(Article from Insurance Law Alert, April 2019)
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Courts across jurisdictions have reached different conclusions as to whether labor costs can be depreciated for the purposes of calculating actual cash value (“ACV”) under a property policy. (See March 2017 Alert, January and February 2016 Alerts). This month, the Tennessee Supreme Court weighed in, ruling that policy language did not expressly permit an insurer to depreciate labor costs in determining ACV. Lammert v. Auto-Owners (Mutual) Ins. Co., 2019 WL 1592687 (Tenn. Apr. 15, 2019).
Two sets of homeowners filed a putative class action against Auto-Owners, alleging that the insurer improperly depreciated both labor costs and materials in calculating the ACV of damaged property. One policy defined ACV as “the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to loss.” The other policy did not define ACV but stated that it includes a deduction for depreciation. Neither policy specifically mentioned labor costs.
The Tennessee Supreme Court ruled that the language in both policies is ambiguous. The court explained that inclusion of the terms “damaged property” and “prior to loss” suggests that depreciation applies only to materials because labor is intangible and labor costs are post-loss expenses. Additionally, the court noted that the policies’ definition of depreciation as “a decrease in value because of age, wear, obsolescence or market value” indicated that it did not include labor because labor does not age, wear or become obsolete. Construing these ambiguities in favor of the insureds, the court concluded that depreciation could be applied only to the costs of materials.
As discussed in our December 2018 Alert, the Eighth Circuit affirmed an Arkansas district court decision certifying a class of homeowners who alleged that a property insurer improperly withheld amounts for labor depreciation when making claim payments. Stuart v. State Farm Fire & Cas. Co., 2018 WL 6358447 (8th Cir. Dec. 6, 2018).