A federal judge in California is weighing whether to allow a proposed class-action lawsuit to proceed against State Farm General Insurance Co., in a case involving nearly 200,000 homeowners who allege the insurer improperly deducted sales tax when determining the actual cash value (ACV) of property damage claims.
At issue is the method used by State Farm to calculate ACV. According to court documents, the insurer first determines the replacement cost of an item, including applicable sales tax, then subtracts depreciation from the total amount to arrive at the ACV. The plaintiffs argue that this approach violates California law and results in underpaid claims.
The case is being heard in the US District Court for the Northern District of California. In a June 18 hearing, Judge William H. Orrick said he was considering a motion to certify the lawsuit as a class action.
While no formal ruling has been issued, Orrick suggested during the hearing that he was inclined to reaffirm a 2017 decision in which he held that sales tax should not be depreciated or deducted when calculating ACV. That earlier ruling was also issued in the Northern District and involved similar legal questions.
The plaintiffs’ position references a section of the California Insurance Code, in place since 2005, that states physical depreciation applies only to parts of a structure that are subject to normal wear and replacement. The plaintiffs contend that sales tax does not meet this criterion and should not be reduced as part of the ACV calculation.
State Farm opposes class certification, arguing that each policyholder’s circumstances vary and that such differences require individual assessments. The insurer also maintains that a violation of insurance code does not necessarily imply financial harm for every policyholder.
The question of whether statutory violations alone justify class certification is also under review by the US Supreme Court.
The outcome of that case could influence this litigation, as the court is considering whether plaintiffs must show actual damages or if a code violation is sufficient to form a class. That matter also involves State Farm and centers on how ACV is calculated in vehicle total-loss claims.
Additional lawsuits in other states allege similar valuation practices by State Farm in its auto claims. In Missouri, a class action claims the insurer applied across-the-board “typical negotiation adjustments” to reduce vehicle values by between 4% and 11%.
Another case in California challenges State Farm's approach to omitting sales tax from some total-loss auto settlements, with plaintiffs alleging the practice affected approximately 10% of claims and involved more than $10 million in disputed amounts.
State Farm's legal and regulatory exposure in California extends beyond the current lawsuit. The California Department of Insurance has launched a formal investigation into the company’s handling of wildfire-related claims.
Financial disclosures show State Farm General Insurance Co. returned to profitability in 2024, reporting $5.3 billion in net income after a $6.3 billion loss the prior year. Its property and casualty earned premium rose to $103 billion.
In parallel, the company has sought emergency rate increases in California between 15% and 38%, citing market volatility and exposure to climate-related risks. State Farm has also warned that without approval for these increases, it may reduce its policy footprint in the state.
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