Frankenmuth Underpays Property Damage Claims, Class Action Alleges

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A proposed class action alleges the method used by Frankenmuth Mutual Insurance Company to calculate the value of damaged property has caused claimants to be underpaid.

The 19-page lawsuit more specifically alleges that Frankenmuth, when calculating the actual cash value of benefits owed under a policy, will improperly withhold the costs of labor and materials to purportedly account for depreciation, even though labor does not depreciate over time. The issue, according to the suit, is with the “replacement cost less depreciation” methodology used by Frankenmuth to calculate the value of an insured’s loss and their actual cash value payment.

By first estimating the cost to repair or replace the damage to a covered structure with new materials, including labor costs, and then subtracting the amount of estimated depreciation, Frankenmuth, in violation of its insurance policies, withholds a percentage of the labor costs as depreciation, the case alleges. Per the suit, the defendant’s failure to pay for the full cost of labor necessary to repair a policyholder’s covered property has left some insureds “under-indemnified and underpaid for [their] loss.”

According to the lawsuit, Frankenmuth sells property insurance for homes and commercial buildings in 47 states. Per the suit, the defendant uses commercially available software called Xactimate to estimate the actual cash value of a claimant’s damaged property in order to determine the amount to be paid in settlement of their claims. According to the suit, insurers may not lawfully withhold repair labor as depreciation in Illinois, Kentucky, Ohio, Tennessee and Wisconsin when using the replacement cost less depreciation methodology to calculate claims settlements.

In adjusting a policyholder’s claim, Frankenmuth uses a “replacement cost less depreciation” methodology whereby an adjuster first inspects the damage and estimates the property’s actual cash value, the complaint relays. Frankenmuth then uses the Xactimate software to calculate the replacement cost, i.e., the cost of new materials and labor to repair or replace the damage, and subtracts the estimated cost of depreciation from the replacement cost value, the suit says.

The case claims, however, that this method improperly withholds labor costs as depreciation, even though the cost of labor does not depreciate over time. Per the suit, the claim-estimate software used by Frankenmuth includes options to subtract either the depreciation of only materials or the depreciation of both materials and labor from a property’s value. By including the costs of labor in its depreciation calculations, the defendant has paid insureds less than they were entitled to receive under the terms of their property insurance policies, the lawsuit argues.

The lawsuit looks to represent the following class:

“All Frankenmuth policyholders (or their lawful assignees) who made: (1) a structural damage claim for property located in Illinois, Kentucky, Ohio, Tennessee, and Wisconsin; and (2) for which Frankenmuth accepted coverage and then chose to calculate actual cash value exclusively pursuant to the replacement cost less depreciation methodology and not any other methodology, such as fair market value; and (3) which resulted in an actual cash value payment during the class period from which non-material depreciation was withheld from the policyholder; or which should have resulted in an actual cash value payment but for the withholding of non-material depreciation causing the loss to drop below the applicable deductible, for the maximum limitations period as may be allowed by law.”

The proposed class excludes claims for which the insurance limit was exhausted by the initial actual cash value payment, as well as claims arising under forms that expressly permit depreciation of labor (unless those forms violate state laws).

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