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McKinnie v. State Farm Fire And Casualty Co.

United States District Court, M.D. Tennessee, Cookeville Division

February 2, 2018

JAMES MCKINNIE, LONNIE MCKINNIE, LARRY ROBERTS, and TINA ROBERTS, individually and on behalf of all others similarly situated, Plaintiffs,



         This is a putative class action brought by James and Lonnie McKinnie, and Larry and Tina Roberts on behalf of State Farm Fire and Casualty Company (“State Farm”) insureds. The core claim is that State Farm refuses to pay prime contractor's overhead and profit associated with the estimated cost to reconstruct a structure where the covered loss is $25, 000 or more.

         State Farm has filed a Motion to Dismiss (Doc. No. 29) that has been fully briefed by the parties (Doc. Nos. 30, 31 & 32). For the reasons that follow, the Motion will be granted in part and denied in part.

         I. Factual Background

         The factual allegations are drawn from the controlling First Amended Complaint. Construed in Plaintiffs' favor, those facts follow, and will be supplemented where necessary for purposes of the legal analysis.


         Plaintiffs collectively owned two commercial structures (connected by a breeze way) located at 650 and 654 North Spring Street in Sparta, Tennessee. Those structures are insured against property loss through an insurance policy (“Policy”) issued by State Farm. The Policy contained an endorsement providing coverage on an “actual cash value” valuation basis, i.e. replacement cash value less depreciation. (Doc. No. 25, First Amended Complaint ¶¶ 6, 8, 10, 12).

         On July 14, 2015, Plaintiffs' buildings suffered extensive damage as a result of a hail storm. The damage affected the entire roof of both structures (more than 200, 000 square feet), necessitating their replacement, as well as the replacement of skylights, ridge end caps, ridge vents, ridge cap flashing, eave trim, gable trim, and other items. (Id. ¶ 13).

         Two days after the storm, State Farm inspected the damage and determined the loss was covered under the Policy. Thereafter, State Farm issued multiple estimates for the property damage utilizing Xactimate, a software estimating program. (Id. ¶¶ 15, 16).

         The most recent estimate was received by Plaintiffs on June 2, 2017. State Farm determined that the replacement cost value for the damage to the building located at 654 North Spring Street was $556, 354.26, which was reduced to $479, 993.39 after depreciation. According to the estimate, reconstruction would require approximately 55 hours of “commercial supervision/project management” time, as defined by the Xactimate software program. (Id. ¶¶ 18, 22).

         State Farm also determined that the replacement cost value for the property damage at 650 North Spring Street was $419, 768.97, which was reduced to $362, 932.66 after depreciation. According to this estimate, reconstruction for this building would also require approximately 55 hours of “commercial supervision/project management” time. (Id. ¶¶ 19, 23).

         “Commercial supervision/project management” time is defined in the Xactimate software as the time required “to manage commercial jobs where Supervision/Project Management is needed to coordinate the work of subcontractors, or perform other project management duties.” Further, “[a] Superintendent/Project Manager may complete tasks such as, but not limited to, create/maintain project schedules, coordinate/meet trades, order materials, inspect job sites, obtain permits, meet with inspectors, etc.” (Id. ¶ 24).

         On the cover page of each estimate, State Farm provides written guidance concerning the Structural Damage Claim Policy.” It stated that, “[d]epending upon the complexity of your repair, our estimate may or may not include an allowance for general contractor's overhead and profit. If you have questions regarding general contractor's overhead and profit and whether general contractor services are appropriate for your loss, please contact your claim representative before proceeding with repairs.” (Id. ¶ 21).

         Plaintiffs contacted Titan Exteriors, Inc. for an estimate of the cost to repair the damaged roofs. Titan is licensed by the Tennessee Board of Licensing Contractors to act as a “prime contractor” with respect to commercial building reconstruction in Tennessee. (Id. ¶¶ 34, 35).[1]

         Titan, which also used Xactimate, came up with an estimate significantly higher than that of State Farm. When overhead and profit are included, the difference was more than $270, 000. (Id. ¶ 94). Even without overhead and profit, Titan's figure was more than $60, 000 higher because State Farm failed to include eave trim, light fixtures, pipe boots and other items in its estimate, and failed to provide payment for temporary repair costs incurred in replacing skylight panels that were needed to prevent additional damage to the roof deck and interior of the building. (Id.). Plaintiffs further allege that, as result of State Farm's failure to promptly adjust and pay the amounts owed, they have been damaged because of the increase in pricing. (Id. ¶ 96).

         Plaintiffs sought payment for the omitted licensed prime contractors' overhead and profit from State Farm. State Farm has refused to pay those amounts.


         Both with respect to their individual claims and that of the class they seek to represent, Plaintiffs contend that State Farm's pattern and practice is to fail to pay overhead and expenses when a prime contractor is required by Tennessee law to perform repairs. It does this by manipulating Xactimate. That is, even though Xactimate allows an insurance adjuster to choose whether to provide full payment for a prime contractor's overhead and profit when calculating replacement cost value, State Farm intentionally changes the settings to omit overhead and profit for a prime contractor. (Id. ¶¶ 50-55). In so doing, State Farm eliminates “payments for all overhead that is not directly attributable to an individual construction project, such as general expenses, payroll expenses, office and building rent and maintenance, management and ownership wages and benefits, utilities, office supplies, salaries for office and sales personnel, office equipment, payroll and construction related software, the costs of ongoing licensure, training of employees, full-time employment of a qualifying agent, [2] audit, accounting, tax and legal fees, advertising, and as profit.” (Id. ¶ 56).

         Instead of paying proper overhead and profit when a prime contractor is necessary, State Farm pays only “job-related” overhead. Such overhead is the type incurred by a single, unlicensed tradesman or a small, unlicensed subcontractor working a job and is directly related to the job.

         Examples include a temporary power line to a jobsite, or the depreciation of a tradesman's hand-tools. It does not include the overhead, such as the retention of a QA, as well as having the necessary ongoing business liquidity and business assets unrelated to a job. (Id. 55).

         Plaintiffs seek to represent a class consisting of:

[a]ll persons and legal entities insured under a State Farm homeowner or property policy insuring property in Tennessee, and for these policyholders: (1) State Farm determined that the policyholder suffered direct physical loss to a dwelling or other structure located in Tennessee that State Farm determined was covered by the terms of the policy; (2) the estimated costs to make the repairs caused by the covered loss met or exceeded one or more of the thresholds set by the Tennessee Contractor's Licensing Act and mandate that those performing work to repair or replace the damaged property hold a valid Tennessee contractor's license and be a “prime contractor”; and (3) State Farm refused to pay the policyholder for overhead and profit as more fully described herein in its adjusting/settlement of the claim.

(Id. ¶ 70).

         II. Standard of Review

         In considering a motion to dismiss under Rule 12(b)(6), the Court “construe[s] the complaint in the light most favorable to the plaintiff, accept[s] its allegations as true, and draw[s] all reasonable inferences in favor of the plaintiff.” Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007); Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir. 2002). Plaintiff need only provide “a short and plain statement of the claim that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests, ” Conley v. Gibson, 355 U.S. 41, 47 (1957), and the Court must determine only whether “the claimant is entitled to offer evidence to support the claims, ” not whether the plaintiff can ultimately prove the facts alleged. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 511 (2002) (quoting Scheuer v. Rhodes, 416 U.S. 232 (1974)). Nevertheless, the allegations “must be enough to raise a right to relief above the speculative level, ” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), and must contain “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). In short, “only a complaint that states a plausible claim for relief survives a motion to dismiss.” Id. at 679; Twombly, 550 U.S. at 556.

         III. Legal Discussion

         The First Amended Complaint is in four counts: Count I alleges breach of contract for State Farm's failure to pay the prime contractor's overhead; Count II alleges breach of contract unrelated to State Farm's refusal to pay overhead; Count III seek a declaration that State Farm's refusal to pay the amounts contractually owed Plaintiffs violates the Policy; and Count IV alleges that State Farm has acted in bad faith, subjecting them to a twenty-five percent penalty. In addition, Plaintiffs seek punitive damages in an amount equal to nine times their actual damages.

         A. Count I - Breach of Contract - Failure to Pay Prime Contractor's Overhead and Profit

         Plaintiffs' breach of contract claim is brought on behalf of themselves, as well as the class. The Court considers the class claim first, which is the only one requiring extended discussion.

         1. Class Claim

         As a preliminary matter, the Court agrees with State Farm that Plaintiffs' class claim has been a moving target. As initially filed, Count I sought to recover for the failure to pay contractor's overhead and profit. In substance, Count I alleged:

62. State Farm failed to pay for contractor's overhead and profit even when the size of the underlying project required contractor licensure under Tennessee law by meeting or exceeding the TCLA Thresholds.[3]
63. State Farm breached its contractual duty to pay Plaintiffs and members of the proposed class the full value of their claims by withholding contractor's overhead and ...

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