Lammert v. Auto-Owners (Mutual) Ins. Co.

Attorneys

*920David McMullan, Don Barrett, Don Barrett, P.A., Lexington, MS, J. Brandon McWherter, Gilbert Russell McWherter PLC (Jackson TN Office), Jackson, TN, T. Joseph Snodgrass, Larson King, LLP, St. Paul, MN, for Plaintiffs., Charles C. McLaurin, Baker, John S. Hicks, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (Nash), Nashville, TN, Jeff Mason, Todd A. Noteboom, Zane Gilmer, Minneapolis, MN, for Defendant., Chief Judge Crenshaw *921Under an insurance policy that (1) defines actual cash value as "the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss," or (2) states that "actual cash value includes a deduction for depreciation," can the insurer depreciate not only materials, but also a portion of the labor costs? Because the answer to that question is central to resolution of this case and has not been definitively answered by the Tennessee courts, and because the answer could affect thousands of policy-holders in this state, the Court will grant Plaintiffs' Motion to Certify Question to the Tennessee Supreme Court. (Doc. No. 46). The Court will also deny without prejudice the remaining pending Motions (Doc. Nos. 27, 32 & 35) because they all hinge to a greater or lesser extent on the answer to the certified question., The named Plaintiffs in this putative class action are two married couples: Gregory and Jamie Lammert, and Larry and Susan Reasons. Both couples had property insurance through Auto-Owners. Both also sustained covered losses to their property and received (or were offered) payments for those loses that depreciated not only materials, but also labor., Auto-Owners calculated its obligation to the Lammerts to be $9,986.36. It did so by first estimating the cost to repair or replace the damage with new materials ($12,146.55) and then subtracting for depreciation ($2,160.19). Both labor and materials were depreciated for certain line items., The Reasons own a home and other structures (including a pool house) in Jackson, Tennessee. Those structure were insured under Auto-Owners' standard form "Homeowners Insurance Policy." That policy, however, did not contain the same language as the Lammerts' policy defining actual cash value, but did provide: "If you do not repair or replace the damaged covered property, we shall pay the actual cash value of the property at the time of loss. Actual cash value includes a deduction for depreciation." (Doc. No. 24-3 at 24)., With regard to the November 2016 claim, Auto-Owners calculated the cost to replace the wind-damaged roofs and then deducted an amount to account for pre-loss depreciation. In response to the Reasons' complaint about depreciation for labor costs, Auto-Owners wrote:, With regard to the March 2017 claim, the Reasons' policy provided for full replacement cost coverage, but the Reasons opted for the actual cash value under the policy. Accordingly, Auto-Owners again calculated the costs to repair or replace the damage property, and then deducted pre-loss depreciation, including labor., When using Xactimate®, the adjuster has the option to calculate deductions by changing the programs' default settings. With the click of a mouse, the adjuster can check boxes to depreciate for "material," "non-material," "removal," "overhead and profit," "sales tax," and any combination of these items. Thus, by clicking the box "depreciate removal" the adjustor depreciates the cost of removal labor; clicking the box "depreciate non-material" results in the labor for reinstallation being depreciated. The ensuing payments vary markedly, depending upon which boxes are checked., To illustrate the point, Plaintiffs rely on a hypothetical claim for indemnity involving laminate flooring that was damaged by a sewer backup when two-thirds of its useful life remained. Under this hypothetical, and without depreciation for either removal of the old floor or reinstallation of the new floor, the actual cash value is $6,640.58. If, however, the cost of reinstallation labor is depreciated, the actual cash value becomes $4,414,83. If both reinstallation and removal labor are depreciated, the value drops $3,757.83. (Doc. No. 28 at 7-8)., Instead, "[n]ovel, unsettled questions of state law...are necessary before federal courts may avail themselves of state certification procedures.' " Arizonans for Official English v. Arizona, 520 U.S. 43, 79, 117 S.Ct. 1055, 137 L.Ed.2d 170 (1997) (citation omitted). In such circumstances, "[t]aking advantage of certification made available by a State may 'greatly simplif[y]' an ultimate adjudication in federal court,' " ibr.US_Case_Law.Schema.Case_Body:v1">id., while at the same time "help[ing] build a cooperative judicial federalism," Lehman Bros., 416 U.S. at 391, 94 S.Ct. 1741., The Tennessee Supreme Court specifically allows for the certification of questions, and "frequently accepts certified questions of law." Seals v. H & F, Inc., 301 S.W.3d 237, 241 n.3 (Tenn. 2010). In this regard, Rule 23 of the Rules of the Tennessee Supreme Court provides, in part:, Tenn. Sup. Ct. R. 23 § 1. Thus, for certification to be proper, (1) resolution of the question at hand must be "determinative of the cause" and (2) there must be "no controlling precedent" from the Tennessee Supreme Court. Both prongs are satisfied in this case., "Rule 23 permits consideration of questions of law only, not questions of fact or controversies as a whole," Seals, 301 S.W.3d at 241 (Tenn. 2010), and "a question of law is 'determinative of the cause' if it is claim-dispositive." Lindenberg v. Jackson Nat'l Life Ins. Co., 147 F.Supp.3d 694, 700 (W.D. Tenn. 2015). This is so because, "even though "Rule 23 itself is not clear as *924to whether the question of law must be determinative of the entire case or merely determinative of a claim or issue within the case," the Tennessee Supreme Court "has previously accepted certified questions involving a plaintiff's claims against only one defendant in a multi-defendant case." Becker v. Ford Motor Co., 2013 WL 6046080, at *2 (E.D. Tenn. Nov. 13, 2013) (collecting cases). It has also answered "important questions of first impression" that would "substantially dispose of the case," Swafford v. Harris, 967 S.W.2d 319, 321 (Tenn. 1998), and, in Renteria-Villegas v. Metro. Gov't of Nashville & Davidson Cty., 382 S.W.3d 318, 324 (Tenn. 2012), answered a question that, in the district court's opinion, would "one way or the other, effectively determine the outcome of th[e] case," Renteria-Villegas v. Metro. Gov't of Nashville & Davidson Cty., 2011 WL 4048523, at *13 (M.D. Tenn. Sept. 12, 2011) ; see Grover by Grover v. Eli Lilly & Co., 33 F.3d 716, 719 (6th Cir. 1994) ("Certification has proved to be an important tool for federal courts sitting in diversity, since it frees them from having to speculate how state courts will decide important questions of state law."); Carbon Processing & Reclamation, LLC v. Valero Mktg. & Supply Co., 823 F.Supp.2d 786, 824 (W.D. Tenn. 2011) (finding Rule 23 was satisfied with respect to issue of whether promissory estoppel was an exception to the statute of frauds, even though complaint also alleged common-law claims for breach of contract, promissory fraud, equitable estoppel, and violation of Tennessee Consumer Protection Act). "Answering a certified question does not finally dispose of the cause; it merely informs the district court, which retains jurisdiction over the cause, how to interpret the state law at issue." Haley v. Univ. of Tennessee-Knoxville, 188 S.W.3d 518, 521 (Tenn. 2006) (emphasis added)., Here, the Court requests the Tennessee Supreme Court's assistance in answering a precise issue under state law, an issue that is fundamental to Plaintiffs' overall claim, and one that serves as the basis for its class certification request. More specifically, the class Plaintiffs seek to represent is defined as follows:, The parties have not cited, and the Court has not located, any Tennessee cases that address the issue of whether labor costs can be depreciated for purposes of determining actual cash value under an insurance policy. Auto-Owners argues the lack of direct authority matters not because the law in Tennessee on this issue is "well settled." (Doc. No. 53 at 2)., The Lammerts' policy defined "actual cash value" as "the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss," while the Reasons' policy defined the phrase to "include[ ] a deduction for depreciation," if they opted not to repair or replace the property. (Doc. No. 23-6 at 24). Neither policy specifically addresses whether actual cost value allows for the deduction of labor., 493 S.W.2d at 459-60 ; compare Ohio Cas. Ins. Co. v. Ramsey, 439 N.E.2d 1162, 1169 (Ind. Ct. App. 1982) ("We therefore adopt the broad evidence rule as the measure of recovery for a total loss to real property insured under a policy containing a liability-limiting clause such as the one in this case."); Brooks Realty, Inc. v. Aetna Ins. Co., 276 Minn. 245, 149 N.W.2d 494, 495 (1967) ("In determining the actual loss of a partially destroyed building we adopt the broad-evidence rule[.]"); with C.L. Maddox, Inc. v. Royal Ins. Co. of Am., 208 Ill.App.3d 1042, 153 Ill.Dec. 791, 567 N.E.2d 749, 757 (1991) ("While we are aware that other states have adopted a 'broad evidence' rule which would permit the introduction of market value evidence...we decline to adopt such a rule.")., Third, it appears that since Braddock was decided almost 45 years ago, it has been cited by state and federal courts only nine times,1 never by the Tennessee Supreme Court or Tennessee Court of Appeals, and never by any court as stating that the broad evidence rule was adopted in Tennessee. For its part, the Sixth Circuit has cited Braddock for the proposition that "[t]he actual cash value of a loss is equal to the repair or replacement costs less depreciation." Parkway Assocs., LLC v. Harleysville Mut. Ins. Co., 129 Fed.Appx 955, 962 (6th Cir. 2005). Immediately after making that observation and citing Braddock , the Sixth Circuit stated:, Id. at 962 (collecting cases). Such language lends support to Plaintiffs' position because an insured might reasonably expect that determining the repair or replacement costs would not include a depreciation for labor., Fourth, labor depreciation was not the issue in either Braddock or Third Nat'l Bank. Instead, in both cases the underlying issue was whether it was proper for the jury to consider depreciation in determining the actual cash value of a loss covered by an insurance policy. It is one thing for the jury to consider depreciation as a factor in determining indemnity. In may be quite another matter for an insurer (as alleged here) to automatically deduct labor costs for removal and replacement in arriving at the actual cash value. As far as the Court can tell, this has not been answered by the Tennessee Supreme Court, making certification of the question proper. See BKB Props., LLC v. SunTrust Bank, 453 Fed.Appx 582, 588 (6th Cir. 2011) ("The certification of questions 'is most appropriate when the question is new and state law is unsettled.' ")., Tennessee law aside, the answer to the question of whether labor costs can be depreciated has resulted in decidedly mixed results in other jurisdictions, depending upon the state law at issue and the policy language. State supreme court decisions that do not permit depreciation for labor costs include: Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675, 677-79 (Ark. 2015) (Arkansas law); Bellefonte Ins. Co. v. Griffin, 358 So.2d 387, 390-91 (Miss. 1978) (auto policy under Mississippi law). State supreme court decisions that do permit depreciation for labor costs include: Henn v. Am. Family Mut. Ins., Co., 295 Neb. 859, 894 N.W.2d 179, 189-91 (2017) (Nebraska law); Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780, 784 (Minn. 2016) (Minnesota law). One state supreme court has indicated that the cost to remove materials cannot be depreciated because it is debris removal, Branch v. Farmers Ins. Co., 55 P.3d 1023, 1027-28 (Okla. 2002), but the labor cost to install new material is subject to depreciation, Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017, 1019-21 (Okla. 2002) (Oklahoma law).

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