Mcfarland v. State Farm Fire And Casualty Co

BRIEF in Opposition to 15 MOTION to Dismiss Incorporating Legal Authority

D. Colo.February 28, 2017

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 17-cv-00291-MSK-STV ZACHARY McFARLAND, Plaintiff, v. STATE FARM FIRE AND CASUALTY CO. Defendant. PLAINTIFF’S OBJECTION TO DEFENDANTS’ 12(b)(6) MOTION TO DISMISS Jack Mattingly Jr., OBA No. 16136 Mattingly & Roselius, PLLC PO Box 70 215 East Oak Ave. Seminole, OK 74818-0070 Telephone: (405) 382-3333 Facsimile: (405) 382-6303 Email: jackjr@mroklaw.com Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 1 of 43 2 INDEX FACTUAL BACKGROUND .......................................................................................... 8 STANDARD OF REVIEW ........................................................................................... 12 Albers v. Bd. of County Comm'rs of Jefferson Cty, Colo., 771 F.3d 697 (10th Cir. 2014) ...................................................................... 12 Smith v. U.S., 561 F.3d 1090 (10th Cir. 2009) .................................................. 12 PROPOSITION ONE: Ambiguities Are To Be Construed Against State Farm ..... 12 Bailey v. Lincoln General Ins. Co., 255 P.3d 1039 (Colo. 2011) ........................................................................ 13 Compass Ins. Co. v. City of Littleton, 984 P.2d 606 (Colo. 1999) .................................................................... 12, 16 Equitable Life Assur. Soc. of U.S. v. Hemenover, 67 P.2d 80 (Colo. 1937) .............................................................................. 12 Leland v. Travelers Indemnity Co., 712 P.2d 1060 (Colo.App.1985) .......................................... 13, 15, 19, 21, 34 Tepe v. Rocky Mountain Hosp. & Med. Services., 893 P.2d 1323 (Colo. App. 1994) .............................................. 12, 13, 14, 21 PROPOSITION TWO: The Policy by its Terms Authorizes Depreciation of Materials but not Labor.............................................................................. 14 Bailey v. Lincoln General Ins. Co., 255 P.3d 1039 (Colo. 2011) ........................................................................ 14 Tepe v. Rocky Mountain Hosp. & Med. Services., 893 P.2d 1323 (Colo. App. 1994) ................................................................ 14 COLO. REV. STAT. 10-4-111 ............................................................................... 14 PROPOSITION THREE: The Policy Language Outside of the Summary Disclosure Form is Ambiguous ..................................................................... 14 Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 2 of 43 3 Chacon v. American Family Mut. Ins. Co., 788 P.2d 748, 750 (Colo.1990) ................................................................. 15 Leland v. Travelers Indemnity Co., 712 P.2d 1060, 1064 (Colo.App.1985) ........................................................ 15 A. Other courts agree that functionally identical contractual provisions Are ambiguous and construe them against the insurers...................... 16 Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675 (Ark. 2013) .................................................................... 18 Bailey v. State Farm Fire & Cas. Co., 2015 WL 1401640 (E.D. Ky. 2015) ........................................................ 17 Boss v. Travelers Home & Marine Ins. Co., 2016 WL 3983833 (W.D. Mo. 2016) ...................................................... 18 Brown v. Travelers Cas. Ins. Co., 2016 WL 1644342 (E.D. Ky. 2016) ........................................................ 17 Labrier v. State Farm Fire and Cas. Co., 147 F. Supp.3d 839 (W.D. Mo. 2015) .............................................. 16, 17 Lains v. Am. Family Mutual Ins. Co., 2016 WL 4533075 (W.D. Wash. 2016) .................................................. 17 Leland v. Travelers Indemnity Co., 712 P.2d 1060, 1064 (Colo.App.1985) .................................................. 21 Mee v. Safeco Ins. Co. of America, 908 A.2d 344 (Pa. Super. 2006) ............................................................ 21 Riggins v. Am. Fam. Mut. Ins. Co., 106 F. Supp.3d 1039, 1040 (W.D. Mo. 2015) .................................. 18-19 PROPOSITION FOUR: Labor Does Not Depreciate ............................................... 21 Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675 (Ark. 2013) .................................................................. 21, 22 Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 3 of 43 4 Bailey v. State Farm Fire & Cas. Co., 2015 WL 1401640 (E.D. Ky. 2015) ............................................................. 23 Redcorn v. State Farm, 55 P.3d 1017 (Okla. 2002) .......................................................................... 21 PROPOSITION FIVE: State Farm’s Valuation of a Repair Project as if it is Merchandise Violates The Reasonable Expectations Doctrine... 23 Bailey v. Lincoln General Ins. Co., 255 P.3d 1039 (10th Cir. 2014) .................................................................... 25 State Ins. Co. v. Taylor 24 P. 333 (Colo. 1890) .......................................................................... 23-25 PROPOSITION SIX: Paying Labor To Install Depreciated Materials Is Not A Windfall............................................................................. 26 1 APPLEMAN ON INSURANCE §3.1 (2d ed. 1996) ................................................. 28 Redcorn v. State Farm, 55 P.3d 1017 (Okla. 2002) .................................................................... 28-29 PROPOSITION SEVEN: Defendant’s Cited Colorado Authorities Are Not Helpful to Resolve This Case .......................................................... 30 Bd. of Assessment Appeals of Colo. v. E.E. Sonnenberg & Sons, 797 P.2d 27 (Colo. 1990) ............................................................................ 30 Branch v. Farmers Ins. Co., 55 P.3d 1023 (Okla. 2002) .................................................................... 32, 33 Brown v. Travelers Casualty Ins. Co., 2016 WL 1644342 (E.D. Ky. 2016). ............................................................ 33 Cty. Bd. of Equalization v. Bd. of Assessment Appeals of Colo., 743 P. 2d 444 (Colo. App. 1987) ................................................................. 30 Dombrosky v. Farmers Ins. Co., 928 P.2d 1127(Wash. App. 1996) ............................................................... 30 Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 4 of 43 5 Dupre v. Allstate Ins. Co., 62 P.3d 1024 (Colo. App. 2002) ............................................................ 27, 30 Graves v. Am. Family Mut. Ins. Co., 2015 WL 4478468 (D. Kan. 2015) ............................................................... 32 Johnson v. Board of Cty. Commr’s of Morgan Cty., 336 P.2d 300 (Colo. 1959) .......................................................................... 30 Lains v. Am. Family Mutual Ins. Co., 2016 WL 4533075 (W.D. Wash. 2016) ....................................................... 30 Providence Washington Ins. Co. v. Gulinson, 215 P. 154 (Colo. 1923) ............................................................................. 31 Thomas v. American Family Mut. Ins. Co., 666 P.2d 676 (Kan. 1983) ........................................................................... 32 Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349 (Ind. 1982) ......................................................................... 33 PROPOSITION EIGHT: Plaintiff Adequately Pled a Violation of the Colorado Consumer Protection Act .............................................................. 34 Showpiece Homes Corp. v. Assurance Co., 38 P.3d 47 (Colo. 2001) .............................................................................. 34 COLO. REV. STAT. 6-1-105 ................................................................................. 35 PROPOSITION NINE: The Complaint Adequately Pled Violations of COLO. REV. STAT. §§ 10-3-1115 and 1116 ................................. 36 Compass Ins. Co. v. City of Littleton, 984 P.2d 606 (Colo. 1999) .......................................................................... 37 Kisselman v. American Family Mut. Ins. Co., 292 P.3d 964, 975 (Colo. App. 2011) .................................................... 36, 38 Sipes v. Allstate Indem. Co., 949 F. Supp.2d 1079, 1085 (D. Colo. 2013)................................................ 36 Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 5 of 43 6 Vaccaro v. American Family Ins. Group, 275 P.3d 750 (Colo. App. 2012) .................................................................. 36 COLO. REV. STAT § 10-3-1115 ........................................................................... 37 PROPOSITION TEN: Sufficient Facts are Pled to Toll the Statute Of Limitations. ................................................................................... 37 Casper v. Guarantee Trust Life Ins. Co., 2016 WL 6803070 (Colo. App. 2016) .......................................................... 37 Gargano v. Owners Ins. Co., 2014 WL 1032303 (D. Colo. 2014) .............................................................. 37 Rooftop Restorations v. Am. Family Mut. Ins. Co., 2017 WL 514060 (D. Colo. 2017) ................................................................ 37 Pinewood Townhome Ass’n v. Auto Owners Ins. Co., 2017 WL 590294 (D. Colo. 2017) ................................................................ 37 Stresscon Corp. v. Travelers Property Cas. Co. of Am., 373 P.3d 615 (Colo. App. 2013) .................................................................. 38 Travelers Property Cas. Co. v. Stresscon Corp., 370 P.3d 140 (Colo. 2016) .......................................................................... 38 COLO. REV. STAT. § 10-3-1115 .......................................................................... 37 COLO. REV. STAT. § 10-3-1116 .......................................................................... 38 A. Fraudulent Concealment tolled the statute of limitations. .................... 38 Coors v. Security Life of Denver Ins. Co., 91 P.3d 393 (Colo.App. 2003) ............................................................... 38 First Interstate Bank of Fort Collins v. Piper Aircraft Corp., 744 P.2d 1197 (Colo. 1987) ................................................................... 38 Onyx Properties LLC v. Board of County Commr’s of Elbert County, 868 F.Supp.2d 1164 (D.Colo. 2012) ...................................................... 38 COLO. REV. STAT.§ 10-3-1104 ...................................................................... 39 Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 6 of 43 7 B. State Farm is equitably estopped from claiming the statute of limitations ................................................................................. 40 Garrett v. Arrowhead Imp. Ass’n, 826 P.2d 850, 854 (Colo. 1992) ............................................................. 40 Campbell v. Pohlman, 2011 WL 1755714 (D. Colo. 2011) ........................................................ 41 C. The discovery rule tolled the statute of limitations ............................... 41 Brodeur v. American Home Assur. Co., 169 P.3d 139, 147 (Colo. 2007) ............................................................. 41 Wardcraft Homes v. Employers Mut. Cas. Co., 70 F. Supp.3d 1198 (D. Colo. 2014) ...................................................... 41 COLO. REV. STAT. § 10-3-1115 .......................................................................... 41 COLO. REV. STAT. § 10-3-1116 .......................................................................... 41 CONCLUSION ........................................................................................................ 41 Smith v. U.S. 561 F. 3d 1090 (10th Cir. 2009) ................................................... 41 Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 7 of 43 8 PLAINTIFF’S OBJECTION TO DEFENDANTS’ 12(b)(6) MOTION TO DISMISS Plaintiff Zachary McFarland respectfully objects to Defendant State Farm Fire & Casualty Co.’s Motion to Dismiss. (Doc. 15.) The motion should be overruled because: 1. The policy provides that materials and not labor are depreciable; 2. Alternatively, the policy is ambiguous and Colorado law requires that ambiguities be construed in the insured’s favor; 3. Other courts interpret functionally identical policy provisions as not authorizing depreciation of labor; 4. Labor does not depreciate; 5. Depreciating labor violates the rule of reasonable expectations; 6. Colorado law has long acknowledged the obvious distinctions between actual cash valuations of chattels vs. real property reconstruction projects; 7. Depreciating labor leaves the insured under-compensated and violates principles of indemnity; and 8. Plaintiff has adequately pled statutory violations and sufficient facts to toll the statute of limitations. FACTUAL BACKGROUND Plaintiff Zachary McFarland brought this class action in Denver County District Court to compensate his fellow insureds from State Farm’s uniform practice of depreciating labor.1 Mr. McFarland entered into a contract with State Farm to insure his home against physical damage. (Complaint, ¶ 4, Doc. 1, p. 16 of 36.) His home was damaged on July 7, 2014 during the policy period and he made a claim on the policy. 1 Plaintiff does not quarrel with the depreciation that was taken for the building materials. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 8 of 43 9 (Complaint, ¶ 5.) The claim was a covered, proper claim and State Farm adjusted it. (Complaint, ¶ 5, et seq.) Mr. McFarland’s policy in pertinent part provided: Summary of Coverage Homeowners Policy . . . IN THE EVENT OF A CONFLICT BETWEEN THE POLICY AND THIS SUMMARY DISCLOSURE FORM, YOUR POLICY PROVISIONS SHALL PREVAIL. ● Replacement Cost is the amount it take to replace your damaged or destroyed property, subject to the limits shown in your declaration page and policy. Please refer to your policy for additional information. ● Actual Cash Value is the cost of repairing or replacing damaged or destroyed property with property of same kind and quality less depreciation, subject to the limits shown in your declaration page and policy. (See Policy, Doc. 15-1, p. 18 of 50.) * * * * * * * * * SECTION 1 – LOSSES INSURED COVERAGE A – DWELLING We insure for accidental direct physical loss to the property described in Coverage A, except as provided in SECTION 1 – LOSSES NOT INSURED. (Doc. 15-1, p. 32 of 50.) SECTION 1 – LOSS SETTLEMENT . . . We will settle covered property losses according to the following. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 9 of 43 10 COVERAGE A – DWELLING 1. A1 – Replacement Cost Loss Settlement – Similar Construction. a. We will pay the cost to repair or replace with similar construction and for the same use on the premises shows in the Declarations, the damaged part of the property covered under Section 1 – COVERAGES, COVERAGE A – DWELLING, except for wood fences, subject to the following: (1) until actual repair or replacement is completed, we will pay only the actual cash value at the time of the loss of the damaged part of the property, up to the applicable limit of liability shown in the Declarations, not to exceed the cost to repair or replace the damaged part of the property… (Emphasis in original.) (Doc. 15- 1, p. 36 of 50.) Thus, State Farm is obligated to pay the actual cash value of all damaged property, until the repair or replacement is completed, at which time the insurer is obligated to pay cost to repair or replace the damaged property. The claim was adjusted and State Farm depreciated the labor required to replace the damaged materials. (Complaint, Doc. 4, p. 2, ¶ 6.) As part of the claims process, State Farm provided these post-contract definitions in the Building Estimate Summary Guide: • Replacement Cost Value: “Estimated cost to repair or replace damaged property.” • Depreciation: “The decrease in the value of property over a period of time due to wear, tear, condition, and obsolescence. A portion or all of this amount may be eligible for replacement cost benefits.” Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 10 of 43 11 • Net Actual Cash Value Payment (ACV): The repair or replacement cost of the damaged part of the property less depreciation and deductible. (Italics in original) (Doc. 15-2, p. 3 of 13, ¶¶ 4, 6 and 7.) After adjusting the claim, State Farm paid Plaintiff $6,003.09, for the actual cost value of the damaged property, with an explanation of benefits. (Doc. no. 15-2, p. 5) In some instances, State Farm affirmatively disclosed when labor was not depreciated. For example, State Farm disclosed it did not depreciate the labor to remove the composition shingles, and represented that no depreciation was taken. (See Defendant’s Explanation of Building Replacement Cost Benefits, Doc. 15-2, item nos. 1 and 2, p. 6 of 13.) In other instances, State Farm did not disclose that it was depreciating labor. The labor to replace composition shingles, roof felt, roof vents, flashing, rain cap, priming and painting the roof cap, painting the deck handrail and wood siding, painting the front porch column, and replacing a window screen was not separately itemized and was depreciated as part of a “unit price” that included materials. (Doc. 15-2, item nos. 3-9 at p. 6 of 13; item nos. 11- 14 at p. 7 of 13; item nos. 15, 16, at p. 8 of 13.) Plaintiff repaired or replaced some but not all of the damaged property. As a result, Plaintiff did not receive the replacement cost value on items such as sealing and painting siding, painting a porch column, staining the deck handrail and replacing the vent termination cap. (Complaint, Doc. 4, p. 2 of 10, ¶ 9.) Depreciating the labor necessary to repair or replace building materials during the ACV adjustment violates the insurance contract. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 11 of 43 12 STANDARD OF REVIEW When resolving motion to dismiss, Courts “accept all the well-pleaded allegations of the complaint as true and must construe them in the light most favorable to the plaintiff.” Albers v. Bd. of County Comm'rs of Jefferson Cty, Colo., 771 F.3d 697, 700 (10th Cir. 2014). “Specific facts are not necessary; the statement need only give the defendant fair notice of what the claim is and the grounds upon which it rests.” Smith v. U.S., 561 F.3d 1090, 1104 (10th Cir. 2009), quoting Erickson v. Pardus, 551 U.S. 89, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007). PROPOSITION ONE: Ambiguities Are To Be Construed Against State Farm. Plaintiff contends that the following Colorado law is dispositive of this case. It is a “fundamental principle that an ambiguous provision in an insurance policy contract must be construed against the drafter and in favor of providing coverage to the insured.” Compass Ins. Co. v. City of Littleton, 984 P.2d 606, 619 (Colo. 1999) citing Chacon v. Am. Family Mut. Ins. Co., 788 P.2d 748, 750 (Colo. 1990). The Colorado Supreme Court characterized this rule as “well settled” eighty years ago. Equitable Life Assur. Soc. of U.S. v. Hemenover, 67 P.2d 80, 81-82 (Colo. 1937). Ambiguous provisions are those that are “reasonably susceptible to different meanings.” Compass, 984 P.2d at 619, citing Chacon, 788 P.2d at 750. “Coverage provisions in an insurance contract are to be liberally construed in favor of the insured to provide the ‘broadest possible coverage.’” Tepe v. Rocky Mountain Hosp. & Med. Services., 893 P.2d 1323, 1327 (Colo. App. 1994) citing Jarnagin v. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 12 of 43 13 Banker's Life & Casualty Co., 824 P.2d 11, 14 (Colo. App. 1991). “Thus, when an insurer seeks to restrict coverage, the limitation must be clearly expressed.” Tepe at 1327. Consumer insurance policies carry a “significant potential for insurers to take advantage of or mislead insureds,” resulting in heightened scrutiny which manifests in the doctrine of reasonable expectations. Bailey v. Lincoln General Ins. Co., 255 P.3d 1039, 1048 (Colo. 2011). The doctrine of reasonable expectations: “… obligates insurers to clearly and adequately convey coverage-limiting provisions to insureds. In Colorado, the reasonable expectations of insureds have succeeded over exclusionary policy language in two main situations: (1) where an ordinary, objectively reasonable person would, based on the language of the policy, fail to understand that he or she is not entitled to the coverage at issue; and (2) where, because of circumstances attributable to an insurer, an ordinary, objectively reasonable person would be deceived into believing that he or she is entitled to coverage, while the insurer would maintain otherwise.” Id. at 1048–49. “In the absence of such a clear expression of limitation, or if the policy provisions are inconsistent or ambiguous, the insurance contract must be construed in favor of coverage and against limitations.” Tepe at 1328, citing State Farm Mutual Automobile Insurance Co. v. Nissen, 851 P.2d 165 (Colo.1993); Lister v. American United Life Insurance Co., 797 P.2d 832 (Colo.App.1990). “[A]n insurer who wishes to avoid liability must not only use clear and unequivocal language evidencing its intent to do so, but it must also call such limiting conditions to the attention of the insured. Absent proof of such disclosure, coverage will be deemed to be that which could be expected by the ordinary lay person.” Leland v. Travelers Indemnity Co., 712 P.2d 1060, 1064 (Colo. App.1985). Against this headwind of contract law State Farm asks for its policy to be Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 13 of 43 14 interpreted to authorize valuing homeowners’ structural damages like the one thing they are exactly not: pre-manufactured merchandise, as opposed to repair projects. PROPOSITION TWO: The Policy by Its Terms Authorizes Depreciation of Materials But Not Labor. State Farm’s motion erroneously states: “[a]lthough the Policy does not define the phrase ‘actual cash value,’ Colorado law supplies the definition. . . .” (Doc. 15, p. 8 of 38.) The policy contains an ACV definition in the Summary of Coverage:2 ● Actual Cash Value is the cost of repairing or replacing damaged or destroyed property with property of same kind and quality less depreciation, subject to the limits shown in your declaration page and policy. (See Policy, Doc. 15-1, p. 18 of 50.) The definition contemplates depreciation of materials but not labor. The modifying phrase “less depreciation” closely follows the phrase “with property of same kind and quality.” This demonstrates that property (i.e. tangible shingles, flashing, etc.) is depreciable. Depreciating non-property items results in a coverage limitation that violates the rule of reasonable expectations and presumptions in favor of coverage. Bailey at 1048 and Tepe at 1328. PROPOSITION THREE: The Policy Language Outside of the Summary Disclosure Form is Ambiguous. Plaintiff respectfully contends the threshold inquiry is what the contract provides in 2 The summary explanation is presumably mandated by COLO. REV. STAT. § 10-4-111. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 14 of 43 15 light of the foregoing rules of construction. First, the contract was written exclusively by State Farm and does not mention, much less explicitly mention limited coverage of labor. On this basis alone, the policy should be construed against the Defendant pursuant to the rules of interpretation set out above. Second, if a homeowner must look up case law from 1890, 1954 and 1959 to understand what the limiting language in State Farm’s ACV provision means, the provision is ambiguous.3 Stated another way, if “actual cash value” as State Farm employs the term is really a legal term of art that requires a survey of Colorado law, it violates the precept that policies are interpreted from the perspective of “the ordinary layperson.” Leland, 712 P. 2d at 1064. A policy holder should not have to be a lawyer to read and understand her policy. Third, State Farm contractually limits its ACV exposure at “the cost to repair or replace the damaged part of the property.” (Policy, Doc. 15-1, pg. 36 of 50, § (1)(a)(1).) Now State Farm wants the Court to impose a more restrictive limitation of its ACV exposure than the cost to repair the damaged property. “Where a contractual provision is clear and unambiguous the court should not rewrite it to arrive at a strained construction.” Chacon v. American Family Mut. Ins. Co., 788 P.2d 748, 750 (Colo. 1990). 3 Page 8 of 38 of Defendant’s Motion (Doc. 15) cites State Ins. Co. of Des Moines, Iowa v. Taylor, 24 P. 333 (Colo. 1890); H.L. Johnson v. Bd. Of County Comm’rs of Morgan Cty, 336 P.2d 300 (Colo. 1959); and Neb. Drillers, Inc. v. Westchester Fire Ins. Co. of N.Y. 123 F. Supp. 678 (D. Colo. 1954) for the proposition that the labor was properly depreciated. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 15 of 43 16 There is no wiggle room in the phrasing of State Farm’s agreed ACV exposure – it is capped at the cost to repair or replace the damaged property. If State Farm wants to limit its ACV exposure to even less than replacement cost of any component of the claim, then it should state as such and not ask a court to re-write the policy to impose a lower maximum ACV payment. A reasonable insured would correctly read the provision as authorizing payment of labor, since receiving the full labor necessary to replace depreciated materials is consistent with State Farms’ agreed maximum ACV exposure. Fourth, the policy is clearly susceptible to more than one reasonable interpretation per Compass, ante, 984 P.2d at 619, as courts have now repeatedly held that the State Farm-drafted language is ambiguous and should be construed in the insured’s favor. A. Other courts agree that functionally identical contractual provisions are ambiguous and construe them against the insurers. Courts hold that identical ACV provisions are ambiguous and construe the policies against State Farm. Labrier v. State Farm Fire and Cas. Co., is a case with the same defendant and contract. 147 F. Supp.3d 839, 842-843 (W.D. Mo. 2015). State Farm contended, like here, that “actual cash value” was unambiguous under Missouri law, which the Court rejected. Id. at 844-846. The Court found that the phrase “actual cash value” means “replacement cost minus depreciation.” Id. at 846. The Labrier Court then summarized other court decisions and concluded that the word “depreciation” was also ambiguous: That the term is open to different interpretations by the courts demonstrates its ambiguity. Because the terms actual cash value and depreciation in this context are ambiguous, the Court must resolve the dispute in favor of the Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 16 of 43 17 insured unless Labrier’s interpretation is not reasonable. Ambiguities are resolved in favor of the insured because ‘insurance is designed to furnish protection to the insured, not defeat it…’ And ‘as the drafter of the insurance policy, the insurance company is in the better position to remove ambiguity from the contract.’ Labrier, p. 850, citing Krombach v. Mayflower Ins. Co., 827 S.W.2d 208, 210-211. The Labrier analysis applies to this case. “Finally, and of significant importance, State Farm controlled the language of the policy; Labrier did not.” Labrier at 851. In Bailey v. State Farm Fire & Cas. Co. the same defendant and policy language was analyzed. 2015 WL 1401640, p.8 (E.D. Ky. 2015). The Court held, “[m]oreover, to the extent that the contract is unclear with regard to whether labor is subject to depreciation, Kentucky law dictates that the ambiguity be resolved in favor of the insured.” Bailey at 6. A Washington Federal Court recently held that policy language with more clarity than State Farm’s was ambiguous. In Lains v. Am. Family Mutual Ins. Co., the policy defined “actual cash value” as “the amount it costs to repair or replace property with property of like kind and quality less depreciation for physical deterioration and obsolescence.” 2016 WL 4533075, p. 1 (W.D. Wash. 2016). The Court declined to sort out whether labor is depreciable and simply held that since the policy lacked any definition of “depreciation” it was ambiguous, should be liberally construed against the insurer, and labor could therefore not be depreciated. Id. at 2 – 3. In Brown v. Travelers Cas. Ins. Co., the policy also provided for an undefined “actual cash value” adjustment. 2016 WL 1644342 at 2 (E.D. Ky. 2016). The parties agreed that ACV meant replacement cost less depreciation. Id. “The sole issue before Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 17 of 43 18 the Court, therefore, is what the word ‘depreciation’ means in this definition of actual cash value.” Id. “Moreover, to the extent that the contract is unclear with regard to whether labor is subject to depreciation, Kentucky law dictates that the ambiguity be resolved in favor of the insured.” Id. at 6. In Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675, 676 (Ark. 2013) the question considered was “Whether an insurer in determining the ‘actual cash value’ of a covered loss under an indemnity insurance policy may depreciate the costs of labor when the term ‘actual cash value’ is not defined in the policy.” The Adams policy did not define “actual cash value.” Id. The Court held, “[b]ecause the term “actual cash value” as used in the policy is fairly susceptible to more than one reasonable interpretation, we are of the opinion that the term is ambiguous.” Id. at 678. The Court went on to find that depreciating labor was illogical and construed the policy against the carrier. Id. at 679. In Boss v. Travelers Home & Marine Ins. Co., the Western District of Missouri analyzed a similarly constructed provision that provided for an ACV adjustment without defining ACV or depreciation. 2016 WL 3983833, at 1 (W.D. Mo. 2016). The Court held the policy did not authorize depreciation of labor: Finally, and of significant importance, Travelers controlled the language of the policy, Boss did not. Travelers could have clarified these issues so that the same definition of actual cash value would apply each time, regardless of whether the definition favored the insurance company or the insured. Having failed to do so, the ambiguous language of the policy must be interpreted against the insurance company under Missouri law. Id. at 9. In Riggins v. Am. Fam. Mut. Ins. Co., the plaintiff’s policy defined “actual cash value” as Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 18 of 43 19 “the amount it costs to repair or replace property with property of like kind and quality less depreciation for physical deterioration and obsolescence.” 106 F. Supp.3d 1039, 1040 (W.D. Mo. 2015). The Court held: Focusing solely on the plain and unambiguous language in Plaintiff’s policy, this Court finds that the phrase ‘for physical deterioration and obsolescence’ limits the type depreciation that may be factored into a calculation of ‘actual cash value.’ As a result, Defendant’s calculation of the ‘actual cash value’ due to Plaintiff under her policy, which included a depreciation factor applied to the entire estimated costs of repair, was improper. Id. at 1041. State Farm elected to not define “actual cash value” in “clear and unequivocal language” that “could be expected by the ordinary lay person” to mean a large percentage of the labor necessary to replace damaged materials would be discounted. Leland, 712 P.2d at 1064. Plain speech could have notified the insured that the labor would be depreciated. Most laypersons have never engaged in an exercise of depreciating labor, or even heard or contemplated that labor depreciates. Defendant’s contention that covering labor during the ACV claim is “unreasonable” as a matter of contract interpretation is plainly contradicted by sensible jurists in Kentucky, Missouri, Arkansas and Washington that have found similar policy provisions (identical in Bailey and Labrier) ambiguous and therefore providing coverage for undepreciated labor. Meanwhile, California, Montana, Ohio and Vermont administratively mandate the very coverage that State Farm argues is unreasonable. See: • In California, 10 Cal. Code of Regulations § 2695.9(f)(1) provides: “Except for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 19 of 43 20 necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment.” • Montana Commissioner on Securities and Insurance: In the Matter of the Report of The Market Conduct Examination of Big Sky Farm Mutual insurance, Co.; Case No. INS-2010-09, Findings of Fact, Conclusions of Law and Order Adopting The Market Conduct of Examination Report of December 31, 2008, dated March 23, 2010, “Additionally, depreciation was improperly applied to labor, instead of just materials, in claims that were adjusted directly by the Company without an independent adjuster.” (See Ex. 1.) • Ohio Department of Insurance, May 21, 2012 Market Conduct Examination of Sandy and Beaver Valley Farmers Mutual Insurance. Co., pp. 7 and 9, noting multiple carrier exceptions to “the industry practice of not depreciating labor.” (See Ex 2.) • Vermont Department of Insurance: In re: Acadia Insurance Company, Stipulation and Consent Order of Oct. 4, 2010: “Whereas the Department concluded, after investigation, that Respondent's method of adjusting certain first party actual cash value property damage claims constituted an unfair claim settlement practice in that Respondent settled these first party claims… by offering and/or paying a settlement amount net of depreciation of labor, profit and overhead costs when it was improper to do so” and insurer represented it required “adjusters who use a specific software to adjust claims to set the default setting for depreciation to ‘materials only.’” (See Ex. 3.) State Farm’s citation to a Colorado Insurance Bulletin is a preemptive defense against its own non-compliance. Colorado Division of Insurance Bulletin No. B-5.1, holds in regard to an ACV policy: “Deduction of contractors’ overhead and profit, in addition to depreciation, is not consistent with the definition of actual cash value.” (See Ex. 4, State of Colorado, Division of Insurance Bulletin No. B-5.1.) State Farm apparently ignored this bulletin. (Doc. 15-2, pp. 10 – 12, where 6 trades are identified with $0 overhead and profit paid.) The only distinction between labor and a contractor’s overhead and profit is that Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 20 of 43 21 the overhead and profit applies to general contractors. (See explanation in Building Estimate Summary Guide, Doc. 15-2, p. 3 of 13: “2. General Contractor’s Overhead and Profit – General contractor’s charge for coordinating your repairs” and Mee v. Safeco Ins. Co. of America, 908 A.2d 344, 350, ¶ 16 (Pa. Super. 2006), finding overhead and profit payable when use of a general contractor is reasonably likely.) Even assuming, arguendo, that Colorado common law endorses State Farm’s approach of depreciating labor, that does not resolve the threshold issue of whether the insurance contract communicates to a layperson that labor necessary to replace damaged (and already depreciated) portions of the home will be depreciated. If an insurer wants to restrict or limit coverage, it must be done so expressly. Tepe at 1328 and Leland at 1064. State Farm is in the obvious and better position to clarify this contractual issue, and insureds should not be made aware of this contract interpretation for the first time after they have paid a premium and incurred damage to their homes. Because the ACV provision in State Farm’s policy is ambiguous and does not forthrightly apprise an insured that their labor costs will be depreciated, the motion to dismiss should be overruled. PROPOSITION FOUR: Labor Does Not Depreciate. Courts have repeatedly held that depreciating labor is not authorized in similar cases because of a basic fact: labor does not depreciate. Defendant cites to Redcorn v. State Farm, a 5-4 decision from Oklahoma that held labor could be depreciated. 55 P.3d 1017 (Okla. 2002). The Redcorn dissent was so compelling that it was adopted by the Arkansas Supreme Court in Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675, 679 (Ark. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 21 of 43 22 2013). The Redcorn dissent focused on the fact that labor does not depreciate: A roof, unlike a preassembled consumer good, is not an integrated product. Redcorn cannot go the lumber yard or the retail store and buy a roof. A roof does not exist until the shingles are transported to the site and installed on top of the house. A roof is not a unified product but a combination of a product (shingles) and a service (labor to install the shingles). ¶ 7 The shingles are of course logically depreciable. As they age, they certainly lose value due to wear and tear. They typically have a useful life of twenty years. It makes sense, then, that sixteen-year-old shingles have lost sixteen/twentieths, or eighty percent, of their value over time. ¶ 8 Labor, on the other hand, is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value over time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of depreciating the value of labor is illogical. The image that comes to me is that of a very old roofer with debilitating arthritis who can barely climb a ladder or hammer a nail. The value of his labor, I suppose, has depreciated over time. Id. at 1023. (Boudreau, J., dissenting.) Justice Summers separately dissented: Before the damage the insured had on his house a roof with sixteen-year- old shingles. After the damage the insured is contractually entitled to have on his house sixteen-year-old shingles, or their value in money. He should not bear any of the cost of installing them, because that would deprive him of that for which he contracted-being made whole as if the damage had not occurred. Id. at 1023. (Summers, J., dissenting.) The Arkansas Supreme Court agreed: “We, like Justice Boudreau and his fellow dissenters, simply cannot say that labor falls within that which can be depreciable.” Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675, 679 (Ark. 2013). Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 22 of 43 23 In Bailey v. State Farm Fire & Cas. Co., the Court adopted Justice Boudreau’s dissent. 2015 WL 1401640, p.8 (E.D. Ky. 2015). The Court explained: However, labor is not subject to wear and tear. Indeed, the cost of labor to install a new garage would be same as installing a garage with 10 year old materials. In other words, depreciated labor costs would result in under indemnification. As the insurance contract is one for indemnity, depreciating the cost of labor violates the contract.” Bailey at p. 6. Denying the distinct nature of labor as a component runs afoul logic. This Court heartily agrees with Justice Boudreau. The very idea of depreciating the value of labor defies good common society. To adequately indemnify its insureds, State Farm should pay the cost of materials, depreciated for wear and tear, plus the cost of their installation. Id. at 8. The foregoing authorities articulately explain why labor does not depreciate. PROPOSITION FIVE: State Farm’s Valuation of a Repair Project as if it is Merchandise Violates The Reasonable Expectations Doctrine. Since 1890, real property has been valued differently than goods in order to accomplish the objective of indemnity. In State Ins. Co. v. Taylor, the plaintiff insured his house for $800. 24 P. 333 (Colo. 1890). The house burned down and the insurer contended the house was only worth $300, along with other defenses not presently at issue. Judgment was granted for Taylor and the insurer appealed. The resulting opinion acknowledged 6 things that inform the result in this case: • The objective of valuation is indemnification: “… [T[he rule is indemnification to the owner… the question, not what someone would have paid for the building, but what amount would indemnify the owner for the loss sustained.” Id. at 337. • The proper rule of damages was the functional equivalent of a Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 23 of 43 24 contemporary ACV valuation, described as “the actual value of the property in the condition it was in at the time of loss, taking into consideration its age and condition, and not necessarily what it would cost to erect a new building.” Id. (emphasis added); • The ACV rule that was formulated in State Ins. Co. did not, as feared by State Farm, constitute replacement cost. “The rule of damages is the value of the property lost, and not the cost of replacement...” Id. • Personalty and realty are necessarily valued differently: “Counsel seem to have confounded the measure or rule of damage for merchandise or goods destroyed with that for buildings. In the former the value in market is correct. In the latter it must be ‘the actual value of the property in the condition it was in at the time of loss, taking into consideration its age and condition, and not necessarily what it would cost to erect a new building. . . .” (citations omitted) Id. • Building materials are properly depreciated: “The assured should be allowed the value of his building at the time of loss; and if, by reason of age or use, it is less valuable than a new building erected upon the same plan, of similar materials and of the same dimensions, the insured should be allowed for such difference arising from deterioration.” Id. (citing Wood, Ins. § 446; Insurance Co. v. Sennett, 37 Pa. St. 205) (emphasis added). • Other construction costs (i.e. labor) were properly considered in the valuation and not lumped in with the depreciated materials: “It follows that the original cost of the building, the cost of constructing a like building at the time of trial on the same land, and the difference in value between the building destroyed, by reason of its age and use, and a new one4, were all proper inquiries to assist the court in arriving at a just conclusion in regard to the loss sustained. . . Id. at 337. (Emphasis added.) State Ins. Co.’s inclusion of the “cost of constructing a like building” with depreciated materials contemplates the distinction between depreciating materials vs. 4 State Farm does not employ the last valuation factor, i.e. quantifying the difference in values before and after the damage. The adjustment purports to simply value the cost of repairing the damages. (See Doc. 15-2.) Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 24 of 43 25 labor costs. State Farm’s contention that a damaged roof should be valued as if it is merchandise or a finished good is also irreconcilable with State Ins. Co. Defendant contends that ACV claims to repair real property damages should be valued as the insured is buying a pre-manufactured, finished good where labor is already incurred and the buyer need not pay a contractor. In reality there is never a pretense that Mr. McFarland would buy a preassembled, complete roof with labor already incurred, take it home, and start using it, like a watch or refrigerator. When the parties contracted, State Farm’s promises revolved around repairs, which contemplates labor: “We will pay the cost to repair or replace with similar construction . . . until actual repair . . . is completed . . . not to exceed the cost to repair or replace. . . .” (Doc.15-1, p. 36 of 50, Section I – Loss Settlement) (emphasis added).) The policy sensibly reflects the practical expectation that Mr. McFarland would have to pay someone to fix his house if damages occur. Then, State Farm’s adjustment necessarily quantifies how much a construction project will cost. (See Claims Worksheet, Doc. 12-4.) It is only when claims savings can be realized that State Farm values the repair project as if their insured is buying pre-manufactured merchandise. The insured’s obvious need and expectation is to hire skilled labor to repair damages. To interpret the policy as if goods are being valued is a plain violation of the doctrine of reasonable expectations. Bailey v. Lincoln General Ins. Co., 255 P.2d at 1048 – 1049. An insured need not hire a watch maker to make a replacement watch, or a factory worker to manufacture a new refrigerator – these items may be bought by any Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 25 of 43 26 consumer, pre-assembled, new or used, without having to cut a check to a laborer. State Farm’s insistence that a repair project be valued as retail merchandise with no indication of this in the policy functionally ambushes the insured with non-coverage (or at a minimum, greatly reduced coverage) of the expense insured for – the necessity of paying someone to perform expensive repairs to fix a damaged home. PROPOSITION SIX: Paying Labor To Install Depreciated Materials Is Not A Windfall. State Farm argues that if labor is not depreciated, an insured would improperly receive a windfall because she receives payment for labor that has not yet been incurred. (Defendant’s Motion to Dismiss, Doc. 15, p. 21 of 38.) State Farm’s hypothetical example (Doc.15, p. 17) of an insured’s 20 year roof being damaged 19 years into the roof’s life demonstrates why no windfall results from paying labor to repair depreciated materials. The hypothetical roof would cost $10,000 to install, $6,000 for labor and $4,000 for materials.5 Defendant argues that if the roof were destroyed after 19 years and State Farm “generously” deducts only 80% depreciation of the entire claim,6 the ACV is $2,000 (20% of the roof’s remaining life multiplied by $10,000), leaving the insured to come up 5 It is impossible to identify what part of the Plaintiff’s shingle replacement cost was material or labor, as State Farm did not disclose the breakdown, but instead rolled both numbers into one “unitized” cost of $191.14 per square. (See Explanation of Building Replacement Cost Benefits, Doc. 15-2, p. 6 of 13, ¶ 3.) 6 No explanation is provided for State Farm’s generosity in this hypothetical. Mr. McFarland’s claim worksheet did not contain any such depreciation discount. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 26 of 43 27 with the remaining $8,000 to replace the roof. $2,000 is little help to replace a $10,000 roof. State Farm contends that if the insured is paid $6,800 for the $10,000 roofing project ($800 for depreciated materials at 20% of $4,000, plus $6,000 for the full, non-depreciated cost of labor) the insured receives a windfall by getting these labor funds without actually having done the repair. Close examination of this hypothesis quickly reveals its flaws. First, if all labor is paid the insured is still $3,200 short of the cost to replace a roof - she has been paid only enough to replace a functioning roof with 80% depreciated building materials. Upon replacement, and only then, the insured is reimbursed for a new, undepreciated roof, which is contemplated by RCV coverage.7 Second, even under the insurer’s current practice of depreciating labor the insured receives payment for labor that is not yet incurred, it is just a depreciated amount. State Farm provides no explanation for why paying the full labor amount would be a windfall when such labor has not been incurred yet, but paying a partial depreciated labor amount does not create a windfall. Third, an insured is not unjustly enriched when he or she receives a non- depreciated labor payment. If materials are depreciated, the insured still has not received the full amount necessary to replace the roof – she has received the monetary equivalent 7 “[W]hile an actual cost policy is designed to avoid placing the insured in a better position than he or she was in before the fire, a replacement cost policy allows for such a possibility because it is intended to allow the insured to replace the damaged building.” Dupre, 62 P.3d at 1030. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 27 of 43 28 of the same type, grade and condition of her old roof. Likewise, if she does not perform the repairs her home remains devalued. She has been compensated in money for what she has lost in real estate value. Even if the insured opts not to perform any repairs, she in in the exact financial position she would have been in but for the loss, and is no better off. Fourth, Defendant presupposes that labor depreciates across the board at the same rate as the underlying building material, whether it be a shingle, a marble countertop, or a layer of windowsill stain. State Farm’s proposed across-the-board depreciation of labor does not reflect economic reality and poses more questions than answers. Different tradesmen and contractors have different labor rates, licensure, and code compliance headaches. Would a licensed electrician’s labor to re-wire a code- compliant kitchen depreciate at the same rate as scraping and painting some trim? Does an accomplished craftsman’s labor depreciate at the same rate as that of an inexperienced teenager’s labor? The idea of depreciating labor does not aid accuracy, it merely allows State Farm to pay the absolute minimum possible in ACV claims. The fifth reason that Defendant’s “windfall” argument fails is because depreciating labor violates the principle of indemnity. The fundamental principle of indemnity is that an insured party should not be put in a better or worse financial position then before an insured loss, but should be restored to the same economic position they were in before an insured loss. 1 APPLEMAN ON INSURANCE §3.1 (2d ed. 1996). As Justice Summers wrote in Redcorn, if the insured had a roof with 16-year-old shingles before the loss, then Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 28 of 43 29 the insured should receive the monetary equivalent of a roof with 16-year-old shingles. Redcorn at 1023. This case provides an example of under-indemnification. Mr. McFarland’s roofing felt was depreciated 50%, from $823.89 to $411.95. (Doc.15-2, item 4, p. 6 of 13.)8 The labor required to physically transport the felt to the roof, staple/nail it down in a workmanlike manner, cut of excess material, trim and place around vents, and then remove all the excess supplies and equipment from the roof has no relation to the age or condition of the old underlayment. Whether the old felt is one year old or twenty, the labor to install the 50% depreciated felt is the same. If Mr. McFarland’s felt was depreciated 50%, and his labor not depreciated he is not bettered - he would have received exactly enough money to buy 50% depreciated felt, plus the labor to replace it. Likewise, receiving 50% of the labor necessary to install the already-50%-depreciated felt represents an amount of money to buy 50% depreciated felt, without sufficient money to actually install it. This plainly leaves him under-indemnified. Prohibiting State Farm from depreciating labor does not present a windfall to insureds; rather, it prevents insurance companies from receiving a windfall by paying insureds amounts that leave them drastically undercompensated.9 8 “Felt” is the underlayment that provides a water barrier between the shingle and roof deck. 9 This under-compensation is not without meaning just because State Farm will pay the full replacement costs once the work is done. Often the ACV payment is so drastically over-depreciated that an insured cannot use the funds to make necessary advances for the replacement work. And, when an insured opts not to have replacement work completed (as is her right) she is left with far less than the actual cash value. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 29 of 43 30 PROPOSITION SEVEN: Defendant’s Cited Colorado Authorities Are Not Helpful to Resolve This Case. Defendant cites multiple authorities that authorize depreciation in an ACV calculation. Whether depreciation is proper does not resolve the inquiry, the issue is what is properly depreciated. State Farm’s cited Colorado authorities are of little use in determining whether labor is depreciable because they deal with whether the cost of building code compliance is included in replacement cost coverage (Dupre v. Allstate Ins. Co., 62 P.3d 1024, 1030 (Colo. App. 2002)) and value an old, destroyed (not damaged) bridge (Johnson v. Board of Cty. Commr’s of Morgan Cty., 336 P.2d 300, 302 (Colo. 1959)). Neither case addresses depreciation of labor and, in any event, McFarland does not request “a higher cost to replace the structure.” Dupre at 1030. Even if he is provided the full labor costs to replace materials, he has not received full replacement value because he must still purchase replacement materials that were also depreciated. Further, Defendant cited to a Washington case, Dombrosky v. Farmers Ins. Co., 928 P.2d 1127, 1136 (Wash. App. 1996) for authority that an insured must complete repairs to recover code upgrades. Dupre at 1030. Washington rules of contract interpretation do not authorize depreciation of labor absent unambiguous language. See Lains v. Am. Family Mutual Ins. Co., 2016 WL 4533075, ante. Likewise, Bd. of Assessment Appeals of Colo. v. E.E. Sonnenberg & Sons, 797 P.2d 27 (Colo. 1990) (valuing a commercial feed lot) and Cty. Bd. of Equalization v. Bd. of Assessment Appeals of Colo., 743 P. 2d 444 (Colo. App. 1987) (valuing drilling rigs) Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 30 of 43 31 are tax assessment cases that do not deal with insurance policy language, repair costs, or ACV valuations. Defendant cites Providence Washington Ins. Co. v. Gulinson, for the proposition that the Colorado Supreme Court recognized that depreciating labor is appropriate. 215 P. 154 (Colo. 1923). This is wrong – the Court did not take a position on drastically different possible depreciation amounts that were offered, but reversed the case because the two appraisals were impossible to reconcile. Id. at 155-156. In Providence Washington, the full amount of the policy was $3,000, subject to a provision that “company shall be held liable for no greater proportion of any loss than the amount hereby insured bears to eighty per cent of the actual cash value of the property described herein at the time when such loss shall happen.” Id. at 154. The appraisers could not agree, and two of the three appraisers signed off on a damage amount that was impossible to reconcile with the stated basis of depreciation. One appraiser said the award was an estimated cost of repairs, and the other said it was an estimate of damage that already reflected depreciation. Id. at 154. The Court held that the extreme disparity in depreciation reflected in the two appraisers’ opinions was indefensible: The actual cost of repairs was $3,217. If the difference between that and the awarded damage, $201, be regarded as allowance for depreciation, it is at a rate grossly at variance with the 50 per cent depreciation allowed for sound value. While the respective rates need not, perhaps, have been exactly the same, yet they could not be greatly different. Here is gross mistake. Id. at 155-156. The possible $201 depreciation of $3,217 would have been a depreciation of about 6.2% - hardly a “unitized” depreciation of the entire building. However, Providence Washington Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 31 of 43 32 does not tacitly endorse any depreciation method – it simply requires some mathematical consistency between two appraisers’ methods of valuation. If the Court tacitly approved a 50% depreciation, then it also approved a 6.2% depreciation. Id. at 155-156. No other court has projected Providence Washington to impact the proper method of applying depreciation, either. Defendant cites to Graves v. Am. Family Mut. Ins. Co., 2015 WL 4478468 (D. Kan. 2015) for the proposition that labor may be depreciated. But see Thomas v. American Family Mut. Ins. Co., 666 P.2d 676, 679 (Kan. 1983): “We hold that the term ‘actual cash value,’ when applied to a partial loss under the insurance policy and facts in this case, means the cost to repair without any reduction for depreciation.” Likewise, the Defendant contends that labor is properly depreciable because Colorado follows the broad evidence rule. First, it is questionable whether Colorado follows the broad evidence rule.10 No Colorado Court claims to follow the rule. Second, the broad evidence rule does not mean that labor may be depreciated. The rule expands the scope of evidence that is properly considered, which is a separate inquiry from whether labor may be depreciated. Third, State Farm’s adjustment quantifies how much a repair project costs on a 10 The rule “provides that actual cash value of a building totally destroyed by fire is a matter of fact to be determined by a consideration of all relevant factors and circumstances existing at the time of loss.” Branch v. Farmers Ins. Co., 55 P.3d 1023, 1026 (Okla. 2002). Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 32 of 43 33 mechanized, standard basis, without resorting to any broad evidence rule. There is no market value analysis in State Farm’s valuation. The computerized claims worksheet contains the methodology used to quantify the damages and it does not reflect some differing, case-by-case formula – it estimates costs of fixing repairs. Fourth, depreciating labor is not compatible with considering “all relevant factors and circumstances” as mentioned in Branch. A principal factor should include whether the damaged property requires a homeowner to incur labor costs. Brown v. Travelers analyzed the circumstances of homeowner claims and concluded: To the extent that labor increases the market value of a good—as with a car—then that labor depreciates along with the good. To the extent that labor does not increase the market value of a finished good—as with a haircut—the value of the labor does not depreciate along with the good. For this reason, the ordinary meaning of “depreciation” allows an insurer to depreciate the value of labor that has merged with a finished good. It does not, however, allow an insurer to depreciate the value of pure labor that has not merged with a finished good. Brown v. Travelers Casualty Ins. Co., 2016 WL 1644342, pp. 3-4 (E.D. Ky. 2016). This rule is harmonious with the broad evidence rule. Likewise, the tax regulations cited by the have little relation to this case. “Insurance law is not concerned with the estimated depreciation charged off on the books of business establishment but rather with the actual deterioration of a structure by reason of age and physical wear and tear, computed at the time of the loss.” Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349, 353 (Ind. 1982). Of course, Plaintiff does not dispute that in some contexts an embedded labor cost is appropriate. Depreciating real estate for tax purposes has a different objective and function that depreciating property for purposes of Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 33 of 43 34 compensating an insured for damages to a house. The function of the tax regulations cited is not to arrive at an accurate partial loss, either. An average insured would never resort to esoteric tax regulations or help in determining what their insurance policy means. Defendant offers support from insurance industry publications that, not surprisingly, support depreciating labor and the attendant savings of claims expense. The test in Colorado is not what a reasonable insurance company thinks policy language means – the test is what an insured layperson understands. Leland at 1064. PROPOSITION EIGHT: Plaintiff Adequately Pled a Violation of the Colorado Consumer Protection Act. Defendant claims that Plaintiff’s Complaint fails to allege the first element of the Colorado Consumer Protection Act (“CCPA”), specifically an allegation of “an unfair or deceptive practice.”11 (Doc.15, p. 27 of 28.) Defendant ignores the specific allegations of the complaint. First, the allegations that Paragraphs 28 – 32 of the Complaint aver the Defendant deliberately withheld a written policy benefit, concealed it by affirmatively disclosing the labor that was not depreciated, and then concealing non-payment of labor by unitizing the depreciated labor with materials in such a way that a consumer would not understand a separate labor component was depreciated. (Doc. 4, p. 6, ¶¶ 28 – 32.) The Complaint also provides that the Plaintiff and class relied upon the representations of State Farm. (Id. at ¶ 30, p. 6.) These paragraphs also contain allegations of a heightened 11 The CCPA applies to an insurer's post-sale conduct and unfair claims handling practices. Showpiece Homes Corp. v. Assurance Co. of Am., 38 P.3d 47, 49 (Colo. 2001). Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 34 of 43 35 duty, deliberately concealing the manner in which labor was depreciated, and Plaintiff’s reliance on the representations. Id. Paragraph 31 of the Complaint alleges: 31. Defendant had a duty to disclose to Plaintiffs and other Class Members that they were depreciating labor costs in their initial ACV payments. Defendant not only failed to disclose this information, it acted in a manner designed to conceal it from Plaintiff and other Class Members. More specifically, Defendant generated and produced documents to Plaintiff and other Class Members concerning their claims in which they failed to disclose the fact that they depreciated labor costs in calculating ACV. In addition, Defendant concealed both the fact and amount of such depreciation by combining the labor and materials components of depreciation into a single sum identified simply as “depreciation” in its adjusters’ loss reports. This practice was peculiarly within the knowledge of Defendant. Plaintiffs and other Class Members could not have known they had been underpaid on their claims through the exercise of reasonable diligence. (Complaint, Doc. 4, p. 6.) This allegation contemplates violations of COLO. REV. STAT. § 6-1-105: • (e): “Knowingly makes a false representation as to the characteristics… benefits…, quantities, services, or property…;” • (g) “Represents that… services… are of a particular standard, quality, or grade… if he knows or should know that they are of another;” • (u) “Fails to disclose material information concerning goods, services, or property which information was known at the time of an advertisement or sale if such failure to disclose such information was intended to induce the consumer to enter into a transaction.” Plaintiff plainly alleged that Defendant depreciated labor in contravention of the policy language and actively concealed that labor was being depreciated with interrelated written representations and omissions in the loss report. The violations of the CCPA are specifically pled with a myriad of unfair and deceptive practices identified in the Complaint. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 35 of 43 36 PROPOSITION NINE: The Complaint Adequately Pled Violations of COLO. REV. STAT. §§ 10-3-1115 and 1116. Defendant’s motion suggests that only two conclusory paragraphs in Plaintiff’s Complaint inform the Court of plausible violations of COLO. REV. STAT. § 10-3-1115. However, the cause of action for deceptive claims conduct plainly realleges previous general allegations in the Complaint: “Plaintiff readopts and realleges all foregoing allegations and further states . . .” (Complaint, Doc. 4, p. 9, Fourth Cause of Action.) The Complaint’s allegations of non-payment and concealment have been briefed, ante. An insured’s burden of proving a claim under § 10-3-1115 “is less onerous than that required to prove a claim under the common law for breach of the duty of good faith and fair dealing.” Kisselman v. American Family Mut. Ins. Co., 292 P.3d 964, 975 (Colo. App. 2011). “Even if a defendant's denial was ‘fairly debatable’ in the common law context, that would not alone establish that the defendant's actions were reasonable as a matter of law under the statutes.” Sipes v. Allstate Indem. Co., 949 F. Supp.2d 1079, 1085 (D. Colo. 2013), citing Vaccaro v. Am. Fam. Ins., 275 P.3d 750, 760 (Colo. App. 2012). “[T]he only element at issue in the statutory claim is whether an insurer denied benefits without a reasonable basis.” Vaccaro v. American Family Ins. Group, 275 P.3d 750, 760, 2012 COA 9M, ¶ 44 (Colo. App. 2012). Plaintiff stipulates that a § 10-3-1115 violation is not actionable if State Farm’s conduct is found to comply with the policy. However, evaluating whether a reasonable basis exists under the circumstances is ordinarily a question of fact for the jury. Vaccaro at 759, ¶ 42. Discovery has not been conducted and reasonableness of the Defendant’s Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 36 of 43 37 actions are not yet ripe for adjudication. For now, Plaintiff has adequately pled a violation of § 10-3-1115. It is already plausible that a statutory claim is viable. State Farm is well aware that its policy is ambiguous to a layperson, and Colorado Courts construe ambiguous provisions “against the drafter and in favor of providing coverage to the insured.” Compass Ins. Co. v. City of Littleton, 984 P.2d at 619. Likewise, the insurer deliberately concealed its depreciation and never told the insured, either in the policy or the written explanation of benefits, that their ACV claim would really be valued like a piece of retail merchandise instead of the actual reality of a labor intensive repair project. PROPOSITION TEN: Sufficient Facts are Pled to Toll the Statute Of Limitations. Defendant contends that violations of COLO. REV. STAT. § 10-3-1115 has a one year statute of limitations because the statue is penal and nor remedial. The relevant statute of limitations for violations of § 10-3-1115 is unsettled, and a certified question was recently sent to the Colorado Supreme Court in Rooftop Restorations v. Am. Family Mut. Ins. Co., 2017 WL 514060, at *3 (D. Colo. 2017). The Colorado Court of Appeals recently held, “We disagree that the statute is penal and instead conclude that section 10–3–1116 is remedial in nature.” Casper v. Guarantee Trust Life Ins. Co., 2016 COA 167, ¶ 56, 2016 WL 6803070, at p. 10 (Colo. App. 2016). This holding was noted in Pinewood Townhome Ass’n v. Auto Owners Ins. Co., 2017 WL 590294, n. 3 at p. 4 (D. Colo. 2017). See also, Gargano v. Owners Ins. Co., 2014 WL 1032303, at p. 3 (D. Colo. 2014), where the Court held a two year statute of limitations applies to § 10-3-1116 claims; Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 37 of 43 38 Stresscon Corp. v. Travelers Property Cas. Co. of Am., 373 P.3d 615, 640, 2013 COA 131, ¶ 124 (Colo. App. 2013) “ . . . section 10–3–1116 was enacted as a remedial measure, intended ‘to curb perceived abuses in the insurance industry,’’’ citing Kisselman v. Am. Family Mut. Ins. Co., 292 P.3d 964, 976 (Colo. App. 2011), reversed on other grounds at Travelers Property Cas. Co. of Am. v. Stresscon Corp., 370 P.3d 140, 146, 2016 CO 22M, ¶ 23 (Colo. 2016). A. Fraudulent Concealment tolled the statute of limitations. Plaintiff specifically pled fraudulent concealment to toll the statute of limitations. (See Complaint, Doc 4, p.6, ¶ 26 – 32.) “One may commit fraud by concealing material existing facts that in equity and good conscience ought to be revealed.” Coors v. Security Life of Denver Ins. Co., 91 P.3d 393, 404 (Colo. App. 2003). The pleading is compliant with the elements of fraudulent concealment set forth in First Interstate Bank of Fort Collins v. Piper Aircraft Corp., 744 P.2d 1197, 1200 (Colo. 1987). (See Complaint, Doc. 4, ¶¶ 26 – 32.) These are: (1) the concealment of a material existing fact that in equity and good conscience should be disclosed; (2) knowledge on the part of the party against whom the claim is asserted that such a fact is being concealed; (3) ignorance of that fact on the part of the one from whom the fact is concealed; (4) the intention that the concealment be acted upon; and (5) action on the concealment resulting in damages. Onyx Properties LLC v. Board of County Commr’s of Elbert County, 868 F. Supp.2d 1164, 1170 (D.Colo. 2012). The first element under Onyx is met. State Farm was under an affirmative Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 38 of 43 39 obligation to disclose it was depreciating labor and its silence is an enumerated deceptive practice under COLO. REV. STAT. § 10-3-1104: • (H)(1)(X): “Making claims payments to insureds or beneficiaries not accompanied by statement setting forth the coverage under which the payments are being made. . .” • (XIV) “Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement;” In addition, falsely representing a policy benefit is an enumerated deceptive insurance practice. (COLO. REV. STAT. § 10-3-1104 (1) (a) and (1)(a)(I).) State Farm’s practice of concealing the depreciation of labor by unitizing it with materials, while simultaneously affirmatively disclosing when separate labor is fully paid at a minimum creates a fact issue as to whether the Explanation of Building Replacement Cost Benefits is intrinsically misleading. (Doc. 15-2.) The Complaint alleges that State Farm was silent regarding depreciation of labor – they just took the depreciation without disclosing it. The policy (Doc. 15-1) did not mention it, and nothing in the Explanation of Building Replacement Cost Benefits alerts an insured that labor is being depreciated. In fact, State Farm’s explanation isolates the labor charges and discloses them when the labor is not depreciated, leaving an insured the impression that the labor is being paid. (See Doc. 15-2, pg. 9 of 13, items 18 – 21.) The selective disclosure of paid benefits coupled with concealment of non-payment, in the circumstances of this case, constitute Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 39 of 43 40 a deceptive omission (if not misrepresentation) regarding what was paid and how it was calculated. The second element (State Farm’s knowledge that the non-payment was concealed) is rightfully inferred because State Farm generated the Explanation. (Doc 152.) The third element (ignorance on Plaintiff’s part) is specifically pled. Plaintiff could not have discovered the non-payment upon exercise of reasonable diligence. (Complaint, Doc. 4, p. 6, ¶ 31: “Plaintiffs and other class members could not have known they had been underpaid on their claims through the exercise of reasonable diligence.”) The fourth element (intention to be acted upon) is plausibly met and properly inferred by virtue of the affirmative representations when labor was fully paid coupled with the concealment of reduced labor. The fifth element, damages, is properly pled and demonstrated by virtue of the Plaintiff not receiving full policy benefits. B. State Farm is equitably estopped from claiming the statute of limitations. “We have held that a defendant’s failure to provide information that he was under a statutory duty to disclose provided an equitable basis for tolling the statute of limitations.” Garrett v. Arrowhead Imp. Ass’n, 826 P.2d 850, 854 (Colo. 1992). Equitable tolling is appropriate where a defendant “wrongfully impeded the plaintiff’s ability to bring a claim when (1) he contributed to the running of the statute of limitations by his acts or omissions, or (2) he failed to disclose information that he is legally required to reveal and Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 40 of 43 41 the plaintiff was prejudiced thereby.” Campbell v. Pohlman, 2011 WL 1755714, at p. 3 (D. Colo. 2011) (interior quotes and brackets omitted). Plaintiff has adequately pled facts to toll the statute of limitations, and at this point a factual record should be developed before adjudicating the statute of limitations. C. The discovery rule tolled the statute of limitations. The statute of limitations for violation of § 10–3–1115 and § 10–3–1116 accrue in the same manner as bad faith claims. Wardcraft Homes v. Employers Mut. Cas. Co., 70 F. Supp.3d 1198, 1213 (D. Colo. 2014). “Pursuant to Colorado's discovery rule, a cause of action for a bad faith tort claim accrues ‘on the date both the injury and its cause are known or should have been known by the exercise of reasonable diligence.’” Brodeur v. American Home Assur. Co., 169 P.3d 139, 147 (Colo. 2007) citing COLO. REV. STAT. § 13–80–108(1). Paragraph 31 of the Complaint pleads sufficient facts to plausibly establish a predicate for the statute of limitations to toll. (Doc. 4, p. 6, ¶ 31.) CONCLUSION The Defendant’s burden is not met. First, all inferences are construed in favor of the Plaintiff, and the objective of pleading is to provide “fair notice” of the allegations. Smith v. U.S. 561 F. 3d at 1104. Plaintiff pled sufficient predicate facts to establish plausible causes of action and tolling of the statute of limitations. State Farm’s policy language, by its own terms, authorizes depreciation of materials but not labor. Alternatively, the policy is ambiguous as to whether State Farm can depreciate labor and that ambiguity must be construed against State Farm. To Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 41 of 43 42 sustain the motion, the Court must essentially find that even accepting all factual allegations as true, no trier of fact could find that the insurance policy is anything other than 100% clear in State Farm’s favor, without ambiguity. Colorado’s rules of construction prevent this conclusion. Many courts and state insurance commissions agree that labor simply does not depreciate. State Farm attempts to avoid a textual analysis of its own policy and interpret the ambiguities against the drafter, but it is well settled that the Court’s threshold analysis should be to interpret the contract, and not to simply find some basis to re-write the insurance against the insured. State Farm authored the contract – not their insured. State Farm controlled the disclosures made to the insured both in the policy and adjustment. Depreciating labor to replace depreciated materials violates the principle of indemnity. Hiring skilled labor to repair damages is an obvious expectation of an insured. If State Farm wanted to depreciate labor along with materials, it could easily have made the policy clear. There is no windfall if an insured merely recovers the labor to install the monetary equivalent of the same depreciated roof. In light of the foregoing authorities, Plaintiff respectfully requests the Motion to Dismiss be overruled in its entirety and this case be allowed to proceed. ATTORNEY FOR PLAINTIFF By: /s/ Jack Mattingly Jr. Jack Mattingly Jr., OBA No. 16136 P.O. Box 70 Seminole, OK 74818-0070 Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 42 of 43 43 (405) 382-3333 Telephone (405) 382-6303 Facsimile Email: jackjr@mroklaw.com CERTIFICATE OF SERVICE I certify that on February 28, 2017 the foregoing document was electronically served via the Court’s CM/ECF system to all counsel of record. By: /s/ Jack Mattingly Jr. Case 1:17-cv-00291-MSK-STV Document 23 Filed 02/28/17 USDC Colorado Page 43 of 43 Exhibit 1 Page 1 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 1 of 13 Exhibit 1 Page 2 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 2 of 13 Exhibit 1 Page 3 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 3 of 13 Exhibit 1 Page 4 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 4 of 13 Exhibit 1 Page 5 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 5 of 13 Exhibit 1 Page 6 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 6 of 13 Exhibit 1 Page 7 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 7 of 13 Exhibit 1 Page 8 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 8 of 13 Exhibit 1 Page 9 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 9 of 13 Exhibit 1 Page 10 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 10 of 13 Exhibit 1 Page 11 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 11 of 13 Exhibit 1 Page 12 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 12 of 13 Exhibit 1 Page 13 of 13 Case 1:17-cv-00291-MSK-STV Document 23-1 Filed 02/28/17 USDC Colorado Page 13 of 13 OHIO DEPARTMENT OF INSURANCE MARKET CONDUCT EXAMINATION OF SANDY & BEAVER VALLEY FARMERS MUTUAL INSURANCE COMPANY NAIC #10270 As Of June 30, 2011 Exhibit 2 Page 1 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 1 of 15 Accredited by the National Association of Insurance Commissioners (NAIC) Consumer Hotline: 1-800-686-1526 Fraud Hotline: 1-800-686-1527 OSHIIP Hotline: 1-800-686-1578 TDD Line: (614) 644-3745 (Printed in house) John R. Kasich, Governor Mary Taylor, Lt. Governor/Director 50 West Town Street Third Floor – Suite 300 Columbus, OH 43215-4186 (614) 644-2658 www.insurance.ohio.gov Honorable Mary Taylor Lt. Governor/Director Ohio Department of Insurance 50 W. Town St. Ste. 300 Columbus, OH 43215 Lt. Governor/Director: Pursuant to your instructions and in accordance with the powers vested under Title 39 of the Ohio Revised and Administrative Codes, a target market conduct examination was conducted on the Ohio business of: Sandy and Beaver Valley Farmers Mutual Insurance Company NAIC Company Code 10270 The examination was conducted at the Company’s home office located at: 108 North Market Street Lisbon, OH 44432 and at the offices of the Ohio Department of Insurance located at: 50 W. Town St. Ste. 300 Columbus, OH 43215 Respectively submitted, May 21, 2012 Lynette A. Baker, CFE, MCM Date Chief, Market Conduct Division Exhibit 2 Page 2 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 2 of 15 TABLE OF CONTENTS COMPANY OPERATIONS ......................................................................................................................... 1 SCOPE OF EXAMINATION ....................................................................................................................... 1 METHODOLOGY ....................................................................................................................................... 2 PERSONAL LINES PAID CLAIMS ........................................................................................................... 2 FARMOWNERS PAID CLAIMS ................................................................................................................ 5 DENIED CLAIMS ........................................................................................................................................ 7 MULTI-LINE NEW BUSINESS UNDERWRITING .................................................................................. 9 MULTI-LINE ENDORSEMENTS ............................................................................................................... 9 CONSUMER COMPLAINTS .................................................................................................................... 10 EXAMINER RECOMMENDATIONS ...................................................................................................... 10 EXECUTIVE SUMMARY ........................................................................................................................ 11 Exhibit 2 Page 3 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 3 of 15 Page 1 of 12 COMPANY OPERATIONS Sandy and Beaver Valley Farmers Mutual Insurance Company is a mutual protective organization organized under Ohio Revised Code (“ORC”) section 3939.01. The Company writes commercial lines farmowners property damage coverage, and personal lines homeowners, church, rental, mobile home, and low value dwelling property damage coverage policies in Ohio. Liability coverage is offered by Grinnell Mutual Reinsurance Company. The Company markets its business through approximately 200 independent agencies. As of December 31, 2011 the Company has over 14,000 policyholders and reported direct written Ohio premiums of $6,574,530. It has been in business since 1879. As of 2011 the Company officers were: James Sanor President Ned Ellis Vice President Leroy Sanor Treasurer SCOPE OF EXAMINATION The examination of Sandy and Beaver Valley Farmers Mutual Insurance Company (“Company”) covered the period from July 1, 2010 through June 30, 2011. The examiners conducted file reviews and interviews of company management. The examination was conducted in accordance with the standards and procedures established by the National Association of Insurance Commissioners (“NAIC”) and Ohio’s applicable statutes and regulations. The examination included the following areas of the Company’s operations: • Paid Claims • Denied Claims • Consumer Complaints • New Business Underwriting • Endorsements This report is a report by tests. Exhibit 2 Page 4 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 4 of 15 Page 2 of 12 METHODOLOGY The examination was conducted through reviews of the claims and underwriting files for the Company’s property insurance products. The examiners also interviewed Company officers, and made requests for additional information. Tests designed to measure the Company’s level of compliance with Ohio’s statutes and regulations, were applied to the files. All tests are described and the results displayed in this report. All tests are expressed as a “yes/no” question. A “yes” response indicates compliance and a “no” response indicates a failure to comply. The results of each test applied to a sample are reported separately. The examiners used the NAIC standards of: 7% error ratio on claim tests (93% compliance rate) and 10% error ratio on all other tests (90% compliance rate) to determine whether or not an apparent pattern or practice of non-compliance existed for any given test. Except as otherwise noted, all tests were conducted on a random sample, taken from a given population of new business or claims records. In an instance where errors were noted, the examiners described the apparent error and asked the Company for a written response. The Company responded that it concurred with all of the examiner’s findings. The Company’s response and the examiner’s recommendations, as applicable, are included in this report. PERSONAL LINES PAID CLAIMS Timely Initial Contact Standard: The initial contact by the Company with the claimant is within the required time frame. Test: Did the Company make timely contact (within 15 days of receipt of loss notice) with claimants following the report of a claim per Ohio Administrative Code (“OAC”) 3901-1- 54(F)(2)? Test Methodology: • The definition of “initial contact” included telephone notice of the claim to the Company or its agent, from the insured, third party claimant, and/or legal representative. • The examiners considered any initial contact to a first notice of loss where more than fifteen (15) days elapsed to be an exception. Exhibit 2 Page 5 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 5 of 15 Page 3 of 12 • The examiners considered any instance where initial contact to a first notice of loss was not documented to be an exception. • The sample consisted of personal lines paid homeowners and fire and extended coverage claims. Findings: Population Sample Yes No Standard Compliance 1031 50 47 3 93% 94% The standard of compliance is 93%. The Company’s handling practices were above this standard. Examiner Comments: Two of the exceptions resulted from missing file documentation. The examiners were unable to determine when the Company first contacted the respective claimants. The third exception resulted from the Company taking more than fifteen days (15) to contact the claimant. Timely Settlement Standard: Claims are resolved in a timely manner. Test: Did the Company make timely payments (10 days after acceptance) to first party claimants per OAC 3901-1-54(G)(6)? Test Methodology: • The examiners considered claim payments made more than ten (10) calendar days after the amount was known and agreed to be exceptions. • The sample consisted of personal lines paid homeowners and fire and extended coverage claims. Findings: Population Sample Yes No Standard Compliance 1031 50 49 1 93% 98% The standard of compliance is 93%. The Company’s handling practices were above this standard. Fair Settlement Standard: Claims are properly handled in accordance with policy provisions and applicable statutes and rules. Test: Did the Company calculate the settlement amount in a manner that conforms to OAC 3901- 1-54(I)? Test Methodology: • The examiners considered claim files not containing the actual estimate used to pay the loss to be exceptions. Exhibit 2 Page 6 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 6 of 15 Page 4 of 12 • In order to be consistent with the industry practice of not depreciating labor, the examiners considered the depreciation of labor to be an exception. • The sample consisted of personal lines paid homeowners and fire and extended coverage claims. Findings: Population Sample Yes No Standard Compliance 1031 50 50 0 93% 100% The standard of compliance is 93%. The Company’s handling practices were above this standard. Treasurer Certificate and Demolition Fund Standard: Claims are properly handled in accordance with policy provisions and applicable statutes and rules. Test 1: If the loss exceeds $5000, did the company claim settlement practices conform to ORC 3929.86? Test 2: If the loss exceeds 60% of the aggregate limits, did the Company make an escrow payment as required by ORC 3929.86? Test Methodology: • The examiners considered applicable claim files without documentation of Company research into the need for, or evidence of, a county treasurer certificate or payment to a demolition fund to be exceptions. • The sample consisted of personal lines paid homeowners and fire and extended coverage claims. Findings: Population Sample Yes No Standard Compliance 1031 50 50 0 93% 100% The standard of compliance is 93%. The Company’s handling practices were above this standard. Exhibit 2 Page 7 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 7 of 15 Page 5 of 12 FARMOWNERS PAID CLAIMS Timely Initial Contact Standard: The initial contact by the Company with the claimant is within the required time frame. Test: Did the Company make timely contact (within 15 days of receipt of loss notice) with claimants following the report of a claim per OAC 3901-1-54(F)(2)? Test Methodology: • The definition of “initial contact” included telephone notice of the claim to the Company or its agent, from the insured, third party claimant, and/or legal representative. • The examiners considered any initial contact to a first notice of loss where more than fifteen (15) days elapsed to be an exception. • The examiners considered any instance where initial contact to a first notice of loss was not documented to be an exception. • The sample consisted of commercial lines paid farmowners claims. Findings: Population Sample Yes No Standard Compliance 351 25 21 4 93% 84% The standard of compliance is 93%. The Company’s handling practices were below this standard. Examiner Comments: The four exceptions resulted from missing file documentation. The examiners were unable to determine when the Company first contacted the respective claimants. Timely Settlement Standard: Claims are resolved in a timely manner. Test: Did the Company make timely payments (10 days after acceptance) to first party claimants per OAC 3901-1-54(G)(6)? Test Methodology: • The examiners considered claim payments made more than ten (10) calendar days after the amount was known and agreed to be exceptions. • The sample consisted of commercial lines paid farmowners claims. Findings: Population Sample Yes No Standard Compliance 351 25 22 3 93% 88% The standard of compliance is 93%. The Company’s handling practices were below this standard. Exhibit 2 Page 8 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 8 of 15 Page 6 of 12 Examiner Comments: Two of the exceptions resulted from the Company not issuing payment to the claimants within ten days (10) of the amount being known and agreed to by the claimant. The third exception resulted from missing file documentation. The examiners were unable to determine when the Company first contacted the claimant. Fair Settlement Standard: Claims are properly handled in accordance with policy provisions and applicable statutes and rules. Test: Did the Company calculate the settlement amount in a manner that conforms to OAC 3901- 1-54(I)? Test Methodology: • The examiners considered claim files not containing the actual estimate used to pay the loss to be exceptions. • In order to be consistent with the industry practice of not depreciating labor, the examiners considered the depreciation of labor to be an exception. • The sample consisted of commercial lines paid farmowners claims. Findings: Population Sample Yes No Standard Compliance 351 25 23 2 93% 92% The standard of compliance is 93%. The Company’s handling practices were below this standard. Examiner Comments: One exception resulted from the depreciation of painting labor. The other exception resulted from the estimate, used to pay the claim, not being in the file. Treasurer Certificate and Demolition Fund Standard: Claims are properly handled in accordance with policy provisions and applicable statutes and rules. Test 1: If the loss exceeds $5000, did the company claim settlement practices conform to ORC 3929.86? Test 2: If the loss exceeds 60% of the aggregate limits, did the Company make an escrow payment as required by ORC 3929.86? Test Methodology: • The examiners considered applicable claim files without documentation of Company research into the need for, or evidence of, a county treasurer certificate or payment to a demolition fund to be exceptions. • The sample consisted of commercial lines paid farmowners claims. Exhibit 2 Page 9 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 9 of 15 Page 7 of 12 Findings: Population Sample Yes No Standard Compliance 351 25 24 1 93% 96% The standard of compliance is 93%. The Company’s handling practices were above this standard. DENIED CLAIMS Sampling Methodology: • The sample included personal and commercial lines denied claims. These claims were not separated by coverage type due to the population size. • The examiners removed and replaced sample claims that were closed without payment, and not formally denied, until a sample of fifty (50) was identified and reviewed. Forty-four (44) records were removed and replaced for this reason. Timely Initial Contact Standard: The initial contact by the Company with the claimant is within the required time frame. Test: Did the Company make timely contact (within 15 days of receipt of loss notice) with claimants following the report of a claim per OAC 3901-1-54(F)(2)? Test Methodology: • “Initial contact” included telephone notice to the Company of a loss from the insured, third party claimant, and/or legal representative. • The examiners considered failure to contact a claimant within fifteen (15) days from the date of notice of the claim, when the Company had sufficient information to contact that claimant, to be an exception. Findings: Population Sample Yes No Standard Compliance 587 50 47 3 93% 94% The standard of compliance is 93%. The Company’s handling practices were above this standard. Examiner Comments: Two of the exceptions resulted from the Company not making contact with the claimant within fifteen (15) days. The other exception resulted from missing file documentation. The examiners were unable to determine when the Company first contacted the claimant. Exhibit 2 Page 10 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 10 of 15 Page 8 of 12 Provisions, Conditions, Exclusions, and Disclosures Standard: Claims are properly handled in accordance with policy provisions and applicable statutes and rules. Test: If the claim was denied on the grounds of a specific policy provision, condition, or exclusion, did the claim file include documentation that the denial notice contained reference to such provision, condition, or exclusion as required by OAC 3901-1-54(G)(2)? Test Methodology: • The examiners considered Company failure to include in its denial a specific reference to the provision, condition, or exclusion that was the basis for the claim denial, to be exceptions. Findings: Population Sample Yes No Standard Compliance 587 50 36 14 93% 72% The standard of compliance is 93%. The Company’s handling practices were below this standard. Examiner Comments: Thirteen (13) of the exceptions resulted from the Company denial letters not specifying the policy provisions wherein the respective losses were excluded. The other exception resulted from the denial letter not being found in the file. Continuing Investigation Notification Standard: Claims are properly handled in accordance with policy provisions and applicable statutes and rules. Test: Was the denial determined within twenty-one (21) days of receipt of properly executed proof of loss, and if not, was notice sent to the insured within the 21 day period and was claimant notified of status of investigation and the estimated time required for continuing the investigation at least every forty-five (45) days thereafter as required by OAC 3901-1-54(G)(1)? Test Methodology: • The examiners considered claim files without documentation of written or verbal communication of the need for additional time to investigate, from the Company to the claimant, dated or logged within twenty-one (21) days of receipt of the proof of loss, to be exceptions. • The examiners considered claim files without notice of continuing investigation letters from the Company to the claimant, stating the need for further time to investigate the claim, every forty- five (45) days, to be exceptions. Findings: Population Sample Yes No Standard Compliance 587 50 44 6 93% 88% The standard of compliance is 93%. The Company’s handling practices were below this standard. Exhibit 2 Page 11 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 11 of 15 Page 9 of 12 Examiner Comments: Four of the exceptions resulted from the Company’s continuing investigation letters to the respective claimants not being found in the files. Two of the exceptions resulted from there being no indication of an inspection of investigation found in the files. MULTI-LINE NEW BUSINESS UNDERWRITING Underwriting Practices Standard: The Company’s underwriting practices are not unfairly discriminatory. Test: Are all applicants underwritten by the same underwriting standards and rules as required by ORC 3901.21(M)? Test Methodology: • The examiners considered instances of incorrect building locations, construction years, construction types, public protection classes, product offerings, premium credits, and deductibles to be exceptions. • The sample consisted of personal lines homeowners and fire and extended coverage policies and commercial lines farmowners applications submitted during the examination period. Findings: Population Sample Yes No Standard Compliance 8061 100 100 0 90% 100% The standard of compliance is 90%. The Company’s handling practices were above this standard. MULTI-LINE ENDORSEMENTS Endorsements Standard: All endorsements are filed with the Department. Test: Did the Company file with the Department any endorsements added to the policy subsequent to a claim being filed as required by ORC 3939.01(A)? Test Methodology: • The examiners considered exclusionary endorsements added to policies, mid-term and after a loss to be exceptions. • The sample consisted of personal lines homeowners and fire and extended coverage policies and commercial lines farmowners claims caused by wind and/or hail submitted during the examination period. Findings: Population Sample Yes No Standard Compliance 747 50 50 0 90% 100% The standard of compliance is 93%. The Company’s handling practices were above this standard. Exhibit 2 Page 12 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 12 of 15 Page 10 of 12 CONSUMER COMPLAINTS Complaints Standard: The Company shall adopt and implement reasonable standards for the proper handling of written communications, primarily expressing grievances, received by the Company from insureds and claimants. Test: Has the Company adopted and implemented reasonable standards for handling written communications, primarily expressing grievances, including procedures to make a complete investigation of a complaint and respond as required by OAC 3901-1-07(C)(15)? Test Methodology: Prior to the on-site portion of the examination, the examiners reviewed Company complaints for the period 1/1/09-6/30/11. Findings: The Company does not have formal written procedures for the handling of consumer complaints. The examiners interviewed Company President, Jim Sanor. Mr. Sanor advised that he reviews and responds to complaints personally, either via phone or written correspondence. He indicated that he does not differentiate in his treatment of complaints directly from the consumer versus from the Department of Insurance. These procedures appear sufficient to deal with the volume of complaints a Company of this size might conceivably receive. EXAMINER RECOMMENDATIONS • The Company should work to improve the quality, quantity, and consistency of its claim adjuster notes and other documentation so claim processing activity can be reconstructed. • Dated logs of all adjuster work activities and copies of all documents should be included in every claim file. In some files the examiners were unable to determine when, or if, contact with the claimant had occurred and/or when the claim adjuster began an investigation. • The Company should ensure that all claim payments are issued/mailed to the claimant within ten (10) calendar days of the settlement amount being known and agreed to by parties. • The Company should ensure that all files contain the claim acknowledgement, continuing investigation, and closing investigation letters to the insured, when applicable, • During interviews with the examiners, the Company indicated that its procedure was not to depreciate labor. The Company should ensure that independent adjuster estimates do not include labor depreciation, in order to maintain consistency between claimant settlements and adherance to Company policies and procedures. • The Company should ensure that denial letters reference the specific, applicable, exclusionary policy lanauage that led to the denial. Exhibit 2 Page 13 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 13 of 15 Page 11 of 12 EXECUTIVE SUMMARY PERSONAL LINES PAID CLAIMS Areas of Review Compliance Standard Compliance Rate Timely initial contact 93% 94% Timely settlement 93% 98% Fair settlement 93% 100% Treasurer certificate and demolition fund 93% 100% FARMOWNERS PAID CLAIMS Areas of Review Compliance Standard Compliance Rate Timely initial contact 93% 84% Timely settlement 93% 88% Fair settlement 93% 92% Treasurer certificate and demolition fund 93% 96% DENIED CLAIMS Areas of Review Compliance Standard Compliance Rate Timely initial contact 93% 94% Provisions, conditions, exclusions, and disclosures 93% 72% Proper denial and continuing investigation notification 93% 88% NEW BUSINESS UNDERWRITING Areas of Review Compliance Standard Compliance Rate Underwriting practices 90% 100% ENDORSEMENTS Areas of Review Compliance Standard Compliance Rate Endorsements 90% 100% Exhibit 2 Page 14 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 14 of 15 Page 12 of 12 This concludes the report of the Market Conduct Examination of Sandy & Beaver Valley Farmers Mutual Insurance Company. The examiners, Ben Hauck, Rodney Beetch, John Pollock, and Molly Porto would like to acknowledge the assistance and cooperation provided by the management and the employees of the Company. May 21, 2012 Date Ben Hauck, AINS, MCM Examiner-in-Charge Exhibit 2 Page 15 of 15 Case 1:17-cv-00291-MSK-STV Document 23-2 Filed 02/28/17 USDC Colorado Page 15 of 15 ST A TE OF VERMONT DEPARTMENT OF BANKING, INSURANCE, SECURITIES AND HEALTH CARE ADMINISTRATION IN RE: ACADIA INSURANCE COMPANY ) ) ) ) ) ) DOCKET NO. 10-027-1 STIPULATION AND CONSENT ORDER NOW COME the Department of Banking, Insurance, Securities and Health Care Administration of the State of Vermont ("Department") and Acadia Insurance Company ("Respondent") and hereby stipulate and agree as follows: WHEREAS, pursuant to the authority contained in 8 V.S.A. §§ 11,12, 13, 15,4723 and 4726 the Commissioner of the Department ("Commissioner") is charged with enforcing the insurance laws of the State of Vermont; and WHEREAS, pursuant to the authority contained in 8 V.S.A. §4726, the Commissioner may investigate any person engaged in the business of insurance in Vermont in order to determine whether that person has been engaged in any unfair method of competition or in any unfair or deceptive act or practice and may suspend, or revoke the license of any insurer and or may impose an administrative penalty for any violation of Title 8, chapter 129; and WHEREAS, Acadia Insurance Company, domiciled in the state of New Hampshire, is authorized to conduct insurance business in Vermont pursuant to the laws of the State of Vermont; and 1 Exhibit 3 Page 1 of 6 Case 1:17-cv-00291-MSK-STV Document 23-3 Filed 02/28/17 USDC Colorado Page 1 of 6 WHEREAS, the Department has conducted an investigation of the method of adjusting third party property damage claims and first party property damage claims performed by Respondent in Vermont; and WHEREAS, 8 V.S.A.§ 4724 (9)(F) provides that "not attempting in good faith to effectuate prompt, fair and equitable settlement of claims in which liability has become reasonably clear" when committed or performed with such frequency as to indicate a business practice is an unfair claim settlement practice and an unfair or deceptive act or practice in the business of insurance and a violation of8 V.S.A.§ 4723 (Vermont Insurance Trade Practices Act); and WHEREAS, the Department concluded, after investigation, that Respondent's method of adjusting certain third party property damage claims, in which Respondent had been accepted liability, included the netting of depreciation where it was improper to do so. The Department further concluded that this method of adjusting constituted an unfair claim settlement practice in that Respondent settled these third-party claims reviewed by the Department by offering and/or paying a settlement amount net of depreciation when the settlement amount should have been the cost of repair or replacement; and WHEREAS, the Department concluded, after investigation, that Respondent's method of adjusting certain first party actual cash value property damage claims constituted an unfair claim settlement practice in that Respondent settled these first party claims reviewed by the Department by offering and/or paying a settlement amount net of depreciation of labor, profit and overhead costs when it was improper to do so; 2 Exhibit 3 Page 2 of 6 Case 1:17-cv-00291-MSK-STV Document 23-3 Filed 02/28/17 USDC Colorado Page 2 of 6 WHEREAS, Respondent has been made aware that the Department may proceed with an administrative action against it for violating 8 V.S.A.§ 4723 of the Vermont Insurance Trade Practices Act; and WHEREAS, Respondent has represented to the Department that it has instructed all of its adjusters who use a specific software to adjust claims to set the default setting for depreciation to "materials only"; and WHEREAS, Respondent disagrees with and does not admit to the allegations and conclusions of the Department, but wishes to resolve this matter administratively, being aware of the expense, consumption of time and uncertainty inherent in litigation, by entering into a stipulation and consent order with the Department on the terms and conditions hereinafter set forth in lieu of proceeding with a hearing. NOW THEREFORE, in consideration of the mutual covenants contained herein, the Department and Respondent stipulate and agree as follows: 1. Respondent shall pay an administrative penalty of Ten Thousand Dollars ($10,000.00) payable within ten (10) days of the date of the execution of this Consent Order. 2. Respondent shall pay the Department's reasonable costs and expenses associated with this order and the investigation pursuant to 8 V.S.A. § 18 in the amount of Four Thousand Four Hundred Seventy Dollars and Sixty-one Cents ($4,470.61). Payment shall be made no later than 10 days after the execution of this Consent Order. 3. Respondent shall cease and desist from offering and/or paying third party settlement amounts net of depreciation in instances in which the repair or 3 Exhibit 3 Page 3 of 6 Case 1:17-cv-00291-MSK-STV Document 23-3 Filed 02/28/17 USDC Colorado Page 3 of 6 replacement of the damaged real property does not result in an increase in the value of the real property. 4. Respondent shall, within 30 days of the signing of this order, make payment to the third part claimants and first party insureds of the amount netted from the cost of repair or replacement or actual cash value payments that Respondent identified as representing depreciation in each of the claims that the Department reviewed and concluded were adjusted in violation of the above cited Vermont Insurance Trade Practices Act. Respondent shall pay interest at the rate of 12% on the amounts paid. An explanatory letter from Respondent that has been approved by the Department shall accompany the payments. Respondent shall submit the explanatory letter to the Department for approval within 15 days of the signing of this Order. Respondent shall submit, in the form of a spreadsheet provided by the Department, the calculations used to compute the amount of interest owed each third party claimant and documentation to verify how the interest was calculated to the Department within 30 days of the execution of this Order. 5. The Department may conduct a follow up investigation/examination within 12-24 months of the signing of this Order. The investigation/examination will focus on whether Respondent is complying with this order, and on whether Respondent is engaging in unfair claim settlement practices as described in 8 V.S.A.§4724 (9)(F) as well as any other issue deemed appropriate at that time by the Department. The Department may seek reimbursement for all costs and expenses associated with the follow up investigation/examination pursuant to 4 Exhibit 3 Page 4 of 6 Case 1:17-cv-00291-MSK-STV Document 23-3 Filed 02/28/17 USDC Colorado Page 4 of 6 8 V. S.A. § § 18. Nothing in this paragraph or Order shall be construed to limit the Department's ability to investigate/examine Respondent prior to 12 months or subsequent to 24 months from the date of the signing of this Order. 6. Respondent hereby waives its statutory right to notice and a hearing before the Commissioner of the Department, or his designated appointee. 7. Respondent acknowledges and agrees that this stipulation is entered into freely and voluntarily and that except as set forth herein, no promise was made to induce the Respondent to enter into it. Respondent acknowledges that it has consulted with its attorney in this matter and it has reviewed this Stipulation and Consent Order and it understands all terms and obligations contained herein. 8. Respondent consents to the entry of this Order and agrees to be fully bound by its terms and conditions. Respondent acknowledges that noncompliance with any of the terms of this Order shall constitute a violation of a lawful order of the Commissioner and shall be a separate violation of the laws of the State of Vermont and shall subject Respondent to administrative action or sanctions as the Commissioner deems appropriate. Respondent further acknowledges that the Commissioner retains jurisdiction over this matter for the purpose of enforcing this order. 9. The undersigned representative of Respondent affirms that he or she has taken all necessary steps to obtain the authority to bind Respondent to the obligations stated herein and has the authority to bind Respondent to the obligations stated herein. 5 Exhibit 3 Page 5 of 6 Case 1:17-cv-00291-MSK-STV Document 23-3 Filed 02/28/17 USDC Colorado Page 5 of 6 STATE OF (nAtIVE COUNTY OF CU{VlI?E-:GLJ\N () Sworn to and subscribed before this The )....1 i1lIay of 2tPfCi"\r?C!2- , 2010. '~ca.tiiC0 tr OI)'KtL(",2I::.-I· NOTARY PUBLIC Accepted by: /~ L'l>r I'/[)\ Kenneth McGuckin, Acting ~ Deputy Commissioner, Insurance Division Vermont Department of Banking, Insurance, Securities and Health Care Administration ORDER IT IS HEREBY ORDERED: My Commission Expires: I" 1/ JotS I I A. Respondent, Acadia Insurance Company shall comply with all agreements, stipulations, and undertakings as recited above. B. Nothing contained in this Order shall restrain or limit the Department in responding and addressing any consumer complaint about Respondent filed with the Department or shall preclude the Department from pursuing any other violation of law. Dated at Montpelier, Vermont this ~~ day of 6c.\V~~'.2010. ommlsslOner Vermont Department of Banking, Insurance, Securities and Health Care Administration 6 Exhibit 3 Page 6 of 6 Case 1:17-cv-00291-MSK-STV Document 23-3 Filed 02/28/17 USDC Colorado Page 6 of 6 STATE OF COLORADO DEPARTl\IEl'll OF REGULATORY AGE.LVCIES DMSION OF INSURANCE 1560 Broadway, Suite 850 Denver, Colorado 80202 Bulletin No. B-5.1 Calculation Of Actual Cash Valm•: Prohibition Against Deducting Contractors' Overhead And Profit From Replacement Cost Where Repairs Are Not Made I. Background and Purpose The purpose of this bulletin is to clarify the position of the Division of Insurance regarding the calculation of actual cash value in residential insurance policies. This bulletin replaces Bulletin 12-98 in its entirety. Bulletins are the Division's interpretations of existing insurance law or general statements of Division policy. Bulletins themselves establish neither binding norms nor finally determine issues or rights. II. Applicability and Scope This bulletin is intended for and applies to all property and casualty insurance companies providing replacement cost coverage of dwellings. The scope of this bulletin is limited to the calculation of actual cash value for dwelling coverage in replacement cost policies, where the policy language below, or substantially similar language to that shown below. is used. III. Division Position Insurers shall be prohibited from deducting contractors' overhead and profit in addition to depreciation when policyholders do not repair or replace the structure. The relevant policy language states: .. We will pay the actual cash value of the damage to the buildings, up to the policy limit, until actual repair or replacement is completed." The Division of Insurance has learned that one or more insurers have interpreted this language, or substantially similar language, to permit deduction for contractors' overhead and profit, in addition to depreciation, from replacement cost in calculating actual cash value. The position of the Division of Insurance is that the actual cash value of a structure under a replacement cost policy, when the policyholder does not repair or replace the structure, is the full replacement cost with proper deduction for depreciation. Deduction of contractors' overhead and profit, in addition to depreciation, is not consistent with the definition of acnaal cash value. The Division of Insurance will interpret policy provisions containing the foregoing or similar language to prohibit deduction of contractors' overhead and profit, in the calculation of actual cash value, where the dwelling is not repaired or replaced by the policyholder. Nothing in this bulletin shall be construed as prohibiting the carrier and insured from explicitly agreeing to a different method for calculating actual cash value. S.5.1 Page 1 of2 Effective 5/8/2007 Exhibit 4 Page 1 of 2 Case 1:17-cv-00291-MSK-STV Document 23-4 Filed 02/28/17 USDC Colorado Page 1 of 2 IV. Additional Division Resources For More Information Colorado Division of Insurance !CARE - Property and Casualty Section 1560 Broadway, Suite 850 Denver, CO 80202 Tel. 303-894-7499 Internet: hnp://www.dora.state.co.us/insurance V. History • Originally issued as bulletin 12-98, December 21, 1998. • Reissued May 8, 2007. B-5.1 Page 2of2 Effective 5/8/2007 Exhibit 4 Page 2 of 2 Case 1:17-cv-00291-MSK-STV Document 23-4 Filed 02/28/17 USDC Colorado Page 2 of 2