The federal judge overseeing a putative class action against insurer The Hartford has certified a class of about 19,500California policyholders in a case claiming the insurer routinelyunderpays claims for damaged property by depreciating items notsubject to such reductions under their policies or state law.

The complaint also accuses Hartford of decreasing the sales taxpaid on replacement items. Both practices, it said, violateCalifornia’s insurance code and constitute breach of contract andrelated claims.

Lead plaintiff's building damaged by fire

The lead plaintiff’s suit concerns a renovated 1900-vintagebuilding in San Francisco that was damaged by a fire in 2013.

Using an “actual cost value” method for paying the claim,The Hartford estimated it would cost $731,000 to repair thebuilding, which it paid Johnson. He spent $644,000 on repairs butdid not repair or renovate the third floor.

In 2015, he sued Hartford in state court in San Francisco; thesuit was removed to U.S. District Court in California’s NorthernDistrict.

Johnson’s complaint said that Hartford depreciated the cost ofnumerous items not subject to depreciation, including baseboards,cement, drywall, insulation, marble, lath and plaster, plumbing andornamental iron among others, often by sizable amounts. Thereplacement cost for plumbing, for instance, was reduced by morethan 42%, while the replacement cost for marble was written down by80%.

Reduced sales tax component

The suit also noted that Hartford reduced the sales tax componentby the same amount as the depreciation on the items themselves.

Hartford’s methodology resulted in “lowballing” claims to itsinsureds, it said.

Hartford moved to deny class certification and also soughtsummary judgment, but in a May 22 order Judge William Orrick shotdown both requests.

Hartford had argued that it paid Johnson more than he actuallyspent on repairs, but Orrick wrote that the policy languageindicated that “the total amount recoverable under the policy isnot limited to the amount actually spent on repairs.”

In any case, he noted, Hartford’s insureds “may decide, for avariety of reasons, to take the [actual replacement value] to whichthey are entitled and not rebuild all of the structure, as Johnsonhas apparently done in not rebuilding the third floor.”

California’s insurance code & replacement value

“The measure of damages is not the difference between the amount ofmoney spent on repairs and what was paid out, but rather thedifference between what Hartford paid out and what it should havepaid out,” Orrick wrote.

Regarding the sales tax, he wrote, such a tax “constitutes anon-tangible item not subject to deduction at all” under the policyor under California’s insurance code.

Hartford’s arguments that the potential class members lackcommonality under federal rules also failed, he said, since all oftheir cases turn on the issue of whether Hartford is prohibitedfrom depreciating certain structural items and the sales tax onthem.

Attorney Ivo Labar of San Francisco’s Kerr & Wagstaffe,who represents Johnson with colleague Michael von Loewenfeldt, saidthat while the instant litigation only concerns Hartford clients inCalifornia, many other states’ insurance laws mirror the Californiacode and that litigation could be filed elsewhere.

“The big takeaway is that national insurance companies need topay attention to the laws that are in effect in their states andnot try to save money at the expense of their insureds,” saidLabar.

Similar cases settled

Labar said that some similar cases in California against otherinsurers, including Farmers, State Farm and AAA, have settledwithin the past few years.

Hartford’s attorneys, Christopher Frost and Michael Mulvany ofBirmingham, Alabama’s Maynard, Cooper & Gale, referred queriesto the insurer’s media representatives, who did not immediatelyrespond to messages.

Contact Law.com writer Greg Landat [email protected].