Tenn. Class Action Alleges State Farm Applies ‘Arbitrary’ Deductions to Payments for Total Loss Claims

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A State Farm Mutual Automobile Insurance Company policyholder claims the insurer has systematically reduced the value of payments for total loss claims by applying “arbitrary and unexplained” adjustments to the value of insureds’ vehicles.

The 17-page amended complaint says State Farm, through its automobile insurance policies, promises to pay the actual cash value of an insured vehicle declared a total loss due to property damage stemming from a collision, theft, or other peril. Under Tennessee law, the suit adds, the insurer is required to make any deductions it takes from the actual cash value “as specific as reasonably possible.”

Notwithstanding its contractual and legal obligations, State Farm has allegedly manipulated data to artificially reduce the actual cash value paid to insureds who submit total loss claims. According to the case, the defendant applies a “typical negotiation adjustment” to the base values of comparable vehicles, which are then used to determine the actual cash value of an insured’s totaled car. The suit alleges that such adjustments—which amount to a reduction of 8.5 percent, on average—are “wholly arbitrary” and not rooted in “any statistical, objective, or verifiable data.”

State Farm’s deductions, the case says, “have no basis in fact” and serve only to significantly understate the actual cash value of an insured’s vehicle.

Per the lawsuit, State Farm calculates its valuations and claims using third-party market value reports from Audatex. According to the case, Audatex utilizes a software program called “Autosource Market-Driven Valuation” (AMDV) that purports to calculate the value of total-loss vehicles based on comparable models recently sold or made for sale in the insured’s geographic area. The case argues, however, that State Farm instructs Audatex with regard to what data to use in its reports, including whether to apply a typical negotiation adjustment to comparable vehicles.

Although the AMDV report starts with itemized internet sales prices for comparable vehicles, a downward adjustment is then applied “to account for typical negotiation,” the suit says. Thus, State Farm’s valuation of each insured vehicle is not based on actual data regarding the cost of comparable vehicles but rather on “an invalid and unexplained assumption that the insured can negotiate a lower price,” the lawsuit argues.

“In short,” the complaint says, “rather than paying actual cash value, State Farm pays less than actual cash value; leaving it to the insureds to make up the difference by engaging in what State Farm describes as a ‘typical negotiation’ and achieving a better deal.”

The lawsuit goes on to contend that State Farm provides no data or explanation of industry practices to support its typical negotiation adjustment, much less an adjustment of 8.5 percent. The only explanation provided in the insurer’s valuation reports, the suit says, is the claim that, “The selling price may be substantially less than the asking price. When indicated, the asking price has been adjusted to account for typical negotiation according to each comparables [sic] price.”

According to the case, an 8.5-percent reduction is far from “typical” and does not reflect market realities.

Moreover, the insurer’s explanation for downward adjustments in its multi-page valuation reports is “buried deep” within the document and fails to provide the dollar amount of the deduction in compliance with Tennessee law, the lawsuit alleges.

“Rather, the insured has to perform a calculation to ascertain the specific dollar amount and/or percentage that was deducted and is left to guess as to what this number was derived from and/or based upon,” the complaint says.

The lawsuit looks to represent a proposed class comprised of:

Originally filed in state court, the lawsuit has been removed to Tennessee’s Western District Court.

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