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Nelson v. American Family Mutual Insurance Co.

United States District Court, Eighth Circuit

September 25, 2013

Charles P. Nelson and Darlene F. Nelson, on behalf of themselves and all others similarly situated, Plaintiffs,
American Family Mutual Insurance Company, Defendant.

Bert Black, Bryce M. Miller, Lawrence P. Schaefer, Esqs. Schaefer Law Firm, for Plaintiffs.

Richard J. Fuller, Esq., for Plaintiffs.

Aaron D. Van Oort, Christina C.K. Semmer, Deborah A. Ellingboe, Amanda J. Rome, Esqs., Faegre Baker Daniels LLP, for Defendant.


STEVEN E. RAU, Magistrate Judge.

The above-captioned case comes before the undersigned on Plaintiffs Charles P. Nelson and Darlene F. Nelson's (collectively, the "Nelsons") Motion for Remand [Doc. No. 15] and Defendant American Family Mutual Insurance Company's ("American Family") Motion to Dismiss Plaintiffs' Class Action Complaint ("Motion to Dismiss") [Doc. No. 7]. These Motions have been referred to the undersigned for a Report and Recommendation ("R&R") pursuant to 28 U.S.C. § 636(b)(1)(A), (B), and (C) and District of Minnesota Local Rule 72.1. (Order of Reference Dated Apr. 15, 2013) [Doc. No. 18]. For the reasons stated below, the Court recommends that American Family's Motion to Dismiss be granted in part and denied in part, and that the Nelsons' Motion to Remand be denied.


A. Factual Background

American Family, a Wisconsin company, sells homeowners insurance policies throughout Minnesota. (Class Action Compl., the "Complaint" or "Compl., " Ex. A ¶¶ 1, 10, Attached to the Notice of Removal) [Doc. No. 1-1].[1] The Nelsons are Minnesotans who are considered senior citizens under Minnesota's consumer protection laws. ( Id. ¶¶ 12, 14); see also Minn. Stat. § 325F.71, subdiv. 1. They purchased a Gold Star Homeowners Insurance Policy (a "Gold Star Policy" or "Policy") from American Family for their new home in 1990, which they have renewed several times and remains in effect.[2] (Compl. ¶¶ 13, 30). The following table shows the replacement cost for the Nelsons' home under their Gold Star Policies:[3]

Date Home 2004 $184, 000 Feb. 1, 2007 $415, 500 Feb. 1, 2008 $427, 500 Feb. 18, 2009 $439, 000 Feb. 1, 2010 $450, 900 Feb. 18, 2011 $454, 500

( Id. ¶¶ 30, 33). The Nelsons claim the replacement cost of their home in 2010 was no higher than $315, 000, and was no higher than $348, 297 throughout the relevant time period. ( Id. ¶ 37).[4] The national average costs of total home reconstructions increased by no more than 15% between January 1, 2006, and December 31, 2010, less than the increases American Family imposed on the Nelsons' replacement cost.[5] ( Id. ¶ 38). In 2011, the Nelsons complained to American Family that the estimated replacement cost for their home "greatly exceeded the actual replacement cost." ( Id. ¶ 35). In response, American Family reduced the replacement cost to $315, 000. ( Id. ). American Family did not refund any portion of the Nelsons' past premiums derived from excess coverage. ( Id. ).

American Family's estimation of the replacement cost of personal property contained within the dwelling also increased, in direct proportion to the above increases, at 80% of the replacement cost of the structure. ( Id. ¶ 34). The Nelsons claim the personal property in their home has never been worth as much as 80% of the replacement cost of their home. ( Id. ).

The 2004 Policy, and all subsequent Polices, stated that the replacement value was "the minimum amount for which to insure [their] dwelling" to receive the full replacement cost in the event of a total loss. ( Id. ¶ 31). The Policies also gave the Nelsons the option to select "a coverage amount equal to that appraised value..., [but only] if the amount is greater than the replacement cost estimated by [American Family's] residential building cost guide, and [American Family] agree[s] to that amount." ( Id. ). The Nelsons allege this means they did not have the option of having the estimated replacement cost reduced. ( Id. ).[6] The 2004 Policy and all subsequent Policies also contained a provision that allowed American Family to increase the coverage limits periodically if the insurable value of the property increased. ( Id. ¶ 32).

Beginning at least as early as 2004, the Nelsons' Gold Star Policies included statements regarding the insurable value of insured structures, as Minnesota law required. ( Id. ¶ 23); see also Minn. Stat. § 65A.01, subdiv. 3. A Gold Star Policy is a replacement cost policy, and therefore, the "insurable value' cannot exceed the replacement cost' of buildings and other improvements on a piece of property." ( Id. ¶ 24); see also Minn. Stat. 65A.09, subdiv. 1.

The Nelsons allege that American Family's estimates of insurable value exceed the actual replacement costs, especially when polices are renewed. ( Id. ¶ 25). These insurable value estimates induced customers to purchase "unnecessary excess coverage." ( Id. ). The Nelsons claim American Family knew or should have known that its estimates of insurable value or replacement cost for insured homes "did not comply with appraisal industry standards and could be expected on numerous occasions to result in excessive value estimates." ( Id. ¶ 26). Additionally, American Family typically "estimates that the replacement cost of all personal property contained in an insured dwelling at approximately 80% of the replacement cost of the dwelling for the [P]olicy year...." ( Id. ¶ 27). American Family does not ask customers renewing their Policies whether there have been any changes to the "existence, nature, or age of personal property." ( Id. ). The Nelsons allege that American Family therefore increases Policy coverage beyond the actual replacement cost, and customers must pay for more insurance than what they require or "can derive a benefit from." ( Id. ).

The Nelsons claim that, because of American Family's conduct, they-and other Minnesotans-purchased insurance coverage for their homes and the personal property in their homes above the insurable value or replaceable cost of the property. ( Id. ¶ 28). Because they paid for excess coverage, they paid insurance premiums for "coverage that is higher than allowed by Minnesota law, and/or for coverage that provides illusory benefits." ( Id. ¶ 28). Gold Star Policies automatically update "the replacement cost of the insured property" each time the Policy is renewed. ( Id. ¶ 1). The Nelsons allege the increases to the replacement cost of their home and its contents create estimates greater than the actual replacement cost. ( Id. ). This then induced them to buy "unnecessary and excessive coverage" and pay higher premiums associated with the excessive coverage. ( Id. ¶ 39). As a result, the Nelsons allege their damages are approximately $3, 500, and that they will continue to suffer damages as long as American Family insures their home and its contents. ( Id. ).

The Nelsons brought suit on behalf of themselves and two putative classes. ( Id. ¶¶ 40-41). The Nelsons seek injunctive and declaratory relief for the following class: "Class I: All residents of Minnesota who currently hold a Gold Star Policy from American [Family] covering residential property located in Minnesota and/or the personal property of such residential property." ( Id. ¶ 41). For ease of reference, this R&R will refer to "Class I" as the "Injunctive Class." The Nelsons seek monetary damages for prior excessive premium payments for the following class:

Class II: All residents of Minnesota who renewed a Gold Star Policy from American [Family] covering residential property located in Minnesota (and/or the personal property contents of such residential property), at any time after a date six (6) years prior to the commencement of this action, in connection with which, American [Family] charged premiums based on a subsequent estimate of the replacement cost of the dwelling and its contents, and who:
a. were over the age of 62 at the time of any renewal during the relevant period; and
b. were provided an estimate of the replacement value of their property that exceeded by more than 10% the value that would have been obtained using the Miller-Swift index.

( Id. ¶ 41). For ease of reference, this R&R will refer to "Class II" as the "Damages Class."

Based on these facts, the Nelsons allege American Family is liable to the Injunctive Class for engaging in a deceptive trade practices as defined in Minnesota Statutes sections 72A.20 and 325D.44. ( Id. ¶¶ 48-55). The Nelsons allege American Family is liable to the Damages Class for unlawful conduct under Minnesota Statutes sections 325F.69, 325F.71, and 8.31, subdivision 3a, and, in the alternative, for unjust enrichment and negligence per se. ( Id. ¶¶ 56-65).

B. Procedural History

The Nelsons filed their Complaint in Hennepin County on January 30, 2013. (Compl.). American Family removed the case to this District on March 15, and filed its Motion to Dismiss the following week. (Notice of Removal) [Doc. No. 1]; (Mot. to Dismiss). The Court dismissed Michael Rothman, Minnesota Commissioner of Commerce, pursuant to the parties' stipulation. (Order Dated Mar. 29, 2013) [Doc. No. 13]. The Nelsons filed their Motion to Remand in mid-April. (Mot. to Remand). The undersigned heard oral argument on both Motions on June 13, 2013. (Minute Entry Dated June 13, 2013) [Doc. No. 31].


The Motion to Remand, if granted, would relieve this Court of jurisdiction, and is therefore dispositive. See Haag v. Hartford Life & Accident Ins. Co., 188 F.Supp.2d 1135, 1136 (D. Minn. 2002) (DSD/JMM).[7] For this reason, the Court addresses the Motion to Remand first, followed by the Motion to Dismiss.

American Family timely removed this case from Minnesota's Fourth Judicial District to this District under the Class Action Fairness Act ("CAFA"). (Compl.); (Notice of Removal ¶ 7). The Nelsons argue class damages are less than $5 million, the jurisdictional requirement for removal of class actions under CAFA, and therefore the Court should remand the case back to state court. (Pls.' Mem. of Law in Supp. of Mot. for Remand, "Nelsons' Remand Mem.") [Doc. No. 17 at 4]; see also 28 U.S.C. § 1332(d)(2).

A. Legal Standard

CAFA implemented an important change to federal diversity jurisdiction, conferring jurisdiction over class actions where "1) there is minimal diversity; 2) the proposed class contains at least 100 members; and 3) the amount in controversy is at least $5 million in the aggregate." Raskas v. Johnson & Johnson, 719 F.3d 884, 886-87 (8th Cir. 2013) (internal quotations and citations omitted); see also Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4 (codified in scattered sections of 28 U.S.C.). When a defendant properly removes a class action case to federal court, "CAFA should be read broadly, with a strong preference that interstate class actions should be heard in a federal court...." Hargis v. Access Capital Funding, LLC, 674 F.3d 783, 789 (8th Cir. 2012) (internal quotations and citations omitted).

The parties do not dispute that they are diverse or that the class contains at least 100 members. Instead, the parties disagree about whether the amount in controversy reaches the $5 million threshold. See (Nelsons' Remand Mem. at 4). Because American Family seeks to invoke federal jurisdiction through removal, it has the burden to prove-by a preponderance of the evidence-that the amount in controversy is greater than $5 million. Bell v. Hershey Co., 557 F.3d 953, 956 (8th Cir. 2009). Under this standard, American Family need not show that damages are greater than $5 million. Id. at 959. Instead, it must show that "a fact finder might legally conclude that they are." Id. (internal quotations and citations omitted). This burden is "a pleading requirement, not a demand for proof." Hartis v. Chicago Title Ins. Co., 694 F.3d 935, 944-45 (8th Cir. 2012). Jurisdiction is measured either at the time of the complaint or the time of removal, "even though subsequent events may remove from the case the facts on which jurisdiction was predicated." Hargis, 674 F.3d at 789 (internal quotations and citations omitted).

If American Family establishes, by a preponderance of the evidence, that the amount in controversy is $5 million or more, the burden then shifts to the Nelsons, who must show that it is legally impossible to recover more than $5 million. Bell, 557 F.3d at 959. An amount in controversy that may be highly improbable does not satisfy the standard of legally impossible. Raskas, 719 F.3d at 888. A legal certainty cannot include an estimate. ...

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