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November 2017: Victory for State Farm in Labor Depreciation Class Action

November 2017

“Labor depreciation” has become a cause célèbre in the insurance plaintiffs’ bar. Across the country, lawyers representing classes of policyholders have filed suits challenging insurance providers’ near-universal practice of calculating actual cash value (“ACV”) of property to be replaced by factoring in all depreciation, including the cost of labor. This practice makes sense as a matter of basic economics, but courts around the country have reached differing conclusions on whether labor depreciation can be factored into ACV. Compare, e.g., Henn v. Am. Family Mut. Ins. Co., 894 N.W.2d 179, 189-91 (Neb. 2017) (holding that labor depreciation was permissible), and Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017, 1021 (Okla. 2002) (same), with Arnold v. State Farm Fire & Cas. Co., 2017 WL 3308990, at *11 (S.D. Ala. Aug. 3, 2017) (denying motion to dismiss after determining that policy did not unambiguously allow for labor depreciation), and Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675, 679 (Ark. 2013) (“We … simply cannot say that labor falls within that which can be depreciable.”).

Quinn Emanuel recently achieved a significant victory in the developing law of labor depreciation on behalf of State Farm Fire & Casualty Company in In re State Farm Fire & Cas. Co., --- F.3d ----, 2017 WL 4227475 (8th Cir. Sept. 25, 2017). State Farm had been sued by a policyholder in Missouri on behalf of a putative statewide class, who challenged State Farm’s calculation of the ACV of her hail-damaged roof. During discovery, the master appointed by the district court ordered State Farm to respond to detailed interrogatories for tens of thousands of policyholders at an astronomical cost. Quinn Emanuel stepped in to prepare a mandamus petition to the Eighth Circuit for immediate relief. Although such petitions are rarely granted, Quinn Emanuel’s briefing persuaded the court to hear the petition and – more importantly – stay the burdensome discovery. The Eighth Circuit also decided to hear State Farm’s Rule 23(f) appeal of the district court’s class certification order, which was also prepared by Quinn Emanuel’s team of Sheila Birnbaum, Douglas Dunham, David Cooper, Guyon Knight, Ellen Quackenbos, and Bert Wolff.

After full briefing and argument, the Eighth Circuit reversed the class certification order, vacated the discovery orders, and dismissed the complaint itself – in the process, issuing the first published opinion by any U.S. Court of Appeals addressing labor depreciation. The Eighth Circuit examined State Farm’s method of calculating ACV – which starts with the full replacement cost of damaged parts and subtracts depreciation (including of embedded labor costs) – and concluded that it was a reasonable business practice. In fact, by using the replacement cost as the starting point, State Farm’s method is often better for the policyholder and results in quicker claim payments. And while the court held out the possibility that this method could result in errors for some individual policyholders, the unique nature of those instances precluded the certification of any class. Thus conclusion led the court to decertify the class, vacate the order directing State Farm to engage in “premature classwide discovery,” and to dismiss the complaint as a whole – a perfect trifecta.