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Nelson v. American Family Mutual Insurance Co.

United States Court of Appeals, Eighth Circuit

August 2, 2018

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

          Submitted: June 13, 2018

          Appeal from United States District Court for the District of Minnesota - Minneapolis

          Before GRUENDER, ERICKSON, and GRASZ, Circuit Judges.


         In 1990, Charles P. Nelson and Darlene F. Nelson ("the Nelsons") purchased a Gold Star Homeowners Insurance Policy ("Gold Star Policy" or "Policy") from American Family Mutual Insurance Company ("American Family") on their home in Monticello, Minnesota. The Policy provided that the Nelsons could recover up to 120% of the policy limit in the event of a total loss, so long as they purchased coverage no less than the replacement cost of the house. Each year, American Family provided the Nelsons with a replacement cost estimate, which was adjusted from the prior year based on inflation. In 2007, however, the estimate spiked approximately $140, 000, the apparent result of a change in the designated "Quality Grade" of the house. Four years later, the Nelsons complained to their agent for the first time that their coverage was too high. In response, American Family reduced coverage for 2011 but refused to refund the Nelsons' claimed overcharges incurred from 2007 to 2010.

         The Nelsons filed an amended complaint against American Family, asserting breach of contract, negligent misrepresentation, and violation of Minnesota's consumer fraud statutes.[1] Each of the claims is based on the notion that the company misrepresented the replacement cost of the property, which caused the Nelsons to pay excessive premiums. The district court[2] granted summary judgment in favor of American Family. Having jurisdiction under 28 U.S.C. § 1291, we affirm.

         I. Background

         In 1990, the Nelsons moved into a newly built lake home in Monticello, Minnesota. They purchased a Gold Star Homeowners Insurance Policy from their long-time American Family agent, Ron Baker. The Policy covers loss or damage to their home ("Coverage A") and personal property ("Coverage B"). The Nelsons chose the Gold Star Policy because it is a replacement policy that covers the total loss of their property up to 120% of the Coverage A amount as long as they insure their house and detached garage to a minimum of 100% of the replacement cost.

         American Family uses a third-party software tool, 360Value, as its "residential building cost guide" under the Policy. 360Value is software designed to generate replacement cost estimates. When an insured purchases a policy from American Family, the agent collects information about the home, including square footage, age, foundation type, exterior type, number and size of rooms, type of fixtures, and number of doors and windows. 360Value also uses a "Quality Grade" field, which refers to the caliber of the home and its various components, to price individual components used in the building's construction. Users select from grades of economy, standard, above average, custom, or premium. Once the user enters all of the information into 360Value, the program generates an estimate of the home's replacement cost.

         The Nelsons' Policy explains that the replacement cost of the home can change over time and that it is the insured's responsibility to make certain that the replacement cost in the renewed policy is accurate. Specifically, the Policy provides that each year when the Policy renews, American Family "will increase the insurance . . . at the same rate as the increase in the Residential Building Cost Index" to adjust for inflation. The Nelsons are also required to notify American Family when remodeling or additions to the house would increase the replacement cost value by $5, 000 or more. The Gold Star endorsement goes on to state:

Our residential building cost guide may be used to develop an estimated replacement cost based on general information about your dwelling. It is developed from researched costs of construction materials and labor rates. This is the minimum amount for which to insure your dwelling. The actual cost to replace your dwelling may be different. We do not guarantee that this figure will represent the actual cost to replace your dwelling. You are responsible for selecting the appropriate amount of coverage. You may wish to obtain a detailed replacement cost appraisal or estimate from a contractor. You may select a coverage amount equal to that appraised value or that cost of construction, if the amount is greater than the replacement cost as estimated by our residential building cost guide, and we agree to that amount.

         When they first moved into the home, the Nelsons purchased a policy that provided that the full replacement cost was $150, 000. By 2006, inflation had pushed the replacement cost estimate provided by American Family to $240, 200. Prior to December 2006, American Family gave the home a Quality Grade of "standard" when inputting data into the 360Value software.

         In December 2006, Baker apparently changed the Quality Grade from "standard" to "above average," generating a new 360Value report on the Nelsons' home with a replacement cost estimate of $379, 841.97. In January 2007, Baker sent the Nelsons a letter and declaration page informing them that the Coverage A amount would increase to $380, 000 starting at the next renewal. The increase in coverage took effect in February 2007. In the following years, full replacement cost coverage on the home rose-due to inflation-to the following amounts: $427, 500 in 2008, $439, 000 in 2009, and $450, 900 in 2010. During these years, the Nelsons never complained about the amount of coverage on their home or the cost of their premiums.

         In 2009, American Family employed Millennium Information Services ("Millennium") to conduct exterior-only surveys of insured properties to determine if any were overinsured or underinsured. Millennium's task was to complete a survey of each property and use the information from the survey to generate a replacement cost estimate report on 360Value (collectively, the "Millennium Reports"). American Family expected agents to review each Millennium Report, assess whether the current coverage amount was accurate, and, if necessary, discuss coverage with the insured. An underwriter would also review the file ...

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