Title: BURGESS v. FARMERS INSURANCE COMPANY, INC.
Citation: 151 P.3d 92, 2006 OK 66
Docket Number: 
State: Oklahoma
Issuer: Oklahoma Supreme Court
Date: September 19, 2006

BURGESS v. FARMERS INSURANCE COMPANY, INC. Annotate this Case BURGESS v. FARMERS INSURANCE COMPANY, INC. 2006 OK 66 151 P.3d 92 Case Number: 99739 Decided: 09/19/2006 THE SUPREME COURT OF THE STATE OF OKLAHOMA BILL BURGESS and BETTY BURGESS Plaintiffs/Appellees, and GARY SADEGHY, Intervenor/Plaintiff/Appellee v. FARMERS INSURANCE COMPANY, INC., FARMERS INSURANCE EXCHANGE, FARMERS INSURANCE GROUP OF COMPANIES and FARMERS GROUP, INC. Defendants/Appellants. CERTIORARI TO THE COURT OF CIVIL APPEALS, DIVISION III APPEAL FROM THE DISTRICT COURT OF COMANCHE COUNTY HONORABLE MARK R. SMITH, JUDGE ¶0 Plaintiffs/Appellees and Intervenor/Plaintiff/Appellee Insureds (hereinafter collectively referred to as "Insureds") initiated and sought class certification of this action against Defendants/Appellants, their homeowners' insurance carrier (hereinafter "Insurer") for alleged systematic underpayment of property damage claims for amounts attributable to general contractor's overhead and profit and failure to disclose to Insureds their potential entitlement to this alleged policy benefit at the time of carrier's actual cash value settlement. The District Court of Comanche County, Oklahoma, Honorable Mark R. Smith, Judge, entered an Order Granting Plaintiffs' Motion for Class Certification after a four-day hearing. Insurer appealed this interlocutory order appealable by right pursuant to THE OPINION OF THE COURT OF CIVIL APPEALS IS VACATED; TRIAL COURT'S ORDER CERTIFYING THE MATTER AS A CLASS ACTION AFFIRMED. Reggie N. Whitten, Michael W. Hinkle, Jason E. Roselius, Derrick L. Morton of Whitten, Nelson, McGuire, Terry & Roselius, Oklahoma City, Oklahoma, for Plaintiffs/Appellees, Bill Burgess and Betty Burgess and Intervenor/Plaintiff/Appellee, Gary Sadeghy. Richard C. Ford, LeAnne Burnett, Rustin J. Strubhar of Crowe & Dunlevy, Oklahoma City, Oklahoma, for Defendants/Appellants, Farmers Insurance Company, Inc., Farmers Insurance Exchange, Farmers Insurance Group of Companies and Farmers Group, Inc. Lavender, J. ¶1 Insureds seek compensatory and punitive damages in this case for breach of contract, bad faith, fraud and deceit arising from Insurer's alleged systematic failure to pay Insureds amounts due for general contractor's overhead and profit (hereinafter "O&P") and for Insurer's alleged intentional withholding of information concerning the Insured's entitlement to the O&P payment at the time of Insurer's actual cash value (hereinafter "ACV") settlement. The contested issues in this litigation concern the circumstances giving rise to the Insureds' entitlement to payment for O&P, timing of the O&P payment, and the nature and extent of Insurer's duty to disclose (and documentation of such disclosure) to its Insureds during the claim settlement process concerning the Insured's right to an O&P payment (and/or the reasons for not paying in any particular circumstance). At the heart of this controversy is Insureds' allegation that there is an industry standard "three trade rule," which dictates that upon a determination that three trades are implicated in the repair of property, then a general contractor is presumed to be needed to coordinate, supervise and oversee the repair and thus, a 20 per cent O&P payment is included in the calculation of the ACV settlement. Insurer denies the existence of a rigid "three trade rule" and argues that such rule, if applied, would impermissibly result in expansion of Insurer's contractual obligations. Insurer asserts that instead of following such a rule, Insurer's adjusters use complete individual discretion and follow a "common sense" approach to determine whether the property damage in each individual case requires a general contractor. Thus, Insurer claims it is a case-by-case determination whether to include the 20 per cent O&P payment at the time of the ACV settlement of the claim. While the trial court expressly avoided reaching any determination on the merits, it examined the "three trade rule" solely for the purpose of identifying the class (class members included only those claimants with claim files reflecting that the involvement of three or more trades was anticipated in the property repair at the time of ACV adjustment). The trial court determined all the requisite elements of All Oklahoma citizens who were or are Farmers homeowners' policyholders who: (1) suffered a covered loss to their home from June 14, 1994 to the present; (2) whose loss was adjusted on an actual cash value (ACV) basis; (3) whose claim files indicate the anticipated involvement of three trades or more in the repair of the property at the time of the ACV adjustment; and (4) whose ACV adjustment did not include a 20% payment for O&P. Insurer filed this interlocutory appeal pursuant to FACTS AND PROCEDURAL HISTORY ¶2 The insurance policy at issue in this case contemplates two types of claim settlements: (1) the actual cash value (ACV) and (2) replacement cost. The policy expressly permits, at the option of the Insured, a claim for ACV with no mandate that the Insured actually repair the property. The insurance policy is silent on the issue of general contractor's O&P, but the parties agree that under certain circumstances, O&P payments are to be paid at the time of the ACV settlement. Covered loss to Buildings under Coverage A and B will be settled at replacement cost without deduction for depreciation, subject to the following methods: (1) Settlement under replacement cost will not be more than the smallest of the following: (a) the replacement cost of that part of the building damaged for equivalent construction and use on the same premises. (b) the amount actually and necessarily spent to repair or replace the building intended for the same occupancy and use. (2) When the cost to repair or replace is more than $1,000 or more than 5% of the limit of insurance in this policy on the damaged or destroyed building, whichever is less, we will pay no more than the actual cash value of the damage until repair or replacement is completed. (3) At your option, you may make a claim under this policy on an actual cash value basis for loss or damage to buildings. Within 180 days after loss you may make a claim for any additional amount on a replacement cost basis if the property has been repaired or replaced. The Burgess claim ¶3 Insureds Bill and Betty Burgess suffered a covered loss to their home on or about October 23, 2000 and filed a claim with Insurer. Insurer's adjuster, David McKeown, met with the Insureds, examined the property and produced an estimated cost of repairs, which included the following list of "O&P items": cleaning, general demolition, drywall, framing & rough carpentry, insulation, painting, roofing and wallpaper. Insurer gave Mr. and Mrs. Burgess a check for the ACV payment of their claim, which did not include an allowance for O&P. Insurer's adjuster testified that he did not discuss general contractor's O&P with the Burgess Insureds, nor did the claim file contain any documentation concerning a general contractor's O&P.4 Mr. Burgess testified he was unaware of O&P, what it was and under what circumstances he might be entitled to O&P payment.5 Insurer's adjuster testified he handled the Burgess claim in a typical fashion that he handled all homeowner property claims.6 ¶4 After receiving their ACV payment, the Burgess Insureds chose to repair their property and submitted supplemental claims for the replacement cost. Mr. Burgess testified he essentially acted as his own general contractor in that he personally located, coordinated and supervised roofing and painting company's repair of his property. The Sadeghy claims ¶5 Insured Gary Sadeghy was a residential homebuilder with twenty years involvement in the construction business. Mr. Sadeghy had several properties insured under his policy with Insurer and had a total of three claims.9 One of these claims arose after Mr. Sadeghy's house was flooded in July, 2000. Insurer's adjuster, Taber Leblanc, met with the Insured, examined the property and produced an estimated cost of repairs, which included the following list of "O&P items": general demolition, floor covering-carpet, finish carpentry/trimwork, painting, wallpaper, and water extraction services. Insurer's adjuster gave Mr. Sadeghy a check in payment of his claim, which did not include an allowance for O&P. Insurer's adjuster did not discuss general contractor's O&P with Mr. Sadeghy, nor did the claim file contain any documentation concerning general contractor's O&P. Mr. Sadeghy testified that at the time of this first claim, he was unaware of general contractor's O&P in terms of insurance carrier's payment of such and/or the circumstances under which he might be entitled to O&P payment. ¶6 Insurer's adjuster testified he was not trained to explain to insureds what O&P was, when they may be entitled to it and that O&P was not a policy benefit.10 Insurer's adjuster could not explain why Mr. Sadeghy was paid for general contractor's O&P on his second claim (the December, 2000 claim discussed below) and not the July, 2000 claim.11 Insurer's adjuster testified he handled the Sadeghy claim in a typical fashion that he handled claims every day.12 Insurer asserts and Mr. Sadeghy concedes that although he received no money in relation to his work as a general contractor, Mr. Sadeghy ultimately received enough money from Insurer to complete the repairs in relation to the July, 2000 loss via his submissions of supplemental claims with receipts for repair costs.13 ¶7 Mr. Sadeghy's second claim arose from damage to a rental property in December, 2000. Insurance Adjuster, John Wright, ¶8 Insureds sued Insurer and sought class certification of a class of current and former insureds similarly situated, asserting Insurer's alleged systematic failure to provide payment under its homeowners' insurance policies for general contractor's O&P, which Insureds allege is a policy benefit made for the purpose of assisting Insureds in securing services of a general contractor. After a four-day hearing on Plaintiffs' Motion for Class Certification, the trial court entered its Order Granting Plaintiffs' Motion for Class Certification on August 5, 2003. The trial court's 19-page Order sets forth in detail its determinations concerning Insureds' demonstration that each statutory requisite for class certification has been met and additionally set forth a class definition, which reflects the trial court's findings. Insurer appealed, principally arguing that individual issues predominated over common issues. The COCA reversed, noting, among other things, that "this Court finds that certifying a class action would impermissibly allow the rewriting en masse of insurance policies." COCA Opinion at ¶ 10. Insureds filed a Petition for Writ of Certiorari, arguing the COCA's decision in this case directly conflicts with Melot v. Oklahoma Farm Bureau Mutual Ins. Co., II ANALYSIS ¶9 The standard of review applicable in an appeal of a trial court's certification of a class action is abuse of discretion. Shores v. First City Bank Corp., ¶10 The first four requirements for maintaining a class action are set forth in subsections 1 through 4 of Predominance of common questions of law or fact ¶11 Insureds are required to demonstrate "that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." ¶12 Insureds argue the resolution of a common question-whether Insureds' should make an allowance for O&P at the time of the ACV settlement when three or more trades are anticipated in the repair of Insureds' property-will establish a wrong for each class member. Insureds assert that whether or not the Insured elected to repair the property, the question of whether the Insureds were entitled to payment for O&P applies to every member of the class, which is limited to those whose claim file indicates three or more trades are implicated in the property repair. ¶13 The trial court ultimately agreed with Insureds and determined that questions of law or fact common to members of the class predominated over questions affecting only individual members, noting that "the group requesting class certification seeks to remedy a common legal grievance" and that although damage amounts may vary, "the breach of contract, fraud and bad faith claims arise from the same or similar acts or omissions for each Class Member." Additionally, the trial court characterized Insurer's potential overpayments as individual damage calculations, which would not defeat class certification. The trial court determined that class certification is superior to other available methods for fair and efficient adjudication of the controversy, noting that class certification in this case most likely presents the only way class members will learn of their claims against Insurer, since the insurance policy is silent on the issue of O&P and Insureds are not provided any written material concerning general contractor's O&P. ¶14 We hold the trial court did not abuse its discretion in its determination that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, as the entire class of Insureds' theory of recovery derives from the allegations that Insurer systematically failed to pay the 20 per cent general contractor's O&P when three or more trades were anticipated in the repair and that Insureds were entitled to information concerning O&P and payment for the O&P amount at the time of ACV settlement regardless of whether subsequent repair costs (if Insured elected to repair the property) included the 20 per cent amount. Insurer would have us reject class certification on the basis of a determination regarding the veracity of its defense on the merits-- that Insurer in fact did not operate pursuant to an across-the-board pattern of underpayment of claims, but rather, made individual assessments as to the propriety of O&P payments on every claim. We express no opinion on the merits and our determination on class certification should not be taken as any indication of how a jury might properly decide these fact questions. ¶15 The thrust of Insurer's argument on appeal is primarily an attack on the merits, specifically the validity of the "three trade rule," and in support of its argument, raises evidentiary challenges as well as a challenge to the reliability of Insured's expert witness testimony pursuant to the standard set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., ¶16 Further, in recognition of the rule that it is inappropriate to consider the merits of a claim when considering whether a class should be certified, we refrain from ruling on the merits of the alleged "three trade rule," as this is a jury question. See Black Hawk Oil Co. v. Exxon Corp., ¶17 As for Insurer's argument that individual issues predominate over questions common to the class, we note that "[f]actual variations in the individual claims will not normally preclude class certification if the claim arises from the same event or course of conduct as the class claims, and gives rise to the same legal or remedial theory." Ysbrand v. Daimlerchrysler Corp., The pronouncement in Melot v. Oklahoma Farm Bureau Mutual Ins. Co. ¶18 Insureds argued on appeal that the allegations, class definition,25 facts and circumstances in this case are virtually identical to those in Melot v. Oklahoma Farm Bureau Mutual Ins. Co., 2004 OK CIV APP 25, 87 P.3d 644 , cert. denied, in which Division No. 4 of the Court of Civil Appeals upheld the District Court of Pottawatomie County's class certification order. In its reversal of the trial court's class certification in the instant case, the COCA distinguished this case from Melot, noting that unlike Melot, the record in this case "indicates that a decision on overhead and profit is based on an individual assessment of each claim."26 It appears that the COCA here reached its determination on class certification as well as its determination as to the persuasive affect of Melot based upon its improper fact-finding conclusion as to the veracity of Insurer's main defense on the merits of the case, i.e., that Insurer in fact did not follow an across-the-board pattern of underpayment of claims, but rather, its adjusters assessed each claim on an individual basis to determine the propriety of O&P payment. This is the heart of the controversy to be decided by a jury. By distinguishing Melot, the COCA essentially simultaneously rejected Insureds' claims on the merits. In doing so, the COCA in this case reached a determination plainly and directly at odds with another published COCA opinion. ¶19 Melot is correct and to the extent the facts in this case are at any odds with those in Melot, it is a distinction without a difference. While Insurer here argues the need for individualized assessment of property loss and adjuster's discretion in determining the propriety of payment of O&P on a case-by-case basis, the insurance carrier in Melot similarly argued that its adjusters' took into account all relevant "factors based upon the particular circumstances of a given claim" to determine whether a general contractor was required to coordinate repairs on a property loss.27 In Melot, the COCA specifically noted "[i]nsurer asserts that determining whether damage adjustments were adequately calculated depends on individualized questions of whether an insured was entitled to a payment for overhead and profit." Melot, 2004 OK CIV APP 25, ¶ 23, 87 P.3d 644 , 648-49. While it noted the insureds' theory of insurer's across-the-board pattern of failing to pay the 20 per cent when three or more trades were involved, the Melot court expressly avoided making any determinations on the merits of the insureds' entitlement to the 20 per cent charge and expressly limited its determination on the issues appropriate for consideration on class certification. The substantive allegations and defenses raised in Melot are virtually identical to those raised here. We believe Melot followed the correct approach in limiting its determination to whether the trial court had abused its discretion in certifying the class, while avoiding any determination on the merits. We find Melot to be analogous to this case and we see no compelling reason to reach a determination at odds thereto. Superiority ¶20 Insurer asserts the trial court erred in its finding that a class action is superior to other available methods for the fair and efficient adjudication of this controversy. We agree with the trial court's finding that a class action is superior to other available methods, because without "class treatment, any widespread underpayment for O&P will continue to go uncompensated or result in hundreds or thousands of individual cases." Certification Order at 17. The record includes evidence reflecting that the number of Coverage A (i.e., dwelling and attached structures used principally as a private residence) claims in Oklahoma for a five-year period ending on January 1, 2001 was 84,715.28 If required to sue individually, Insureds would be forced to seek compensation for O&P and in each case would require the same proof regarding the existence and validity of the "three trade rule." Class action lawsuits are designed to enable plaintiffs such as Insureds here to "vindicate the rights of individuals who otherwise might not consider it worth the candle to embark on litigation in which the optimum result might be more than consumed by the cost." Deposit Guar. Nat'l Bank v. Roper, 445 U.S. 326 , 338 (1980). ¶21 The record reflects that alleged underpayment amounts are likely to be relatively small and therefore, most individual insureds would refrain from filing individual suit considering the relative cost of litigation.29 Obviously, class certification is superior to individual trials in terms of judicial economy and efficiency. Without the mechanism of class certification here, some Insureds would likely remain unaware of their claims against Insurer due to the insurance contract's silence on the subject of O&P and the lack of information provided to Insureds regarding Insureds' potential entitlement to payment for O&P. In the event the case becomes unmanageable, the trial court is free to de-certify the class and/or maintain the class as to certain issues or create subclasses should the need arise. See Ysbrand v. Daimlerchrysler Corp., 2003 OK 17, ¶ 21, 81 P.3d 618 , 627, cert. denied, 542 U.S. 937 (2004) (citations omitted). III SUMMARY ¶22 In sum, we have reviewed the record before us and we find nothing in the record to convince us that the trial court abused its discretion in certifying a class here. The trial court is empowered under 12 O.S. § 2023(C)(1) to alter or amend its certification order before a decision on the merits, should circumstances warrant. Due to the Insureds' demonstration before the trial court of the satisfaction of the statutory prerequisites for certification of a class and notably, as specifically challenged on appeal, the predominance of the common questions over individual issues, this case appears to be one where class certification would result in significant savings of judicial resources. We express no opinion concerning the merits of the case and limit our holding to the determination that the trial court did not abuse its discretion in the entry of its Order Granting Plaintiffs' Motion for Class Certification. ¶23 Upon certiorari previously granted, THE OPINION OF THE COURT OF CIVIL APPEALS IS VACATED; TRIAL COURT'S ORDER CERTIFYING THE MATTER AS A CLASS ACTION AFFIRMED. ¶24 WATT, C.J., LAVENDER, OPALA, EDMONDSON, COLBERT, J.J., concur. ¶25 WINCHESTER, V.C.J., TAYLOR, J., dissent. ¶26 KAUGER, J., not participating. ¶27 HARGRAVE, J., disqualified. FOOT