United States District Court, M.D. Tennessee, Cookeville Division
JAMES MCKINNIE, LONNIE MCKINNIE, LARRY ROBERTS, and TINA ROBERTS, individually and on behalf of all others similarly situated, Plaintiffs,
STATE FARM FIRE and CASUALTY COMPANY, Defendant.
WAVERLY D. CRENSHAW CHIEF UNITED STATES DISTRICT JUDGE
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.
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.
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.
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).
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).
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).
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,
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).
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).
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).
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).
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).
sought payment for the omitted licensed prime
contractors' overhead and profit from State Farm. State
Farm has refused to pay those amounts.
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,  audit, accounting, tax and legal fees,
advertising, and as profit.” (Id. ¶ 56).
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.
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).
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
(Id. ¶ 70).
Standard of Review
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.
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.
Count I - Breach of Contract - Failure to Pay Prime
Contractor's Overhead and Profit
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.
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
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.
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