuation tool and how it is used, not from the allegedly monopolistic conduct.
“The harm is based on the way it’s being used or misused,” Chen said. “It’s not an antitrust problem.”
Aside from antitrust claims, Sheahan and a proposed class of homeowners allege bad faith, intentional and negligent misrepresentation, false promise, reformation, negligence and violation of multiple California consumer laws.
The complaint further claims that State Farm discontinued “guaranteed replacement cost” policies in 1997 and started capping replacement costs at 20% after the Oakland Hills Fire in 1991 destroyed more than 3,000 buildings, causing massive insurance losses. The plaintiffs say State Farm never explained the ramifications of that change to homeowners.
After the hearing, plaintiffs’ co-counsel Rebecca Williams said without antitrust claims, the plaintiffs cannot seek treble damages, which could triple any damages award. That will make it harder for them to recoup the full cost of rebuilding, she said.
Donoho added that if the plaintiffs prevail on their reformation claim, that could force State Farm to rewrite its insurance contracts and cover a higher portion of homeowners’ rebuilding costs.
After a one-hour hearing, Chen said he will issue a ruling partly granting State Farm’s motion to dismiss with leave to amend. He did not specify which claims he would dismiss or for which he would permit amendments.
A case management conference is scheduled for Oct. 3.
Frank Falzetta, of Sheppard, Mullin, Richter & Hampton in Los Angeles, and Andrew Yaphe of Davis Polk in Menlo Park, California, argued for the defendants.