When repairs to a damaged home reach a certain level of complexity, they call for supervision by a general contractor, who receives a percentage of the actual repair costs as “general contractor’s overhead and profit” or “GCOP.”  Under “replacement cost” policies, insurers must pay GCOP for appropriate claims, even if the insured chooses not to use a contractor or elects not to make repairs.  In the past, this obligation has been the subject ofclass action suits, in which plaintiffs asserted that insurers must pay GCOP whenever they expect a repair to involve multiple construction “trades.”  More recently, however, the terms of the insurer’s obligation have been refined.  Last month, in Juvonen v. United Property & Casualty Insurance Co., No. 502010CA2171 (Fla. Cir. Ct. June 2, 2015), a Florida court declined to certify a class of insureds who had not been paid GCOP, finding that the “very nature” of the governing legal standard is such that “common questions cannot predominate.”

The “Three Trade” Rule

The wave of GCOP suits that were filed a decade ago brought claims that

upon 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 [overhead and profit] payment is included in the calculation of the [insurance] settlement.

Burgess v. Farmers Ins. Co. 151 P.3d 92, 94 (Okla. 2006).

Plaintiffs called this doctrine the “three trade rule,” and they presented it as an “industry standard.”  Id.  Based on that assertion, plaintiffs could also argue that all of a given carrier’s insureds (i) who suffered a loss implicating three trades, but (ii) who did not receive a payment for GCOP had claims against the insurer that presented a predominant, common issue.  On the strength of that argument, several courts either granted motions to certify GCOP claims as class actions or denied motions to strike class action allegations.  E.g.Burgess, 151 P.3d at 99; Lindquist v. Farmers Ins. Co., 2008 WL 343299, at *5 (D. Ariz. 2008).  See also Press v. Louisiana Citizens Fair Plan Property Ins. Corp., 12 So.3d 392, 396 (La. App. 2009).

Carpe Diem

The three trade rule proved to be potent medicine, but it came with a sell-by date.  Because these decisions left open the possibility that plaintiffs might fail to prove the rule was an actual “industry standard,” none of them established the rule as law.  The plaintiffs who brought these cases won the significant settlement leverage that is associated with viable class actions; but the theories underlying these cases remained susceptible to challenge, if and when courts defined a different trigger for the obligation to pay GCOP.

Thus, in Mills v. Foremost Ins. Co., 269 F.R.D. 663 (M.D. Fla. 2010), a federal court in Florida offered the following diagnosis, in the course of denying class certification:

As the Eleventh Circuit has not established a “three trade rule” standard …, the likelihood that a putative class member plaintiff will need to argue what was reasonable under the circumstances [of] his or her specific claim … creates a lack of predominance … as that argument may be different from a fellow putative class member.

See also Nguyen v. St. Paul Travelers Ins Co., 2008 WL 4534395, at *8 (E.D. La. Oct. 6, 2008).

The following year, in National Security Fire & Cas. Co. v. DeWitt, 85 So.3d 355 (Ala. 2011), the Supreme Court of Alabama vacated an order that had certified a class.  In doing so, it further clarified the weaknesses in the case for certification:

[Plaintiff] has not cited, and we have not found, any Alabama statutes, regulations, or caselaw that requires the application of a three-trade rule … [or] that would prevent [the insurer] [1] from presenting evidence … that the three-trade rule is not a valid indicator of whether it is reasonably foreseeable that a general contractor will be necessary …; [2] from presenting evidence in individual cases … that it was not reasonably foreseeable that general contractors would have been necessary …; and [3] from presenting evidence in individual cases to show that, even if the three-trade rule applied, those particular estimates did not actually reflect that three or more trades would be involved in the repairs. …

The court therefore found it “highly likely” that the question of whether each policyholder’s repairs required a general contractor could be resolved only on the basis of “individualized evidence.”

The “Reasonably Likely” Rule

In Florida, the hammer dropped in Trinidad v. Fla. Peninsula Ins. Co., 121 So. 23 433 (Fla. 2013), when the Supreme Court of Florida held that GCOP is “a necessary component” of an insurer’s obligations under a “replacement cost” policy.  (Most of the earlier GCOP cases had involved coverage for actual cash value, or “ACV.”)  The court did not adopt the “three trade” rule; it held that GCOP must be paid “where it is reasonably likely a general contractor would be needed.”  Id. at 439.

Making a virtue of necessity, the plaintiffs in Juvonen sought to certify a class of insureds “whose initial damage estimate from [the defendant insurer] include[d] more than one trade.”  They argued, that is, that the “reasonably likely” rule inaugurated in Trinidad is more generous than the “three trade” rule, because it requires payment based on the presence of at least two trades, rather than the old more than two.  When they moved to certify the putative class, they argued for

per se approach in which a general contractor is determined to always be reasonably likely to be needed when a project calls for more than one trade.

The Palm Beach Circuit Court did not see things that way.  In the course of ruling that the plaintiffs could not satisfy the “predominance” requirement for class certification, the court stated:

By the very nature of a ‘reasonably likely’ standard, common questions cannot predominate on this issue.  Each situation for each putative class member would need to be individually examined to determine if use of a general contractor was reasonably likely to be necessary.  Similarly, a representative plaintiff may have a situation in which use of a general contractor was reasonably likely to be needed, but such a finding would not ‘necessarily’ prove the case of other class members without a further inquiry.  A finding of predominance is inappropriate under such facts.

The court distinguished earlier cases that preserved class allegations, noting that none of them was decided in “a jurisdiction that uses a ‘reasonably likely’ standard such as Florida’s.”  It also noted that the courts which decidedBurgess and Press were not permitted to consider merits issues (such as whether the “three trades” rule really is an “industry standard”) in connection with class certification.  Florida law “expressly allows such consideration.”

Beating an Uncertified Class

The court found that plaintiffs had also failed to satisfy the requirements for class certification in other ways.  With respect to the numerosity requirement, the court held that it could not identify potential class members who wereentitled to GCOP payments without a detailed analysis of each individual claim.  Based on its decision about what the “reasonably likely” standard requires, the court held that it could not “use Plaintiff’s more-than-one-trade standard as a proxy for that … standard.”  Additionally, testimony before the court demonstrated that only a manual review of individual claim files could establish which policyholders had not received GCOP.

Plaintiffs also failed to prove typicality, because the court found that the claims of the two plaintiffs who testified at the certification hearing were substantially different from each other.  These putative class representatives could not even “prove each other’s cases, let alone the claims of potentially 50,000 other putative class members whom they claim to represent.”  Moreover, the defendant had raised unique colorable defenses to the claims of the plaintiffs, which also defeated typicality.

So Long, GCOP?

Trinidad created a potential barrier to class certification in GCOP cases; the plaintiffs in Juvonen ran into it head-on.  Because Juvonen is a trial court decision, the viability of future GCOP class actions in Florida has not yet been finally determined.  For now, the reasoning of the case makes it an important precedent.