Alycen A. Moss | Property Insurance Law Observer | June 20, 2017
In February, the Nebraska Supreme Court held that it is acceptable for insurance companies to depreciate labor costs when determining the actual cash value (ACV) of damaged property, even when the insurance policy does not define “actual cash value” or “depreciation.” See Henn v. American Family Mutual Insurance Co., 295 Neb. 859 (Neb. 2017). Writing for the Nebraska Supreme Court, Chief Justice Michael Heavican concluded that all relevant facts and evidence should be used to calculate ACV, and both materials and labor constitute relevant facts to consider when establishing the value of property prior to the loss.
The case dates back to a September 2011 dispute when Rosemary Henn filed a homeowner’s claim with American Family due to damage to her home’s roof vent caps, gutters, siding, fascia, screens, deck, and air-conditioning unit during a hailstorm on August 18, 2011. American Family determined that Henn’s insurance policy covered the damaged property.
American Family’s policy provided that, following a covered loss, an insured may recover “the cost to repair the damaged portion or replace the damaged building, provided repairs to the damaged portion or replacement of the damaged building are completed,” or “[i]f at the time of loss, … the building is not repaired or replaced, [American Family] will pay the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building.” Under both options, the insured would first receive an actual cash value payment. The policy, however, did not define “actual cash value” or “depreciation.” The policy also did not describe the methods employed to calculate “actual cash value” or explain how American Family determined the difference between replacement cost value and ACV.
After inspecting the storm damage, American Family paid Henn the ACV for the damaged property and provided Henn with a written estimate that explained the calculations for replacement cost value, actual cash value, and depreciation. The estimate defined “actual cash value” to be “based on the cost to repair or replace the damaged item with an item of like kind and quality, less depreciation.” The estimate further stated “replacement cost” was the “cost to repair the damaged item with an item of like kind and quality, without deduction for depreciation.” In the estimate, American Family’s adjuster determined the cost to repair and replace the damaged portions of Henn’s home, and it subtracted depreciation of both the materials and labor. The estimate did not specify which portion of depreciation derived from materials and which portion derived from labor.
Henn did not make a claim for payment of replacement costs, but instead, filed a lawsuit in Nebraska state court. American Family removed the case to the U.S. District Court for the District of Nebraska on diversity grounds, and filed a motion for summary judgment. The District Court held the motion in abeyance until the Nebraska Supreme Court could answer the following certified question: “May an insurer, in determining the ‘actual cash value’ of a covered loss, depreciate the cost of labor when the terms ‘actual cash value’ and ‘depreciation’ are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated?”
The Nebraska Supreme Court looked to other jurisdictions for clarity on the proper calculation of ACV, primarily the Oklahoma Supreme Court’s split decision in Recorn v. State Farm, 55 P.3d 1017 (Okla. 2002). In Recorn, the majority reasoned that depreciation of labor logically factored into the ACV determination because a building is a product of both labor and materials. The dissent argued that labor, like all services, does not logically depreciate, and that a roof, for example, is not an integrated product, but a combination of a product (shingles) and a service (labor to install). Other states discussed Recorn at length. The Supreme Court of Arkansas and the U.S. District Court for the Eastern District of Kentucky sided with Recorn’s dissent, arguing that labor does not logically depreciate. However, the U.S. District Court for the Western District of Pennsylvania and the Florida District Court of Appeals sided with Recorn’s majority. Furthermore, in Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349 (Ind. 1982), the Indiana Supreme Court described the broad evidence rule as a “flexible approach” accounting for “every fact and circumstance which would logically tend to a formation of a correct estimate of the loss.”
Armed with case law from within and outside of the court’s jurisdiction, the Nebraska Supreme Court ruled that ACV unambiguously includes labor depreciation under the broad evidence rule because both materials and labor constitute relevant facts to consider when establishing the value of property prior to the loss. The Court reasoned that ACV is not a measure of damages, but rather, it is only intended to provide a depreciated amount of the replacement costs to start the repairs.
Yet, as the case law discussed in Henn demonstrates, different states take different approaches to this issue. For example, in a 2015 case from Arkansas, Shelter Mutual Ins. Co. v. Goodner, 477 S.W.3d 512 (Ark. 2015), held that labor cannot depreciate: “The shingles are of course logically depreciable. As they age, they certainly lose value due to wear and tear…. Labor, on the other hand, is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value over time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of depreciating the value of labor is illogical…”
So, when dealing with calculation of ACV, we must be aware of our jurisdiction. Different states have come to different conclusions on the issue, with no obvious answer as to why a state chooses one policy over the other. When paying ACV, an insurer must be aware of whether the state allows labor depreciation in the calculation, lest an insurer faces litigation like American Family. This is an issue to watch for the future, as states will likely produce more case law on the calculation of ACV in coming years.