Firm-Wide blog

Burg Simpson Files Class Action Complaint Over Replacement Cost Insurance

By Burg Simpson
April 17, 2013
7 min read

Burg Simpson has filed a class action lawsuit against the State Auto Insurance Companies regarding their Homeowners Replacement Cost Coverage.  The lawsuit alleges that the insurance companies have found a new tactic to increase their profits.  They are requiring Homeowners to purchase Replacement Cost Coverage at values dramatically higher than the market price of the home. The lawsuit alleges that State Auto relies upon computer programs to calculate the alleged amount of insurance needed for replacement cost coverage and is requiring  Homeowners to insure their homes at double or triple the home’s actual price in order to be adequately protected.

Cincinnati Enquirer Story on 4/17/13  “Alexandria Man Alleges ‘Phantom Insurance’ Coverage

The end result is that homeowners paid greatly increased premiums for coverage that provided no actual benefit to the homeowner.  In fact, the unjustified increases in coverage actually harm homeowners, by also increasing their deductibles for such things as earthquake coverage.  A class action complaint filed by Burg Simpson seeks to hold State Auto Insurance Company liable for such practices.  If you are insured by State Auto, or if you have a different insurance company engaged in the same practice, please contact Burg Simpson for information about your rights. 


As alleged in the class action lawsuit, in a push to recoup losses suffered due to recent climatic events, insurance companies with existing Homeowners policies are instituting a program to “re-evaluate” and in reality over-insure homes beyond their actual replacement cost.  While the insurance companies claim that the new valuation and associated premiums imposed on the homeowner are necessary to fully protect the homeowner’s investment, the affected home’s replacement cost has either not increased, or if it has, only by a mere fraction of what the insurance companies claim.  As a result, insurance companies have raised the premiums paid on these policies, increased the deductibles born by the homeowners in the event of a claim, and reduced the insurance companies’ risk of ever having to pay for a claim.  On April 8, 2013, Burg Simpson filed a class action complaint against State Automobile Mutual Insurance Company, State Auto Financial Corporation, and State Auto Property and Casualty Insurance Company (Collectively: “State Auto”) in the United States District Court for the Southern District of Ohio to hold these companies accountable for engaging in such practices.


Consumers suffer when insurance companies overvalue a home.  Homeowners policies are policies of indemnity.  If a home burns down that is insured for twice the amount necessary to rebuild, the homeowner will not profit from the difference.  Rather, the insurance company will only provide the amount necessary to rebuild the exact home that the fire destroyed.  If the home is insured for more than the cost to rebuild, the homeowner cannot collect the difference.  Instead, the excess coverage is simply coverage paid for by the homeowner that can never be used.

Although the homeowner cannot profit from over-insured property, insurance companies like State Auto can, by collecting higher premiums than necessary, and keeping those premiums as profit.

Insurance premiums are determined based upon the rate per $1000 of coverage.  While the rates are often subject to regulation by state departments of insurance, the amount of coverage purchased is not.  Therefore, many insurance companies, including State Auto, have started a practice of requiring Homeowners to increase the amount of coverage purchased as a means of increasing premium revenue.

The traditional Homeowners policy sold in the United States offers four basic coverages, insuring the dwelling (Coverage A), other structures on the property (Coverage B), personal property (Coverage C), and loss of use (Coverage D).  The policy limits for Coverages B, C, and D are based on a percentage of Coverage A.  Therefore, every time the insurance company raises the coverage limits for Coverage A (the Dwelling), it also raises the coverage limits for Coverages B, C, and D.  The increases in Coverages B, C and D result in an increase to your insurance premiums as well.

The benefit from adjusting the coverage limit for the home (Coverage A) was not lost on State Auto.  In 2009, State Auto issued an agency wide bulletin acknowledging that “State Auto, like the entire insurance industry, continues to experience loss problems in Homeowners [insurance].”  To offset their underwriting losses, State Auto initiated a program to increase revenue by dramatically increasing its valuation of homes (Coverage A).  State Auto called this its Insurance to Value Program.  Using this Program, State Auto increased profits without the need for a dramatic rate increase that might run afoul of state regulations.


To execute the Insurance to Value Program, State Auto purchased a Replacement Cost Estimator from Marshall & Swift/Boeckh to begin “re-evaluating” the cost of homes under existing policies.  Shortly after State Auto “re-evaluated” an individual’s home, the homeowner received a form letter indicating that “[a]s a result of that evaluation, [State Auto has] increased the Coverage A limit”, because of the increased costs of “building materials, along with associated labor and equipment costs required to assemble them.”  Often, this notice marked only the first of several coverage increases that were justified with minimal explanation like, “Due to repair and replacement cost increases, Section I Coverages have been increased by 5.5%.”  Through these means, State Auto systematically increased the Coverage A limit for homeowners’ dwellings and in turn raised premiums in a manner they could not have done through rate increases alone.


As alleged in the lawsuit, State Auto’s systematic increase in coverage limits through the Insurance to Value Program dramatically increased State Auto’s profits.  Nationally, from 2009 to 2011, State Auto revenues from premiums increased from $230 million to $272.7 million, an increase of 18.5%.  In Kentucky alone, the average premium paid by Kentucky State Auto Homeowner policyholders increased from $787.16 in 2010 to $980.21 in 2012.  This is an average increase of 24.5%.  This led to a revenue increase in Kentucky of approximately $1,130,636 between 2010 and 2012.  All the while, State Auto actually reduced Kentucky customers during this time.  In total, between 2010 and 2012, State Auto realized an increase of 3.4% in premiums on 20.4% fewer properties.


The named Plaintiffs and class representatives in Burg Simpson’s class action complaint built their home in 2001 for a cost in the low to mid $200,000s.  Shortly thereafter, Plaintiffs insured their home with State Auto.  In 2009, after State Auto began its Insurance to Value Program, Plaintiffs’ home underwent a “re-evaluation.”  As a result, State Auto raised Plaintiffs’ coverage limits from $339,500 to $503,600 in a three-year period, all for a home with a market value in the mid $200,000s.  These increases in the amount of “replacement cost coverage” resulted in premium increases of more than 55%.  The class action alleges that State Auto misrepresented to its insured when it claimed that the cost to replace this home is double the home’s market value.

The Ohio Department of Insurance is quoted as simply telling Homeowners to take their business elsewhere.  This response does not address the legal claims of homeowners who have been told by State Auto that grossly increased amounts of coverage were necessary, and who relied upon these representations by State Auto and paid for excess coverage.  Moreover, while the recently filed class action focuses on State Auto’s practices in Ohio, Michigan, Kentucky, and Tennessee, it is unlikely that these actions are limited to these states or to State Auto alone.  Other insurance companies also use Replacement Cost Estimators and like State Auto are “re-evaluating” the coverage limits on their existing Homeowners policies.  Many insureds are being told by their insurance companies that they are required to purchase excessive levels of Homeowners replacement cost coverage.


If you or a loved one own a home and you believe your policy limits and premiums for Homeowners Insurance have increased without cause, you may be entitled to compensation.  The attorneys at Burg Simpson would be happy to speak with you and review your records to determine if you have a viable case against your insurance company. Call 1-800-713-9340 or fill out our contact form for a FREE no-obligation consultation today.

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