SAN FRANCISCO (CN) – Attorneys for State Farm customers whose homes were wiped out by the Northern California wildfires fought in federal court Thursday to keep alive a class action claiming State Farm issued insurance policies that intentionally undervalued their houses, and then lowballed the cost to rebuild.
Lead plaintiffs Brian and Alison Sheahan of Santa Rosa says State Farm used an unreliable valuation tool called 360 Value, provided by Insurance Services Offices Inc. and Verisk Analytics, that estimates the value of a homeowner’s insurance policy based on ZIP code without taking into account the homes’ architecture, design elements, building materials, building code requirements and other factors.
The Sheahans and other property owners in Santa Rosa claim State Farm intentionally underinsured their homes so it could attract more customers and sell more policies at cheaper rates.
Their complaint characterizes the alleged scheme as a “one-two punch.” After a loss, State Farm uses another tool, Xactimate by Xactware Solutions and Verisk, which often estimated construction costs 50% below the actual market rate for rebuilding in Northern California.
For the Sheahans, 360 Value estimated their property at $509,000 and Xactimate estimated the cost of rebuilding at $804,000, far below the actual rebuild cost of $2.2 million.
According to the lawsuit, in many instances homeowners never saw the information entered into the 360 Value software, they were never interviewed and no one visited their house.
“Because State Farm’s undervaluation started so low with the initial 360 Value pricing, following a catastrophe such as the Northern California Wildfires, thousands of policyholders are systematically financially ruined,” the lawsuit says.
Attorney Julia Donoho and her co-counsel Rebecca McWilliams, who represent the fire victims, told U.S. District Judge Edward Chen that State Farm misrepresented the 360 Value tool as a reliable way of determining insurance policy values.
But Chen, who has already dismissed the case twice, asked them how they could skirt a disclaimer State Farm offers saying it doesn’t guarantee accuracy in its estimates.
Donoho said state law requires insurance companies to base policies on an estimate and since the construction industry standard for estimates is within 10% of the actual rebuild cost, State Farm must have known its Xactimate values were inaccurate.
Chen didn’t appear to buy the industry standard argument, since insurance adjusters are not required to be licensed contractors. But he asked State Farm’s attorney Frank Falzetta whether theoretically there could be a point where a disclaimer fails, “if the insurance company knew systematically that an undervaluation was going on.”
Falzetta said he was not prepared to concede that point.
“There’s nothing in the law or insurance code that says any estimate has to be in a certain range of accuracy,” he said.
While the plaintiffs also argued State Farm was required by California insurance code to notify them of extended replacement coverage following a disaster, Falzetta said State Farm owed them no such duty under Fitzpatrick v. Hayes, a 1997 case where the state court ruled insurance companies have no obligation to notify customers about the availability of extra liability coverage.
“Is there any circumstance where you can envision an insurance company or agent as responsible who misrepresents coverage or an omission?” Chen asked.
“No, you don’t owe any special duties of disclosure or anything else,” Falzetta said.
Chen said that one of the main problems he’s had with the case is the plaintiffs’ inability to articulate an antitrust injury, something he’s still been unable to discern from their third amended complaint.
“Injury here may be due to misrepresentation, deliberate unfair practices, but antitrust injury is generally about some anti-competitive conduct that causes injury to the consuming public. I don’t see what’s different here,” he said.
Chen took the case under submission.
Outside the courtroom, Donoho said many of her State Farm-insured clients have come to her office “in tears” because they realize they’ll never be able to rebuild.
Donoho and McWilliams said they hope Chen gives them a chance to amend their complaint a fourth time to show the extent of what they believe is a long-running collusive conspiracy between State Farm and Verisk.