Judge Stanwood R. Duval, Jr. of the United States district court of Lousisa federal district court sitting in Louisiana recently held that two homeowners could jointly file an amended complaint and proceed with their proposed class action lawsuit against State Farm Fire and Casualty Company and software company Xactware. (Click here to read Judge Duval’s opinion.) The allegations arise out of State Farm’s use of Xactware’s software in valuing its insureds’ claims, which was allegedly designed to lowball the value of Hurricane Katrina-related insurance claims.

Kathleen and Gordon Schafer insured their New Orleans home through a homeowners’ policy they purchased from State Farm. Hurricane Katrina caused substantial damage to their home. After submitting a claim for their damages to State Farm, State Farm sent an adjuster to their home to value the damage to the property.

The Schafers now allege that State Farm used Xactimate, a Xactware software program, to determine the replacement value of their lost and damaged property. The Schafers claim that in determining the value of a claim, the software program uses a pre-determined price for each damaged item. The Schafers allege that: (1) State Farm requires claims adjusters to use the pricing set forth in the software program; (2) the prices in the software are below market value; and (3) Xactware works with various insurance companies who receive similar below market pricing databases

The Schafers seek to bring a class action suit against State Farm and Xactware on behalf of all similarly situated homeowners affected by the pricing arrangement between State Farm and Xactware. In their first amended complaint, the Schafers asserted claims for price-fixing, intentional misrepresentation, negligence, fraud and breach of contract.

The Court dismissed the price-fixing allegation against both parties, holding that there was no evidence that the parties conspired to fix prices. In addition, the Court ruled that the Schafers could pursue their claims against State Farm for breach of contract, negligence, intentional misrepresentation and fraud. As to Xactware, the breach of contract claim was dismissed, as no contract existed between the Schafers and Xactware. Further, the claim for negligence was dismissed since it was not properly asserted under the Louisiana Products Liability Act but the Court’s opinion did not address whether such an allegation would be appropriate. The Court, did, however, allow the Schafers to proceed against Xactware on their claims for intentional misrepresentation and fraud.

The Schafers filed a second amended complaint on September 4, 2007. (Click here to review the Second Amended Complaint) The Second Amended Complaint specifically adds allegations against Xactware, that Xactware (1) intentionally understated its pricing of goods and services; (2) conspired with State Farm and other insurers in violating the terms of the insurers’ policies with its insureds, violating the Louisiana Anti-Monopoly Statutes and the Louisiana Insurance Code; and (3) violated the Louisiana Products Liability Act due to the defective design of the Xactimate software.

We will continue to provide updates on this and other Katrina-related issues on InsureReinsure.com.