Hello, everybody. Welcome to today's CLE. My name is Jacob Phillips, and I'll be presenting today. The CLE course is called Class Actions and Auto Insurance: A Primer on Litigating Total Loss Vehicles on a Class-Wide Basis. The reason we're devoted some time to this is that beginning in around 2015, but especially in around 2017 or 2018, there's been a significant increase in the amount of class actions in the specific context of total loss auto insurance, both started in Florida. At least this wave of the litigation started in Florida, but it's now expanded all over the country. It's probably the most litigated issue in the insurance and class actions, in particular, in the insurance area of law. This course is going to address three major theories under which these class actions are brought, along with some of the major issues for each specific theory, both as the merits, but then also as the class certification. Full disclosure, I litigate these as a plaintiff's attorney on the class side, so a lot of what we'll be looking at are some of these issues related to the merits of class certification from the perspective of the plaintiff. Although I hope that either way something can be drawn whether from the plaintiff's side or from the defense side. Really how this is gonna break down is we have three parts, and part one, we're gonna be giving an overview of how total loss vehicles, vehicles are totaled, are valued, how the value of the vehicles are calculated. Part two, I'm gonna then provide the three major theories of liability in these class action cases related to total loss insurance for autos. And then part three, after describing what those three theories are, I'm gonna go over some of the key issues and some of the potential hurdles for each theory. Let's start with part one, which is how is the actual cash value of these total vehicles, how are they even determined? First, let's start with what a total loss even is. A total loss is when a vehicle is the... The correct term is when a vehicle is totaled. Total loss is just the term of art that the insurance industry uses to describe that situation where a vehicle is totaled. And what that means, essentially, is that a total loss occurs when it would be impossible or uneconomical to prepare a damaged vehicle. As you can see on the slide, this would include what's called the salvage value of a vehicle. And that just means the value of the vehicle after the accident, so even if your vehicle is completely smashed up, it retains some salvage value just for the parts that may not be damaged or for the metal or what have you. Basically, if the cost to repair the vehicle plus its salvage value is greater than the vehicle's pre-loss market value, it's a total loss. If the repair costs plus its salvage value are less than the vehicle's pre-loss value, it's a partial partial loss. What happens is that when an insured submits a claim for a damaged vehicle, what the insurance company does initially is they estimate what they think it's gonna cost to fix the vehicle. The labor rates, and the cost of the paints, and maybe you need to replace the bumper or a headlight or what have you. The replacement cost of the component parts plus however much it's gonna cost to actually implement the fixes to the vehicles to repair the damage. That's gonna be the estimated repair costs. 80% of claims approximately, that repair cost amount less a deductible is gonna be what the insurance company ends up paying, but obviously there's some situations where you might have a $10,000 vehicle that gets in a serious accident. It's gonna cost 18 grand to repair the damage. Well, of course, an insurance company isn't gonna pay $18,000 to fix a $10,000 vehicle. That would be uneconomical. That's a situation where it would be uneconomical to repair a damaged vehicle, which means the insurance company is gonna say it's a total loss. The other scenarios are where you don't even have to estimate the repair cost because the car was burnt to a crisp in a fire, or it got flooded, or it was stolen or what have you. In those situations, it's impossible to repair the vehicle, so the vehicle is gonna be considered a total loss. How does this work within the structure of how insurance policies are written? First, auto insurance policies start with what's called the coverage grant. That's where the policies states we're gonna pay for loss to your covered auto. And typically loss is defined as something like, direct, accidental and physical damage to, or theft of your covered audit. That's the first thing. It's the coverage grant. We're gonna pay for loss. We're gonna pay for damage to your vehicle. Next, the policy will then give the list of exclusions. Basically the causes of loss that we're not going to cover. If the reason why your vehicle was damaged was for any of these reasons, you don't get a set. And those are what you would expect. Basically, intentional damage. If you intentionally caused the accident or if you were using the car to drive for Uber when the accident occurred. Then they're not gonna pay for that loss. Acts of god sometimes or government interference. There can be any number of reasons, but it's gonna be a list of the reasons that an accident might occur that would get the insurance company out of jail free card type of thing. We don't have to pay any amount of money for this loss. After that, let's assume you got an accident. The cause of the loss was none of these excluded causes. The insurance company. Now they're gonna pay for the loss. The question is how much do they have to pay. And that's where we get to be limits on liability portion of the policy. Virtually every insurance policy today, if it's not some specialized policy or an antique vehicle or something like that, they're gonna limit the loss to the lesser of the actual cash value, what they call the actual cash value of the vehicle prior to the loss, or the cost to repair or replace with property of like kind and quality. And that gets back to what we were talking about before, where if the pre-loss value is higher than the repair cost, that's a partial loss. We're only gonna pay the cost to repair. But if it's less than the repair costs, then they're not gonna pay to repair the vehicle because the limit of liability is the lesser of actual cash value or the cost to repair. Typically, a policy at that point will then delineate with more detail, how they calculate the actual cash value, what actual cash value means, and how they calculate repair costs. It might have something explaining that to calculate the cost of repair or replace, they're gonna use labor rates from the geographic region, or we don't have to replace with original manufacturer parts. We can use non OEM parts and things of that nature. Important to keep in mind that when a policy says that we'll pay for loss limited to the lesser of actual cash value or cost to repair or replace, replace in this context means the cost to replace component parts, not the cost to replace the whole vehicle. The cost to repair and if necessary, replace, insert a part. Your bumper or a door, what have you. And then finally, after they've explained how the amount is calculated or the limit of liabilities is calculated, the policy will finally include a payment for loss clause, which basically says how they're specifically going to pay either the actual cash value or the cost of repair or replaced. And typically this is something like we're either gonna pay for the loss of money or we're gonna repair or replace the property, which means directly. We're either gonna pay you and you can do whatever you want with that money, or we're going to directly pay a repair facility, or a car dealership, or what have you, to repair or replace that property. The next thing is, let's assume we're in the land of total loss. What the company's going to be doing is paying the actual cash value. the next question is how are insurance companies calculating that actual cash value? Virtually every insurance company today, if we're talking about your normal vehicle, we're not talking about a plastic or an antique or some specialized vehicle, they use one of three vendors. CCC probably has the most market share. Followed by a company called Mitchell. Followed by a company called Audatex. Between the three of 'em, I could be wrong on this, but I think they have about 95% of the total loss valuation market share. All three vendors use the same basic method, what I call the comp method. What's the comp method? First, what they do, these companies, is they identify the advertised price of comparable vehicles listed for sale in the relevant market. If you have a 2016 Honda Civic and you live in Miami, they're gonna identify a handful of 2016 Honda Civics offered for sale by car dealerships in the Miami market. That's step number one. Step number two is that these companies will then make adjustments to these advertised prices based on differences between the comparable vehicle and the insured vehicle in categories like mileage or equipment or options. Say you have a 2016 Honda Civic offered for sales for $15,000, but that vehicle has 10,000 miles on it and the insured vehicle has 20,000 miles on it. Obviously, all else being equal, a vehicle with 10,000 miles is worth more than a vehicle with 20,000 miles. In that scenario, what these companies would do is they would take that $15,000 advertised price, and they'll lower it. The theory accurately being that if this comparable vehicle had 20,000 miles on it, it wouldn't be listed for sale at 15 grand. It would be listed for sale at a lesser amount to reflect the fact that the vehicle has more mileage on it. Same thing for equipment. Basically, let's say the insured vehicle had aftermarket leather seats instead of cloth seats, but the $15,000 advertised vehicle did not have have the cloth seats in that scenario, these companies would increase the price because, all else equal, a vehicle with leather seats is worth more than a vehicle with cloth seats. If this $15,000 vehicle had leather seats, it would've been listed for sale and an amount higher than 15,000. That's basic theory. After adjusting each of the comparable vehicles for any differences, if there are any, which there always will be, at least for mileage, the average of the however many comparable vehicles they identified becomes the base value of the insured vehicles. To keep it simple, if there's three comparable vehicles, one's 15,000, one's 17,000, one's 16,000, they're gonna take the average of those three, 16,000, and that becomes the base value of the insured vehicle. The next step is that this base value will be adjusted based on the pre-loss condition of the insured vehicle. Say $16,000 is our is our base value, but the insured vehicle, even prior to the accident was in really terrible condition. They just really didn't take care of the vehicle. It's a bad condition. They're now going to decrease the base value, the $16,000 base value. They're gonna lower that to account for the pre-loss condition of the insured vehicle. A lot of people ask wasn't in an accident? How did they even know what the condition the vehicle was in prior to the loss? But there are ways to figure that out. If you get hit on the side, let's say, all of the damages on one side of the vehicle, but you can still tell, typically, if there's a bunch of cigarette burns and the dashboard is all messed up, even though it wasn't hit. There was no impact to it in the accident. Or there's cut marks in the rugs or what have you. You can see all that, even though the vehicle was in an accident. They know that wasn't caused by the accident. This vehicle was just at that condition even before the accident occurred. This post-condition amount is called the adjusted value of the vehicle. After that, usually depending on state law and the terms of the policy, typically the insurance company will then add sales tax, maybe some title fees, registration fees, taken all together this amount, the adjusted value plus the taxes and fees equals the actual cash value, the amount that they're actually going to pay the insured, less potentially any deductible. To recap, before moving to part two, a total loss is a situation where it's impossible or uneconomical to repair an insured vehicle after an accident. If a total loss occurs, the insurance company's payment is gonna be based on the vehicle's actual cash value prior to the loss. And generally, to calculate actual cash value, insurance companies use one of three vendors who calculate the actual cost value based on the listed price of comparable vehicles, adjusted for any differences in mileage, equipment, options or what have you. That is a general overview of how actual cash value is calculated. Moving the one to part two, we're gonna discuss the three main theories of class actions related to total loss litigation for automobiles. The first theory is what we'll call the tax, tag and title theory. You probably won't be surprised to know that the theory is the actual cash value of a vehicle not only includes the underlying value of the vehicle, let's call it the market value, but it also includes costs to replace the vehicle, sales tax, title transfer fees, registration fees. This theory is gonna turn heavily on how ACV is defined by a policy or by state law if there is no policy definition. Fundamentally, it's premised on the notion of indemnification. Indemnification is to put someone in the same position they would've been in, had no loss occurred. Obviously, the position that an insured would be in had the accident never occurred, is that they would still have their insured vehicle, their 2016 Honda Civic. To indemnify someone in that scenario requires paying them whatever amount is necessary for them to purchase a 2016 Honda Civic. And as we all know, those costs not only include the sale price, the list price, say the $15,000, but it also requires payment of sales tax, 6% in Florida, at least 6% of that $15,000 in sales tax. And it also includes whatever fees the state mandates as necessary to purchase a vehicle. Typically, the fee to title of the vehicle and the fee to register the vehicle. Now this theory can be broken down into one of three camps based on how most insurance companies pay or don't pay taxes and fees. Camp number one is scenarios where the insurance company is generally including sales tax as part of actual cash value, but they're not including title or registration fees. This mostly occurs because there'll be a state regulation on what insurance companies are required to do. And a lot of those regulations, if you go state by state, they specifically require that insurance companies include sales tax, but they won't say anything about title and registration fees. This camp is obviously going to turn on whether actual cash value as actually defined by the policy, whether it includes title and registration fees. For example, Geico and a few other insurance companies, they specifically define actual cash value as the replacement cost of the vehicle less depreciation and several courts have held under that definition of actual cash value, it does include title and registration fees because title and registration fees are, of course, replacement costs. Other policies, for example, Progressive is a major example of this. They specifically define actual cash value as the market value of the vehicle. A lot of courts have held that market value doesn't include sales tax and fees. Those are just things that get passed onto the state. Market value is the amount that a willing buyer would pay a willing seller for a vehicle. The seller doesn't retain the taxes and fees. That's not really part of the consideration. Those are just pass through costs. In this scenario, the way that the policy specifically declines ACVs is pretty much the only consideration. The second camp is where an insurance company is only paying sales tax if the insured submits proof of replacement, in other words, a purchase order or what have you, within a certain amount of time. Usually, this is because there are at least three states, Florida, Illinois, and Ohio, where the state regulation sets forth that process. They basically say you gotta include sales tax, but you can condition sales tax on proof of replacement. This camp is gonna turn on whether a court thinks that the regulation is incorporated into the policy and sets the governance standard or whether the state regulation is just a minimum floor. The insurance company, if they promise more in their policy, they can't seek refuge in the state regulation. A good example of this is a case of Florida. Where USAA's policy defines ACV as the cost to buy a replacement vehicle. The court, in that case, the Middle District Judge Cogan said the Florida regulation says that you can condition it and want proof of replacement, but your policy didn't say that. Your policy said you were gonna pay the cost to buy a vehicle. And of course, the cost to buy a vehicle includes sales tax. The third camp is where the insurance company is including sales tax if the insured owns the vehicle, but they're not including sales tax if the insured leased the vehicle. Generally, insurance policies don't distinguish between leased and non-leased vehicles in their policy language, so they'll define your covered auto as the vehicle listed in the deck sheet or something like that without mentioning whether it's owned or leased. This camp is really gonna turn on whether the insured is entitled to the benefit of their bargain, even if, from a certain way of thinking, receiving sales tax that you never paid to lease your vehicle can be conceived of as a windfall. Obviously, I would push back on that. It's not a windfall to receive the thing that you bargain for, but there is certainly thinking that is a windfall, so should an insured receive sales tax? He didn't pay for the vehicle and he is not gonna pay if he leases or replaces the vehicle. And each case, the model of damages are just whatever the mandatory minimum amount of sales tax, the percentage imposed by the state, as well as the amount of title fees or registration fees that are required to purchase and then title and register a replacement vehicle. The second theory is what I'm calling the invalid methodology theory. This theory is that those three vendors that we discussed, CCC, Mitchells and Audatex, that the way that they calculate actual cash value is simply invalid. The whole the whole method is invalid. Usually there will be a state regulation that requires insurance companies to use something like a recognized used auto industry source. The theory here is that CCC, Mitchells and Audatex are not used auto industry sources. They're insurance industry sources, but used car dealerships don't follow CCC, Mitchells and Audatex. Only insurance companies do really. That's the general theory. Sometimes under this theory, it's not so much that it's not a recognized source, but they'll point to state regulations requiring that. The state will say insurance companies can adjust from the listed price of comparable vehicles, but those adjustments have to be... They will use language like itemized verified and statistically valid. Under the invalid methodology theory, this is not true, that the adjustments that CCC and Audatex and Mitchells are making, they're not verified, they're statistically invalid, they're based on that data, et cetera. Typically, under this theory, the model of damages is just the difference between the value of the vehicles calculated by the vendor, by Mitchell or by CCC or by Audatex. The difference between that and the value calculated by data or Kelly Blue Book or some other recognized source. Typically data and Kelly Blue Book have a higher value, come to a higher value than than the three vendors we've been discussing. The differences are the damages, rather are the differences between that amount. If CCC says the vehicle is a 2016 Honda Civic in Miami is worth 16 grand and NADA says it's worth 17 grand, then damages are a thousand bucks. The third theory is what I'm calling the negotiation theory. This does not apply to CCC,,. The theory only applies to Mitchell and to Audatex. Recall that earlier we talked about how the way of calculating actual cash value is to take the average listed price of comparable vehicles adjusted for any differences between the comparable vehicle and the insured vehicle, and mileage or equipment or options. I left one thing out, which is that for Mitchell and Audatex, there's an additional adjustment that's made. It's essentially the same adjustment, but they call it different things. Mitchell's calls it a projected sold adjustment and Audatex calls it a typical negotiation adjustment. But the reason is the same behind both. The idea here is that, true or not... I'm gonna try not to be pejorative here. The theory behind the adjustment is that car dealerships don't actually sell vehicles for what they advertise them for, typically. They list the price at 17 grand. If they can get 17 grand, great, but probably they're gonna have to negotiate down. The consumer's gonna come in and say, no, no, no, I'm not gonna use 17 grand for that. I'll give you 16 grand or whatever. And, and they'll negotiate from there. if we're trying to calculate the proper market value, according to Mitchell and Audatex, you can't just take the list price, you have to apply a projected sold adjustment or a typical negotiation adjustment based on the listed price now. Typically, I've looked at a lot of these market valuation reports, a lot of times we're talking about 4%, 5%, sometimes it's high as 8%, 9% adjusted down from the listed price for each comparable vehicle. Okay, so what's the negotiation theory? Well, under the negotiation theory, it's pretty simple. Mitchell and Audatex are wrong that this doesn't happen, That there's not typically a negotiation off the cash price. The negotiation theory is that because of market forces with the ubiquity of internet advertising, internet shopping, being able to compare prices before you ever even go to a dealership. Car dealerships price the market now. In the olden days, sure when people wanted a Honda, they just drove to their local Honda dealership. Maybe they had some clippings from a newspaper or whatever, but now they drove to the Honda dealership. They saw the sticker price. They looked at the vehicle with the one they wanted, and then they started negotiating. In that scenario, back in the 1990s, back in the early 2000s, maybe Mitchell's and Audatex's assumption were correct, but not anymore. Now it's important to distinguish between this and the invalid methodology theory. Under the negotiation theory, the methodology in general is fine, taking comparable vehicles, adjusting for differences in mileage, options, and equipment. Yeah, that's great. That's exactly what you should be doing. It's just that you're wrong about the typical negotiation adjustment in particular, or the projected sole adjustment in particular. Under this theory, the model of damages are whatever the ACV calculation would've been, had no projected sold adjustment or typical negotiation adjustment been applied. If the average projected sold adjustment was 7% for a particular vehicle, then damages are just 7% higher than whatever the ACV as calculated by Mitchell or Audatex was. Let me put it very simply. Let's assume it was Mitchell. If Mitchell said the actual cash value of the vehicle was 16 grand and the average projected sold adjustment was 500 bucks, the damages are 500 bucks. ACV should have been $16,500 under this theory. Mitchell said it was 16,000 flat, so damages are 500 bucks. To recap part two briefly, in a class action total loss litigation, there's three general theories of liability. The first is the simplest, which is just that actual cash value should be interpreted to include sales tax as well as title and registration fees. The second is the invalid methodology theory, which is basically that the entire method, the entire system, the entire software is invalid and should be rejected. And then the negotiation theory, which is that no, the methodology is fine, there's just a discreet specific adjustment, namely the projected sold adjustment or the typical negotiation adjustment that is invalid. Let's turn to part three, where we're gonna go kind of theory by theory and talk about some of the key issues and potential hurdles from the plaintiff's perspective related both to the merits and to class certification, starting with the tax tag and title theory. As for the merits, the most critical question which we've discussed before is how is actual cash value defined? Typically, actual cash value is defined as either something like replacement cost less depreciation, or it's defined as something like fair market value. Obviously, cost less depreciation from the plaintiff's perspective is very much preferred because a lot of courts have been disinclined to find that the market value of a property includes ancillary costs such as taxes and fees and the materials. You should see a couple of examples of the differences. There's a Fifth Circuit case, which rejected a claim by a plaintiff that market value includes taxes and fees. And then there's a few cases from Florida District Courts interpreting the cost of depreciation language and finding that it does include taxes and fees. One note here is that a lot of policies don't define actual cash value at all. They have the language saying that liability is limited to the lesser of actual cash value or the cost of repair replaced, but then they don't provide any definition of what actual cash value means. In that scenario, we have to turn to state common law because a lot of states will have supreme court cases, generally pretty old, but some newer, saying if actual cash value is undefined in the policy, here's what it means under state law. And generally, that will either be cost less depreciation, market value, or the broad evidence rule. Broad evidence rule is essentially, you can account for any number of factors of deciding what actual cash value means. In the hierarchy of preference for the tax title theory, the most preferable would be replace the cost or cost of purchase. Second would be broad evidence, Third would be market value. Another critical question is what are the relevant state regulations on taxes and fees? If it's required, great, but generally if it's required, insurance companies are gonna be paying it. More often, you're gonna be looking at whether the state regulation allows for insurance companies to condition payment of taxes and fees on proof of replacement or whether it requires sales tax, but not title registration fees, and how is that going to impact the court's analysis. Under one theory, let's say you have a state regulation that says insurance companies settling on an actual cash value basis must base their payment on the actual cost to purchase comparable vehicle, including sales tax. Let's say that's what the regulation says, which a lot of them do state by state. One argument that the insurance companies can make is they were by implication saying that we don't have to pay title and registration fees because a lot of other states specifically require a payment of title registration fees. In our state, they don't. Under the theory that the inclusion of one thing applies to the exclusion of all others, the state's requiring us to pay sales tax and not requiring us to pay title registration fees. That's just one argument that can be made. Obviously, you wanna be prepared in answering that question. There's a case in the Seventh Circuit of Florida, Liberty Mutual where Judge Altonaga had what I thought was a very persuasive opinion, rejecting that argument. Another critical question is going to be what the scope of the class might be. If you're looking at a client who wasn't paid sales tax or wasn't paid title and registration fees, that obviously doesn't mean they're never paying. Insurance companies are never paying taxes or registration fees. A critical question is what's the scope of the classic fees? Is this gonna be a big enough class that's gonna make it worth it to bring a case? And some of those questions are, for instance, insurance company might not pay sales tax if the insured retains the salvage vehicle, but they do pay it if they don't. Or they might pay sales tax if the insured owned the vehicle, but not if the insured leased the vehicle, especially if your client leased their vehicle or if your client retains the salvage vehicle. It'd be worth doing some investigation and finding a total loss that occurred where that didn't happen, where the insured owned the vehicle or where the insured did not retain the salvage vehicle, and see if the insurance company still didn't pay sales tax or still didn't pay title registration fees. That'll give you a sense of what the scope of the class might be. This of course also impacts liability, not just the potential scope of damage damages because insurance company's going to have better arguments that they don't have to pay sales tax if the vehicle's leased or if the insured retained the stoppage vehicle or what have you. Then they're going to have, generally speaking, the insured owned the vehicle, didn't retain it, it's gonna be a really good case that they owe sales tax in that scenario. Still a good case in the other scenarios, but obviously the arguments are gonna be different. If you think about the merits, the hurdle as for leased vehicles in particular. Most states, consumers only pay sales tax on the monthly payment when they lease the vehicle. The argument from the insurance companies is gonna that sales tax therefore isn't part of the loss. Forget about getting to the actual cash value. We promise to pay for loss. They didn't lose anything. They paid sales tax at the beginning of the month on a lease payment. They then used the vehicle for that month. They got what they paid for. That sales tax is expired, so to speak. They paid it for the second month, same thing. A year into the lease, they pay it at the beginning of the month and 15 days later, they get a total loss. At most. what they lost was just 15 days worth of sales tax. It's not even a part of their loss. We haven't even got to actual cash value yet. Obviously there's some responses to that argument. Usually when I tell people that argument, the initial reaction is to scoff. That doesn't really make sense. It's a pretty good argument, once you think about it in a little bit more depth, which is that even when you're paid sales tax on an owned vehicle from the insurance company's perspective, they're still only paying you the amount of sales tax that you lost. Imagine that you purchase a vehicle for $30,000 and you pay $1,800 in sales tax. You then use the vehicle for a while, it depreciates when you get in the total loss. The vehicle's now worth $20,000. How much does the insurance company have to pay you in sales tax? Assuming it's 6% of the vehicle value paid $1,800 when you purchased it, they owe you now $1,200, 6% of the 20 grand. In a sense, they're only paying you the sales tax that you didn't lose. The unexpired sales tax, so to speak. You used $10,000 worth of the vehicle and therefore used $600 of sales tax. Now the vehicle's worth $20,000. You've lost the value of the vehicle and you've lost $1,200 in sales tax. We're giving you the amount of sales tax that you lost. That is a part of your loss, $1,200. One way of looking at it is that's exactly what they should have to do if the vehicle is leased. Every time you made a sales tax payment, you've got the benefit of that payment. You used that sales tax, so to speak, until the month in which the total loss occurred. All that the insurance company owes you, under this theory, is the lost sales tax, the unused sales tax. Of course, there's counterarguments that I find persuasive, which is great. Then you should have written your policy that way. You should have distinguished between leased and non-leased vehicles. You didn't. You charged the same premium. In exchange for that premium, promised the same coverage, which is actual cash value. You didn't distinguish between leased and non-leased vehicles. You could have if you wanted to, you drafted the policy. Insureds have been paying a premium for that coverage this whole time. They're entitled to the benefit of their bargain and it's not a windfall to receive that for which he bargains. Some of the key cases on this point. That should be in your materials. State Farm, which is a 2019 Middle District of Florida case. That case is pending appeal right now or has been, but there's been nothing from the 11th Circuit thus far. And then Paris v. Progressive, which is a 2021 Twelfth Circuit Florida case. What are some of the potential hurdles? For all three of these theories, I'm gonna be looking at the potential hurdles of class certification, appraisal, and then the merits. Just to let you know. Broken down into those three categories. As for the tax and title theory, class certification is a low hurdle. I don't think there's been a court that's denied class certification yet, although one decision is up on interlocutory appeal in the Fifth Circuit. I think we're arguing on that is sometime in February. But every court's issued opinion thus far has certified the cases for class treatment. That's not to say that it's easy necessarily that the two issues typically tend to be as sustainability depending on what circuit you're in. A question of article for scanning, which is really the loss of argument for leased vehicles, especially if that's the case, is that it's a class of leased vehicles, but no injury results from the breach because they didn't pay any. There was no loss is the theory, so there's no standing. Or because you might have a client that wasn't paid tax and title fees, but is seeking sales tax on behalf of the class for those class members who weren't paid sales tax. That insurance companies will typically raise questions of whether the plaintiff has standing to represents the absent in class members who weren't paid sales tax. But generally, we're talking about form contract language. We're talking about a pure issue of law. Does actual cash value include sales tax and or tag and title fees? And this really should be a case in which class certification is granted. The second potential hurdle is appraisal. Just quick background. Almost every insurance policy, with a few exceptions depending on state law, 95% of the time, the insurance policy is gonna have an appraisal clause. The appraisal clause basically says, if you, the insured and we, the insurance company, if we disagree as to the amount of loss, then either party is allowed to demand an appraisal of the loss. And we're settle gonna this through appraisal. The question is for each of the three theories, is the insurance company gonna be able to get rid of this claim at the outset by invoking the appraisal clause? And the tax, tag and title theory, appraisal really shouldn't be too much of a hurdle. Most state laws are pretty much consistent in that they distinguish between factual disputes over the loss and legal disputes over contract interpretation. And what the state say is if this is a factual dispute about the loss amount, if this is a factual dispute about how much damage occurred to the vehicle, or how much is it gonna cost to repair the damage or what have you. That's the outlook of appraisers. That's what they do. They go and they look at vehicles and they assess damage and how much is it gonna cost to fix this damage. That's appraisal. If the dispute turns on what the policy means, the dispute is about what does actual cash value mean. Does actual cash value or is actual cash value properly interpreted to include sales tax? That's a legal question. That's not an appraisable question. In the context of tax, tag, title, the dispute really does turn on contract interpretation. You can't go to an appraiser and say, listen, Mr. Appraiser, we have this case law saying actual cash value means this, and we have these statutes saying that mandatory fees and taxes are applying to the purchase price. But the defendant has this case law saying... Mr. Appraiser, can you please tell us who's right as a matter of law? That's not how it works. That's not what appraisal does. Appraisal shouldn't be too much of a hurdle in the tax, tag and title realm. There's probably five or six opinions denying motions to compel appraisal on the context of tax, tag, and title, which then leads to the merits. How much of a hurdle are the merits? It depends on policy language. And as you see on my slide, I put that it ranges from low to virtually insurmountable. As discussed previously, if you have a policy that says ACV is defined as the cost of replacement or the cost of purchase to a replacement vehicle or cost to purchase a comparable vehicle, courts generally are going to find that's properly interpreted to include at least sales tax. Tag and title may be a little bit of iffy, but even then the hurdle on the merits is going to be pretty low under that policy language. But if ACV is defined as market value, we've now gotten to the point where the hurdle on the merits is virtually insurmountable. The Singleton case that we discussed previously, the Fifth Circuit, there's a few other cases as well, basically saying that market value is the amount actually exchanged between the buyer and the seller. It doesn't include fees and costs that just get passed through directly to the state. Right or wrong. That's where courts have landed. And then there's a middle point, which is when ACV is undefined. If it's undefined, obviously we look at state law, but even state law can be a little iffy on this point. You might be able to find state law saying that if ACV is undefined, it means replacement costs less depreciation. But a lot of those cases might be business damage, large buildings being damaged, or at least homeowner cases. Some courts have even said, no, no, no, no. In that context, maybe it does mean the replacement costs less depreciation because there's no active market from which to determine market value. But for used autos, we have a market we don't have to turn to replacement costs us depreciation because we can ascertain the market value very easily because of how hot the market is. Even then, even with undefined ACV, you kinda have to be careful. The other merits related theory that could be a hurdle comes from the Seventh Circuit. The Seventh Circuit's reasoning was that if you don't incur the cost of taxes and fees, then it's not a part of your loss. We don't get to actual cash value. Even if actual cash value is defined as the replacement cost, unless you show that you actually incurred those costs in replacing the vehicle, then it's not a part of your loss, then thus we don't have to get to the limit of liability. Limit of liability is not a promise to pay according to Seventh Circuit. It's a limited liability. It's until you first show that it's part of your loss. We don't have to get to the limit of liability on loss. I find this theory to be very interesting and unpersuasive, but it's out there. Although a lot of the courts since the Seventh Circuit's decision by Siegler. A lot of courts that are not bound by Siegler have declined to follow it. And some of those cases should be in the materials you receive or some of the citations at least. Should be in the materials that you receive. I have some of these notable cases that we discussed before, so you can take a look at those afterwards when you have time and feel free to look 'em up. This is related to classification appraisal and to the merits. Turning out to the second, invalid methodology theory, you can see I put a couple of key questions on there. Obviously overwhelmingly, the most important question is what's the language of the relevant state regulation? If there is no state regulation, there is no invalid methodology theory. It's dependent entirely when there being an applicable state regulation and then turns on what those requirements are. Most state regulations are fairly generic. It comes from the 1970s or 1980s. There was a model unfair claims settlement practices acts that was proposed and a lot of the states have adopted that language or something very close to that language. You find that a lot of the state regulations have similar requirements. Some are pretty generic in that they don't go much beyond. You just gotta use a recognized used auto source. Sometimes you gotta use a source approved by the department of insurance. Others, and I think probably most, get more specific and typically have some requirement that we discussed earlier about any adjustments to the price of comparable vehicles, have to be verified, specific, sometimes appropriate and dollar amounts, or statistically valid. And then some get even more granular and they'll even say say you can only use comparable vehicles that are listed for sale within 60 miles of the insurance address or that have been listed for sale or sold within the last 60 days or what have you. And they get to pretty granular details. And then obviously the next question beyond is just nearly what those requirements are. The key questions are A, is there a private cause without action for violations? If not, two, is the regulation incorporated into the insurance policy such that a violation of the regulation is necessarily a breach of the policy terms? Those are kinda the key questions related to the invalid methodology theory. Turning to some of the potential hurdles, class certification, I characterize as a pretty high hurdle, but not impossible. Here's the main reason that class certification would be a difficult issue and we'll point to a couple of cases later, essentially holding this. Let's say that the methodology, whether it's CCC or Mitchells or Audatex, let's say that it is valid, that it violates the regulation. It's not a recognized used auto source, so it violates the regulation. Or it's using vehicles more than 90 miles away from the insured's address, which violates the regulation, so it's invalid. The problem is did it get to the wrong amount? Okay, it violated the regulation, but was it correct? It said the ACV was $18,000. Imagine that you live in upstate New York and CCC used comparable vehicles listed for sale in New York City, which is more than 90 miles away and therefore violated the regulation. Well they also proudly calculated a higher actual cash value amount than if they had used vehicles offered for sale in upstate New York, which has a lower market. Sure, they violated the regulation, but they also paid you more than they would've paid you had they followed the regulation. Was the contract breached? If it was, were there any damages resulting from that breach? Probably not. Probably they actually have an offset claim. That's just one example of why class certification can be very difficult. You have to go case by case and show that not only was there a violation of the regulation, but also that violation caused damages. They calculated a lower actual cash value amount than they would have calculated had they followed the regulation. And it's not immediately obvious that's going to be the case in all situations or maybe even in most situations. A counter to this is that class certification is certainly not impossible, assuming that the court buys a theory of damages that is certifiable. In the Fifth Circuit, there was a case in which the theory of damages. We're not gonna go back and redo all of the valuations under a method that comports with the statute. We're just gonna use data, we're just gonna use whatever data says the value is as the damages. The difference between NADA and Mitchell. There still can be a problem there, which is that in the state case, I think the public record shows that 20 or 25% of the time... this was a case against Progressive. Progressive uses Mitchell. About 20 to 25% of the time, Mitchell was actually higher than data. You do get a situation where, what do we do about that? Do we exclude those people from the class? But the point is if a court buys that a classifiable theory of damages matches the theory of liability, that's a way of avoiding the class certification hurdle under the invalid methodology theory. But that's definitely rare. There's definitely more cases denying class certification in this context than it granting it. Appraisal is also a pretty significant hurdle. Not impossible, but pretty significant. And the reason is just that even on its face, calculating the value of a vehicle, looking at its condition, looking at the equipment, seeing differences in mileage, seeing if they have standard rims or upgraded rims, trying to figure out the pre loss, all of this certainly sounds like something appraisers do, not something that the court is gonna do. A lot of this is going to also turn on the same issue that we discussed in class certification because the counter to that and the plaintiff's perspective falls short, but determining whether a particular methodology for appraising the underlying value of a vehicle, determining whether that methodology comports with state law is a legal question. An appraiser can appraise the value of the vehicle, but appraiser can't decide if a different way of appraisal what is permitted under state regulation. That's something for the court to decide. deciding whether the claim is appraisable or whether appraisal should be compelled is probably also, again, going to turn on whether the court accepts the theory of damages or whether the court says, no, look, unless you show that their methodology not only violated the statute, but also resulted in a payment of less than actual cash value, which is all that you're entitled to under the policy. The only thing you're entitled to is actual cash value. Unless you show that they paid you less than actual cash value, then we don't get past this threshold issue of damages, and we can't determine that until we have an appraisal, which the policy calls for. For that reason, I characterized the appraisal hurdles. It's pretty high. Merits. This is where medium to highest, I characterize it. Obviously, some of it depends on state regulation. Again, a lot of this turns back on some of the same issues we raised with respect to class certification and appraisal, which is that if all you had to show was that the methodology doesn't comport with the state regulation, then depending on the actual facts, depending on the language of the specific regulation, sure it might not be all that difficult to show that this regulation was violated. But if you also have to show what the damages are, if you have to show that they not only violate the regulation but also paid less than ACV, then that can turn into something that's pretty difficult unless either A, they're statutory damages or B, again, the court accepts some theory of damages that you just used Kelly Blue Book, which not too many courts have been inclined to do, at least thus far. And then again, we've included some notable cases, both positive and negative for the court's perspective, at least related to the merits, and class certification, and appraisal for the invalid methodology theory. And that brings us to our third and final theory, the negotiation theory. First, some of the key questions. What's perhaps most interesting about the negotiation theory is that it doesn't really turn on how actual cash value is defined and it doesn't really turn on state regulation or what the state regulations require. It essentially turns the critical question is whether it is factually true that car dealers routinely sell vehicles for less than their listed cash price. If the answer is yes, then probably, it's fine that Mitchell and Audatex are applying these projected sold adjustments. If the answer is no, then it's not. There's not much of the key questions because it really turns with that simple issue, is this actually true? Is this actually how the market is operating? The potential hurdles. There's not very many cases other than the merits. There's been no class certification case. Has there been an appraisal decision? I think there might have been. There's been a few appraisal decisions. But in any case, it's much less developed than the other theories, so it's more difficult to say. As you see on your slide, as to all three, there's one the one hand, but on the other hand, potential. For class certification, it's probably certainly more of a hurdle than on the tax, tag and title, but not as much of a hurdle as the invalid methodology theory. Theoretically, there's a potential fit issue between liability and damages. For example, if car dealers don't normally negotiate 80% of the time, car dealerships sell vehicles for their listed cash price, but 20% of the time, they do negotiate. Person comes in, pays cash, but even though they're paying cash, they're still gonna negotiate off of the listed price. Okay, well probably the insurance companies shouldn't be applying projected sold adjustments uniformly across the board, but can they apply it 20% of the time? How do you calculate damages 20% of the time. This is happening. What happens to which class member? Is this an individual case by case type of basis or is the answer that, everybody gets a projected sold adjustment applied to it, but it's at 80% less than whatever was applied by the insurance company? And if so, how do you identify with what that percentage is? Those are some of the potential hurdles the class certification. But again, there's on the other hand for each of these. On the other hand is all of the potential hurdles to class certification can be turned around as reasons why the adjustment never should have been applied in the first place, which is you look at something. Okay, they're 20% of the time they're negotiating or 50% of the time they're paying less than list price, but we don't know whether that's because of negotiation or because the insured agreed to finance through the dealership, and so they lowered the price a little bit because they were gonna get points on the loan. Well that's not a part of actual cash values. It can't determine that. Or maybe it wasn't 'cause of negotiation at all. Maybe it was because of employee discount, or loyalty discounts, or a military discount, or a friends and family discount. That's not a negotiation. The insurance company would say, 'cause we can't determine these things, we have to look at every case on individual basis and this can't be certifying. The turnaround on that is, if you can't determine these things, why are you assuming that it's a cash negotiation each time that goes to the merits. There's definitely responses to all of those arguments, but at least somewhat of a hurdle I think is fair to say. Same thing for appraisal. I think it's probably more of a potential hurdle than for tax, tag and title, but probably less than the invalid methodology. On the one hand, again, the underlying value would be sounds like something that's suitable for appraisal. But then the counter to that would be this issue turns on expert testimony from used car industry about how the market works and statisticians looking at the underlying of empirical data, determining how often these negotiations off of list price are occurring by comparing the list price to the reported sold price of millions and millions of vehicles. How is an appraiser going to determine these issues? You don't go to an appraiser and present evidence, and call witnesses to the stand and provide expert testimony. This is all the type of thing that happens and it's resolved by a court. At the very least, even if the claim includes some theoretically appraisable issue, it also certainly involves issues that are not appraisal. And in fact, several of the decisions that have come out have compelled appraisal of the negotiation theory, but then has not dismissed the case on that basis, so the parties have come back, said, okay, we went through appraisal. Now we have these issues of law that are left for the court to resolve. You might have to go through an appraisal process, but that also might not sync the claim, so to speak. And then on the merits, it's tough to say. Certainly, all the cases are surviving the pleadings, thus far, but looking forward, I think one of the hurdles might be in culture, there might be a little bit of a general assumption that car prices are negotiable. I think a lot of people like to imagine that at least they... Ha ha. I'm not a sucker. I don't pay list price. You might have that as a potential hurdle. People might think that they can go in and negotiate off of the listed price of the vehicle. But the response to that, I guess is that first if you have data showing that no, it doesn't happen, or if you can show a jury that, yeah, you might think that you're negotiating off the list price, but they're making it up through financing, through sale of auxiliary products, through all of these other things, which are unrelated to the cash value of the vehicle, obviously. They might be making you think that they're dropping 500 bucks and you're getting a great deal, but it's because they've already convinced you to finance through them, or to sell ancillary products, or to take less on the trade in than they otherwise would've given you or what have you. I think that there's a pretty good case on the merit test negotiation theory, but there are certainly hurdles. Mostly factual hurdles, less so legal hurdles. And then again, we've provided a few notable cases. There's been more since I actually prepared this slide. If anybody's interested in seeing more of the case law as to the motions to dismiss on the negotiation theory, please feel free to reach out to me. My contact information should be in the materials that you receive. To basically summarize. I know we've gone a little long so I'll be quick on this, but total loss class action litigation is a pretty fascinating and interesting body of law. I've certainly enjoyed being a part of it. We're not talking here about statutory causes of action, which with statutory only damages and the type of cases that can cause some cynicism and eye rolling about class litigation as public policy. These are benefit of the bargain cases. These are what are you contractually entitled to. These are real damages. These are hundreds of dollars, sometimes thousands of dollars. For this reason, I think resolution of the cases have depended far less on jurisprudential philosophy than a lot of other class action cases. A lot of other class action cases, I'm sure those of you who litigate on the class basis, you're just waiting. What judge is pulled and how you feel about your case. A lot of times it depends on the judge that's pulled. Not so here. I mean we're talking about contract interpretation here. We're talking about benefit of the bargain. I think there's less of that, but they're also difficult. They're also pretty complicated. They're data intensive. We're talking about millions of data inputs that have to be reviewed and analyzed. You have an intellectually interesting and also challenging body of law, but with the potential to do some good for people out there, to make sure that they receive that to which they are entitled under their policies of insurance. How these cases develop over the next few years? I think a significant impact, both on the auto industry and it already is having an impact on the auto industry, but I think it also had a very interesting impact on the developments of 23 case law in general. Again, if you have any questions, wanna discuss, I love discussing these things. I love talking about these things. Anything that you wanna talk about, any questions that you have, feel more than free to call me or email me and I would be happy to discuss it with you. Thanks for joining and I hope you guys have a great week. And good luck out there.