Lawsuit Claims State Farm Uses ‘New Construction’ Numbers to Generate Lower Cost Estimates for Property Remodeling Jobs

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A proposed class action alleges State Farm Fire and Casualty Company, in an attempt to save money, has wrongfully used “new construction” numbers when generating through industry-standard software cost estimates for projects more properly considered “reconstruction,” resulting in the underpayment of policyholders’ claims. 

The 80-page breach-of-contract lawsuit says that although the widely used “Xactimate” software is relied upon and trusted in the insurance industry for generating cost estimates for “new construction” and “reconstruction” projects related to covered property damage, State Farm has “discarded the industry practice” by estimating reconstruction project costs based on the program’s lower new construction numbers. The effect of this, the complaint says, is that costs generated for “new construction” have yielded lower estimates for policyholders more accurately engaging in reconstruction and netted the defendant potentially millions in underpaid claims. 

“As a result of this scheme, State Farm has routinely generated estimates that it knows full well to be below the fair and reasonable cost for the reconstruction of the insured’s property,” the lawsuit alleges. “The purpose of the scheme was to enable State Farm to save money at the expense of its insured by underpaying claims.”

The lawsuit charges that every insured on the other end of State Farm’s “new construction” estimate scheme, which the case charges has occurred in at least New Jersey, New York and Pennsylvania, has incurred “some type of financial hardship and/or financial loss” and is more than likely not represented by an attorney or public insurance adjuster. Proposed class members are also most likely unfamiliar with the distinctions between new construction as opposed to reconstruction and generally assume State Farm’s estimates have been produced in good faith, the suit says. 

State Farm Fire and Casualty Company is the residential and commercial property and casualty insurance arm of the State Farm family of companies, the case begins. Like many other major property and casualty insurance companies, State Farm makes use of Verisk Analytics’ Xactimate software to estimate costs for repairing property damaged by fire or other insured risks, the suit relays.

According to the complaint, the Xactimate program provides a specific cost for each line item of a construction estimate, and adjusts the costs based upon the geographic area in which a property is located. The suit shares that the figures generated in Xactimate are widely considered in the insurance and construction industries, in particular by parties other than the insurance companies themselves, as below the reasonable cost of repairs. The case stresses, however, that the Xactimate pricing scale is not part of the fraudulent conduct in which State Farm has allegedly engaged. 

With Xactimate, a user can generate costs for “new construction,” i.e. for a building that needs to be rebuilt in its entirety from the foundation up after a total loss, or “reconstruction,” as with a building from which some parts remain serviceable. Crucially, and almost across the board, the case says, the Xactimate costs for reconstruction are higher than the pricing of the same item for new construction. 

Although State Farm, for many years, used the Xactimate program properly, that is, used reconstruction estimates for reconstruction jobs and new construction estimates for new construction jobs, the company at one point pivoted and began applying lower new construction estimates to all reconstruction jobs, the lawsuit alleges. Per the case, State Farm has engaged in this practice to save money. 

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