California Supreme Court Affirms California Fair Plan Ass’n v. Garnes, and Preserves Homeowners’ Interests

Stephanie Poll | Property Insurance Coverage Law Blog | August 17, 2017

The California Department of Insurance recently issued a press release announcing that the California Supreme Court affirmed the homeowner reimbursement protections recently decided in California Fair Plan Association v. Garnes.1 Back in June, my colleague Kevin Pollack wrote about the recent decision and whether actual cash value means fair market value or replacement cost minus depreciation in, Does Actual Cash Value Mean Fair Market Value or Replacement Cost Minus Depreciation.

Last week, the California Supreme Court refused to consider the insurance industry’s petition to overturn a lower court’s decision that insurers must pay to repair a home even if the repair costs exceed the home’s market value. There, a house fire occurred and the homeowner submitted a claim for $320,549 to her insurer, California Fair Plan Association. This amount represented the cost to repair the damaged home, less depreciation. Garne’s FAIR fire insurance policy had a limit of $425,000, yet Fair Plan denied the claim and only paid $75,000, which was determined to be the fair market of the property in 2011 (in large part due to the mortgage-driven recession).

The supreme court’s refusal to consider the proposal ended an ongoing battle and cemented an important decision that protects homeowners’ interests. Insurance Commissioner Dave Jones stated: “This is an important win for homeowners who should have confidence their insurer will deliver on its promises regardless of housing value fluctuations.”2 Jones filed an amicus brief in support of Garnes, arguing the Insurance Code entitled Garnes to be reimbursed. The lower court agreed and relied on Jone’s interpretation of the Insurance Code when ruling in Ms. Garne’s favor.

The Insurance Commissioner appeared as an amicus curiae, or friend of the court. Jones’ interest was in protecting consumers and ensuring the Insurance Code is properly interpreted and enforced. Our friends over at United Policyholders also filed an amicus brief supporting Garnes and advocating for homeowners’ rights.
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1 California Fair Plan Ass’n v. Garnes, No. A143190, 2017 WL 2303165 (Cal. Ct. App. May 26, 2017).
2 http://www.insurance.ca.gov/0400-news/0100-press-releases/2017/release082-17.cfm

Calculating Actual Cash Value, Part 29: Oregon

Shane Smith | Property Insurance Coverage Law Blog | August 25, 2017

This week, Oregon made national news as one of the best locations to view the Great American Eclipse. I realized I had not yet covered Oregon in my series on calculating actual cash value, leading to today’s blog.

In Growers Refrigerating Co. v. American Motorists Insurance Company,1 the insured commenced an action to recover for damage to pears stored in its cold storage plant as a result of contamination following an ammonia leak in refrigeration equipment.

Although the issue the court considered did not center on the cost of repairs, the court held the term actual cash value is defined as the market value at the time of the occurrence:2

We recognize that this is not a case involving the cost of repairs. We also agree that it would have been preferable for plaintiffs in this case to offer testimony framed more precisely in terms of the difference in the cash or market value of the pears before and after they were contaminated by ammonia. We nevertheless hold, however, that under the particular facts of this case evidence showing a comparison of the amounts received from contaminated and uncontaminated pears, together with evidence of the amounts paid in the adjustment of claims for contamination damage to the owners of the pears, was not only admissible, but that presumptively, and in the absence of evidence to the contrary, such amounts represented the difference between the value of the pears before and after they were contaminated by ammonia.

The jury in this case was properly instructed on the issue of damages in terms of cash or market value, as required by the provisions of the policy. We hold that there was sufficient evidence to support its verdict awarding damages to plaintiffs.

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1 Growers Refrigerating Co. v. American Motorists Ins. Co., 260 Or. 207, 488 P.2d 1358 (1971).
2 Id. at 1363, 1364.

Colorado Joins a Growing List of Jurisdictions Allowing Depreciation of Labor Costs When Determining Actual Cash Value

Larry Bache and Jonathan Bukowski | Property Insurance Coverage Law Blog | August 8, 2017

While I often argue that depreciating labor simply does not make sense, insurers continue to push the question of whether the depreciation of labor costs in Actual Cash Value policies is acceptable. Though several jurisdictions have rejected the depreciation of labor, surprisingly, the recent trend of jurisdictions touching upon the subject has been to allow for the depreciation of labor.

Courts allowing for the reduction of depreciation for labor appear to base their reasoning upon one simple key issue – whether the definition for Actual Cash Value within the policy is ambiguous. Generally, where the term is found ambiguous, reductions for depreciation of labor are inappropriate as a reasonable policyholder would not expect labor to be depreciated. Similarly, when a court finds Actual Cash Value unambiguous, they typically hold that reductions for depreciation of labor are appropriate to prevent unjust enrichment.

Unfortunately, on July 28, 2017, the United States District Court for the District of Colorado held the term Actual Cash Value in a USAA homeowners policy unambiguous, allowing USAA to depreciate labor when issuing its actual cash value payment.

In Basham v. United Services Automobile Association,1 USAA’s policy provided a two-step approach for resolving property damage claims above $5,000.00:

(1) USAA would pay only the “actual cash value” for the loss, defined as –

the amount it would cost to repair or replace covered property, at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence.

(2) However, if the homeowner completed the repairs or replacement within one year and timely submitted notice, USAA would pay for the replacement cost without a deduction for depreciation.

The policyholder partially repaired her home and was reimbursed without a deduction for depreciation. However, the policyholder was left with the lesser actual cash value—after a depreciation deduction of both the cost of materials and the cost of labor—for the property damage that she did not fix within one year. While the policyholder accepted USAA’s depreciation deduction for the cost of materials, she argued that USAA violated her policy by taking a depreciation deduction for the cost of labor.

USAA’s policy language provided:

Actual cash value means the amount it would cost to repair or replace covered property, which is evaluated at the time of loss or damage, with material of like kind and quality, and subject to a deduction for deterioration, depreciation and obsolescence.

In determining the policy language to be unambiguous, Judge Jackson relied heavily upon the presence of commas to conclude that their presence signaled the independence of each phrasing from the prior and subsequent grouping. The court took it one step further, concluding that each of these independent phrases referred back to the cost of repairing or replacing covered property. Based upon this interpretation, the court interpreted the policy as unambiguously providing:

Actual cash value means “the amount it would cost to repair or replace covered property, which is evaluated:

  1. At the time of loss or damage,
  2. with material of like kind and quality, and
  3. subject to a deduction for deterioration, depreciation and obsolescence.

In other words, the amount it would cost to repair or replace a covered property is subject to a deduction for depreciation. Therefore, at least in this one federal trial court, both the cost of materials and the cost of labor are subject to a depreciation deduction where Actual Cash Value is unambiguous.

What does this recent decision mean for Colorado policyholders? The good news is that this decision is not binding upon Colorado state courts. However, it can be used as persuasive argument in support of an insurers justification for reductions for depreciation of labor in state court. Therefore, policyholders should always carefully read their policy language to determine its coverages and limitations. For instance, a policy could provide language forbidding the depreciation of labor costs, or as in this case, even providing circumstances where reductions are not made where the property is repaired within a defined timeframe. Finally, this trend emphasizes the importance of purchasing a Replacement Cost Policy.
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1 Basham v. USAA, No. 16-cv-03057 (D. Colo. July 28, 2017).

Calculating Actual Cash Value, Part 26: Montana

Shane Smith | Property Insurance Coverage Law Blog | July 5, 2017

In Montana, a jury may consider all relevant evidence when determining the actual cash value of the property damaged or destroyed.1 Under the broad evidence rule, the trier of fact “may consider any evidence logically tending to the formation of a correct estimate of the value of the insured property at the time of the loss.”2

Where a policy limits the insurer’s liability to the actual cash value at the time of the loss, what constitutes actual cash value depends upon the nature of the property insured, its condition, and other circumstances existing at the time of loss.3

Depreciation because of age should be considered in determining the actual cash value of a building partially destroyed by fire.4

However, although not expressly rejecting the use of depreciation based on the age of a building partially destroyed by fire in arriving at its sound value before the fire, the court in McIntosh v. Hartford Fire Insurance Company,5 did not use a depreciation percentage in further determining the amount of liability of the defendant insurance companies. The record showed that the buildings had been insured under policies which provided “against all direct loss or damage by fire. . .” and also that the company “shall not be liable beyond the actual cash value of the property at the time any loss or damage occurs, and the loss or damage shall be ascertained or estimated according to such actual cash value, with proper deduction for depreciation however caused, and shall in no event exceed what it would then cost the insured to repair or replace the same with material of like kind and quality.” The insurance companies argued that where the buildings had depreciated 48%, the cost of repairing them using new materials should likewise be depreciated by the same percentage in fixing the amount of liability of the companies. The court held that under the state statute, Mont. Code Ann. § 33-24-101, where there was no valuation in the policy, the measure of indemnity in insurance against fire is the expense, at the time that the loss is payable, of replacing the thing lost or injured, in the condition in which it was at the time of injury, and that since no valuation of the property insured was included in any of the policies the statute was incorporated into them. The court reversed and remanded with directions to enter judgment against the insurance companies for an amount equal to the full cost of repairing the building using new materials where necessary to restore it to the condition it was in before the fire.
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1 CQI, Inc. v. Mountain W. Farm Bureau Ins. Co., No. CV 08-134-BLG-CSO, 2010 WL 2943143, at *2 (D. Mont. July 21, 2010).
2 Id.citing Interstate Gourmet Coffee Roasters, Inc. v. Seaco Ins. Co., 59 Mass. App. Ct. 78, 794 N.E.2d 607, 611 (Mass. App. Ct. 2003).
3 Century Corp. v. Phoenix of Hartford, 157 Mont. 16, 482 P.2d 1020 (1971).
4 Lee v. Providence Washington Ins. Co., 82 Mont. 264, 266 P. 640 (1928).
5 McIntosh v Hartford Fire Ins. Co., 106 Mont. 434, 78 P.2d 82 (1938).

Depreciation of Labor Costs When Determining Actual Cash Value: Henn v. American Family

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.