Auto-Owners Insurance Higher Property Valuation for Lower Payout Class Action

On May 18, 2019, Mason’s Automotive Collision Center was damaged by a tornado. Mason’s was insured by Auto-Owners Insurance Company under a policy that does not cover damage to the building’s foundation. However, the complaint for this class action alleges Auto-Owners includes the cost of foundation repair “as part of a scheme to reduce the amount it must pay its policyholders through a Coinsurance provision.”

Auto-Owners insured Mason’s Arkansas property for $399,200. The policy includes a coinsurance percentage of 80% and a deductible of $5,000.

The complaint explains, “Coinsurance provisions mean that an insurance company will not pay the full value of a loss if the value of the covered property at the time of loss is greater than the limit of insurance on the property but instead will pay a fraction of the loss. Thus, the greater the value of the covered property at the time of loss, the less the insurance company will pay its insured.”

The calculation for payout includes the following steps:

• “Multiply the value of the Covered Property at the time of loss by the Coinsurance percentage;”
• “Divide the Limit of Insurance of the property by the figure determined in Step (1)” above;
• “Multiply the total amount of loss, before the application of any deductible, by the figure determined in Step (2); and”
• “Subtract the deductible from the figure determined in Step (3).”

The complaint shows a chart comparing the figures when the cost of foundation is and is not included in the replacement cost of the building. Including the foundation increases the value of the building, giving a correspondingly higher figure when it’s multiplied by 80%.

However, in Step (1), where the insured limit ($399,200) is compared with the full value of the building, the higher valuation of the building results in a lower figure, because the limit is a smaller portion of the building’s value. That is, $399,200 compared with a higher value of the building yields 0.57; $399,200 compared with the lower value is 0.65.

These figures then become the multiplier to the cost of the damage. That cost is multiplied by 0.57 with the higher building cost or 0.65 with the lower building cost. Naturally, the final figure will be lower with the smaller multiplier.

Thus by increasing the value of the building, Auto-Owners can decrease the amount of its coverage and the final amount it is obligated to pay.

The complaint proposes two classes:

• Class A is all persons or entities that have a commercial property damage insurance policy with Auto-Owners.
• Class B is all persons or entities that have or had a commercial property damage insurance policy with Auto-Owners at any time between September 24, 2016 and the present, and who received a payment for a property damage claim where the payment was reduced by the policy’s coinsurance provisions where the property valuation included foundation work or repairs.

The complaint proposes, in the alternative, the same classes but limited to residents of Arkansas.

Article Type: Lawsuit
Topic: Insurance
Tags: Business Insurance, Incomplete payment of benefits due, Insurance