Judge green lights lawsuit accusing State Farm of fraud in accident claims

A class-action lawsuit accusing State Farm of "a fraudulent scheme" to undervalue vehicle loss assessments can continue, a federal judge ruled last week.

Judge Virginia M. Kendall denied State Farm's motion to dismiss the lawsuit filed in U.S District Court for the Northern District of Illinois.

Twenty-seven plaintiffs from 26 states all totaled vehicles in accidents and submitted claims to State Farm, according to court documents.

State Farm asked the court to dismiss 26 non-Illinois plaintiffs’ claims under the Illinois Consumer Fraud and Deceptive Business Practices Act. Kendall denied that request. The judge agreed, however, that the Federal Arbitration Act requires Minnesota plaintiff Sabrina Capers to take her contract breach accusations to arbitration before she can litigate the claims made in the lawsuit.

'Not based on any market realities'

In calculating the actual cash value of the plaintiffs' totaled vehicles, the lawsuit claims State Farm applied a “typical-negotiation adjustment,” which reduced plaintiffs’ total-loss payments.

"Defendant’s third-party vendor identifies the price of comparable vehicles listed for sale in the relevant market," the complaint reads. "After the vendor determines the value of the comparable vehicles, Defendant’s vendor applies an arbitrary and baseless flat-rate adjustment to the value of each 'comparable vehicle,' which Defendant and its vendor call a 'typical negotiation' adjustment."

The typical negotiation adjustment "is not based on any negotiations, typical or otherwise, and is not based on any market realities," the lawsuit states. The adjustment ranges from 4%-11% of the value of the “comparable vehicle.”

"The vehicles with lesser value are subject to a greater percentage reduction, with the percentage adjustment becoming lower as the value of the 'comparable vehicles' increases," the complaint reads. "This percentage reduction artificially reduces the total-loss payment for the totaled vehicle and, with the sliding percentage scale, ensures that every total loss payment Defendant makes to insureds is significantly, but unconscionably, reduced."

Plaintiffs note that State Farm does not apply the adjustment in California because it was sued there in 2008 and agreed to stop the practice.

Complaint: Arbitration a key tool for State Farm

A provision of the State Farm policy in question requires the parties to submit to an appraisal if there is a disagreement over the value of the vehicle, the complain states, calling it "an integral part of the defendant's fraudulent scheme."

"Since the amount by which the insureds’ total-loss claims are underpaid is likely less (or only marginally greater) than the cost of the appraisal, Defendant knows and intends that the insureds will forego the appraisal process and accept the artificially determined loss-payment for their total-loss claims," the lawsuit reads. "As designed by Defendant, the appraisal provision prevents Plaintiffs and the Class from effectively vindicating their rights under the Policy."

The dispute is not about the actual cash value, plaintiffs say in the lawsuit, filed in March 2022.

"This case challenges Defendant’s systematic and fraudulent scheme to misvalue insureds’ vehicles that are declared a total loss in a manner which does not comport with representations made by Defendant or obligations undertaken by Defendant in its Policy, in order to illegally increase its own profits," the lawsuit reads. "This is an issue that cannot be resolved through an appraisal process."

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.