Think Twice About Depreciating Repair Costs in Our State, says the Tennessee Supreme Court

Andres Avila | SDV Insights | June 11, 2019

Tennessee’s Supreme Court recently held that an insurer may not withhold repair labor costs as depreciation when the policy definition of actual cash value is found to be ambiguous. Tennessee joins other states like California and Vermont that prohibit the depreciation of repair labor costs in property policies.

In Lammert v. Auto-Owners (Mut.) Ins. Co., No. M201702546SCR23CV, 2019 WL 1592687, the Lammerts and other insureds sought property damage coverage from Auto Owners Insurance for hail damage to a home and other structures they owned in Tennessee.

Auto-Owners Insurance agreed to settle the claims on an actual cash value basis (ACV), which is a method of establishing the value of insured property that must be replaced to determine the indemnity by the insurer. There are multiple methods to calculate ACV. Auto-Owners decided to use the ACV calculation method of deducting depreciation from the cost to repair or replace the damaged property. Depreciation is the decline in value of a property since it was new because of use, age or wear. The rationale behind this method is that an insured should not make a profit by recovering the cost of, for example, a new roof for a damaged roof that was ten years old, and thus depreciation is deducted from the indemnity.

Auto-Owners, however, decided to deduct both the materials and the repair and replace labor costs, as depreciation, when calculating the ACV. Neither of both policies under dispute specifically mentioned that repair labor costs could be depreciated in their ACV definitions. The parties thus disagreed on whether depreciation applies only to the materials or to both materials and repair labor.

One of the policies 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 the loss;” while the other did not define ACV but stated that ACV included a deduction for depreciation.

The insureds argued that depreciation should be limited only to the cost of the replacement materials. In their view, the language “depreciation applicable to the damaged property” eliminates labor costs, which are intangible and cannot be depreciated because they do not age or wear out. The insureds also argued that the “prior to the loss” policy language eliminated labor costs because the costs at issue were post-loss repair costs. Auto-Owners contended that neither policy was ambiguous because depreciation of a property is calculated based on the total replacement cost, which includes both labor and materials.

Allowing Auto-Owners to depreciate the cost of labor would leave the insureds with an out of pocket loss inconsistent with the principle of indemnity of insurance to make insureds whole. However, allowing the deduction may in turn cause a windfall to the insureds, also defeating the purpose of indemnity. The Tennessee Supreme Court sided with the policyholders and solved the dilemma by citing to case law from, among others, Oklahoma, Arkansas, Nebraska and Minnesota, as well as regulations in Vermont, California and Mississippi.

The Court noted that Oklahoma uses the “broad evidence” rule to determine ACV. This method, also followed in New York, allows insurers to consider any and every fact and circumstance that logically tends to a correct estimate of the loss.

Accordingly, in Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017, 1020 (Okla. 2002), the Oklahoma Supreme Court ruled that repair labor must be depreciated under the “broad evidence” method.

A decade later, the Arkansas Supreme Court was more persuaded by the dissenters than the majority in Redcorn and concluded that labor was not depreciable because labor does not lose value due to wear and tear over time in Adams v. Cameron Mutual Insurance Co., 2013 Ark. 475, 430 S.W.3d 675 (2013). However, in 2017 the Arkansas legislature abrogated Adams and enacted Arkansas Statute section 23-88-106, which specifically included the cost of labor in its definition of an expense depreciation.

The Tennessee Supreme Court further noted that Nebraska, which also uses the “broad evidence” rule, sided with the Oklahoma Supreme Court majority. It held that property is a combination of materials and labor and thus repair labor costs must also be depreciated from the replacement cost to determine ACV. Henn v. American Family Mutual Insurance Co., 295 Neb. 859, 894 N.W.2d 179 (2017). The court also considered a third approach from Minnesota, which also follows the “broad evidence” rule. In Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780, 785 (Minn. 2016), the Minnesota Supreme Court held that certain labor costs may be depreciable making it an issue of fact rather than law.

The Court then turned for guidance to case law from the federal circuit courts of appeals involving the law of Missouri, Kansas and Kentucky. The Tennessee Court found that Missouri and Kentucky lean towards allowing insurers to deduct repair labor costs as depreciation; while Kentucky, on the other hand, leans towards seeing depreciation as an ambiguous term and thus interpreted against insurers, preventing carriers from subtracting repair labor costs as depreciation.

The Tennessee Court then turned to insurance departments’ regulations of the point in California, Vermont and Mississippi. California (Cal. Code Regs. tit. 10, § 2695.9(f)(1) (2019)) and Vermont (Insurance Bulletin No. 184) prohibit the depreciation of repair and replacement labor. On the other hand, the Mississippi Insurance Department Bulletin 2017-8 declared the absence of a statutory prohibition to labor costs depreciation in that state but that insurers should clearly provide for it in the insurance policy if they intended to do so.

Tennessee acknowledges both the “broad evidence” rule and the replacement-cost-less-depreciation method to determine ACV. The Tennessee Supreme Court was persuaded that, since neither of the policies explicitly stated whether labor costs are depreciable when calculating ACV, there was an ambiguity that had to be interpreted against insurers and in favor of insureds.

This decision in Tennessee serves as a warning that, absent policy language stating otherwise, property insurers cannot depreciate repair labor costs when calculating the ACV of a property using the replacement cost less depreciation method in Tennessee.

Dispute Whether Contractor Overhead & Profit Should Be Included in Actual Cash Value Payment Will Be Decided by State Supreme Court

Daniel Ballard | Property Insurance Coverage Law Blog | June 11, 2019

The Pennsylvania Supreme Court recently agreed to hear argument on the matter of Kurach v. Truck Insurance Exchange.1 Merlin Law Group blogged about this class action lawsuit back in May of 2017 and the link can be found here.

Kurach involves a situation where the insureds had not completed construction repairs at the time they received the ACV (Actual Cash Value) payments, and the insurance carrier refused to include overhead and profit in the payment. For those unfamiliar, overhead and profit is otherwise known as “10 and 10.” If the work to repair an insured’s damages are to be performed by a general contractor, the contractor would incur overhead above the costs of labor and materials and would also be entitled to earn a reasonable profit. The 10 and 10 represents the typical percentages allocated in the insurance industry for overhead and profit.

The relevant policy language in Kurach is:

Actual cash value- means the reasonable replacement cost at time of loss less depreciation for both economic and functional obsolescence.

5. How We Settle Covered Loss.

(1) Settlement for covered loss or damage to the dwelling or separate structures will be settled at replacement cost, without deduction for depreciation, for an amount that is reasonably necessary, for the lesser of repair or replacement of the damaged property

. . . . .

When the cost to repair or replace damaged property is more than $2,500, we will pay no more than the actual cash value of the loss until actual repair or replacement is completed.

e. General contractor fees and charges will only be included in the estimated reasonable replacement costs if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the repairs. However, actual cash value settlements will not include estimated general contractor fees or charges for general contractor’s services unless and until you actually incur and pay such fees and charges, unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.

(Emphasis Added)

The trial court in Kurach relied on the decision in Gilderman v. State Farm Insurance Company,2and ruled in favor of the insured, stating:

Insurance companies are required in Pennsylvania to include general contractor overhead and profit in actual cash value payments for losses where repairs would be reasonably likely to require a general contractor…. [This reflects] the majority approach across jurisdictions.

However, the appellate court reversed the trial level on the basis that Gilderman “does not set forth binding Pennsylvania law defining how actual cash value is calculated.” The court reasoned that the term “Actual Cash Value” was not defined in the policy that was the basis in Gildermanand the term was defined in absence of the any definition in the policy itself. The appellate court distinguished Gilderman as the Kurach policy specifically defined actual cash value. The court found that the definition of actual cash value as determined in Gilderman did not constitute the law of the State of Pennsylvania and could not overcome the explicit policy definition in the Kurach policy.

Chip Merlin has recently blogged about this issue in dealing with Colorado’s proposal to eliminate a bulletin requiring insurance companies to pay contractor overhead and profit rather than deduct the amount until incurred.3 A paper that Chip wrote on the topic can be accessed here.

Should the Supreme Court of Pennsylvania affirm the appellate court’s ruling on the calculation of actual cash value, it will be another instance of an insurance carrier moving the goal posts back on consumers and further flips the principles of insurance on its head. A basic tenet of insurance is that (1) a loss happens, (2) the insurance company pays the insured for the covered damages, and (3) the insured then fixes the damages with the payment provided by the insurance company. Insurance companies seem to want to turn the process into (1) a loss happens, (2) payment is withheld and the insured is limited to making only the repairs he can afford, and (3) the insurance company keeps the funds withheld if the insured is not affluent enough to make the repairs.

Let’s hope the Pennsylvania Supreme Court gets it right.
____________________________________
1 Kurach v. Truck Insurance Exchange, Docket No. 12 EAP 2019 (Penn.).
2 Gilderman v. State Farm Ins. Co., 659 A. 2d 941 (Pa. Super. 1994).
3 The Colorado Division of Insurance has recently stated they will not withdraw the bulletin(Colorado Bulletin No. B-5.1, Calculation of Actual Cash Value: Prohibition Against Deducting Contractors’ Overhead And Profit From Replacement Cost Where Repairs Are Not Made).

Tennessee High Court Excludes Labor Costs from Insurer’s Actual Cash Value Depreciation Calculations

Michael S. Levine and Geoffrey B. Fehling | Hunton Andrews Kurth | April 24, 2019

The Tennessee Supreme Court has refused to construe an ambiguous definition of actual cash value to allow for deduction of labor costs as part of depreciation calculations where that subset of repair costs are not clearly addressed in the policy. Despite the split of authority nationwide, the Tennessee case presents a straightforward application of policy interpretation principles to a common valuation issue in first-party property claims.

In Lammert v. Auto-Owners (Mutual) Insurance Co., No. M2017-2546-SC-R23-CV (Tenn. Apr. 15, 2019), insureds brought a class-action lawsuit against their property insurer, Auto-Owners, alleging breach of contract. The plaintiffs each owned buildings damaged by a hail storm and had each submitted claims to Auto-Owners. Auto-Owners accepted the claims and determined that the losses would be determined on an actual cash value basis. In performing those valuations, Auto-Owners depreciated both the building materials and the labor costs associated with repairing the properties. The insureds challenged the labor cost depreciation. Auto-Owners moved to dismiss the lawsuit. In response, the insureds requested that the district court certify to the Tennessee Supreme Court whether, “[u]nder Tennessee law, may an insurer in making an actual cash value payment withhold a portion of repair labor as depreciation when the policy (1) defines actual cash value 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 the loss,’ or (2) states that ‘actual cash value includes a deduction for depreciation?”’

In their briefing to the Court, the insureds asserted that to allow for depreciation of both materials and labor would defeat the purpose of indemnity, which is to make the insureds whole after the hail storm. In response, Auto-Owners argued that applying depreciation only to materials would result in a windfall to the insureds by leaving them in a better position than they were in before the loss (by receiving full value of non-depreciated labor costs). Given the policy’s lack of clarity as to whether depreciation should apply to labor costs, the Court sided with the insureds.

The Court discussed the split of authority among state and federal courts nationwide, but applied basic policy interpretation principles that undefined policy terms are to be construed according to their plain, ordinary, popular meaning and that ambiguous policy language must be construed against the insurer and in favor of coverage. The Court found that both parties presented plausible interpretations of the policies, neither of which explicitly stated whether labor expenses were depreciable when calculating actual cash value.

The Court recognized the principle under Tennessee law that the purpose of indemnity insurance is to reimburse and restore the insured to the position he or she was in before the loss. The Court also looked to the dictionary meaning of “depreciation,” which is “a reduction in value or price of something; specif[ically] a decline in an asset’s value because of use, wear, obsolescence, or age.” Despite Auto-Owners’ plausible interpretation that all components of repair costs, including labor, are subject to depreciation, the Court found that it is also reasonable that a homeowner would understand that depreciation would only be applicable to material goods that can age and experience wear and tear and that an insurer calculating actual cash value of repair costs would only apply depreciation to the physical materials that actually deteriorated. If Auto-Owners had wanted a more technical definition of depreciation that is not evident on the face of the policy, they had the burden of clarifying the policy to incorporate that meaning.

The Lammert decision applies bedrock contract interpretation principles to resolve ambiguous policy language. The decision is also interesting because it addresses a basic property valuation issue that is often disputed but rarely litigated because contested valuation issues that relate to the value or quantum of loss suffered are frequently resolved through the appraisal process, even though issues of policy interpretation and construction should be determined by a court. The concepts of market value, replacement cost, and actual cash value are relevant in nearly every property insurance claim, but despite their ubiquity, the applicable valuation method must be clearly set forth in the policy. Where there is ambiguity, it should be resolved in favor of the insured. This is especially true where, as in Lammert, the undefined term’s ordinary meaning conflicts with the insurer’s preferred technical or industry-specific meaning.

Colorado Not Replacing Contractor Overhead and Profit Bulletin

Chip Merlin | Property Insurance Coverage Law Blog | May 20, 2019

The Colorado Department of Insurance will not be repealing its longstanding bulletin requiring that contractor overhead and profit be a part of a calculation to determine actual cash value at tomorrow’s stakeholder meeting in Denver. This is fantastic news for all Policyholders and the correct decision by those dealing with this issue in the Colorado Department of Insurance. We discussed the issue in, Colorado Overhead and Profit Issues—Merlin Law Group Files a Response for Colorado Policyholders, and noted this meeting in, How To Adjust Actual Cash Value and Overhead and Profit in Colorado—Colorado To Hold Public Forum For Comments.

I am flying to Denver to attend this important meeting and visit with Merlin Law Group’s Denver attorneys Larry Bache, Jon Bukowski, and Tim Burchard. We anticipate that the remaining discussion on the agenda may get quite emotional because many contractors and roofers feel that the insurance industry is trying to put them out of business through numerous techniques, which also includes changing longstanding replacement cost policy language.

The current notice indicates that tomorrow’s meeting will be about:

  1. The Division has determined that it will not be repealing this Bulletin.
  2. The reasons the Division considered repealing this Bulletin were as follows:
    • A widespread misunderstanding of the Division’s position on Overhead and Profit (O&P) contained in the bulletin and the limits to the Division’s authority concerning O&P; and,
    • Many complaints are filed with the Division alleging insurers wrongfully deny O&P and use the Bulletin to support their contention that O&P must be paid.
  3. Through this stakeholder meeting the Division is seeking input from interested participants on how best to revise the Bulletin to clarify any ambiguity concerning the Division’s limited authority regarding O&P and to address the number of complaints received by the Division related to O&P.

Point two is very valid. I have never read the Bulletin to mean that all contractors, especially small or one-man shops supervising few people, are entitled to General Contractor Overhead and Profit. They are certainly entitled to their own reasonable and fair overhead and profit. And, this brings up the point which insurance adjusters and others seems to miss—there is no exact value as to what a reasonable and fair margin or cost is for an individual contractor’s overhead and profit. But, it has to be paid.

Generally, the bigger and more complex the job, the greater the need for contractors to have resources and associated costs to oversee, supervise, manage, fund and carry the manpower, sophistication and other costly burdens of a construction project and the larger the overhead must be and the higher the profit return needs to be to monetarily reward the effort. This is true no matter if the classification of the contractor is as a subcontractor or a general contractor. Each will have an overhead burden, and each will need a profit margin to sustain the business and reward the effort.

All roofers are entitled to overhead and profit. This seems to be a huge insurance industry fight as we speak with roofers. Some roofers are doing enough oversite and supervision of so many activities and they are providing a lot more than just roofing laborers nailing shingles on a roof. They deserve a much higher amount of overhead and the consequential profit. We proved all this in a trial we won for a roofer which I noted in, Merlin Lawyers Earn Unanimous Nebraska Trial Verdict.

So, this is going to be an interesting meeting. Not all roofers and contractors are entitled to as much overhead and profit as they would want. Still, many insurance company adjusters and claims managers are going to have to pay more overhead and profit and often, a lot more.

I hope all this effort results in quality restoration for the policyholder at fair prices to be paid for quality construction by contractors, and which are not gouging to the insurer. The policyholder is whom all of us are supposed to be helping obtain a prompt payment and a quality reconstruction of damaged property.

Tennessee Supreme Court Holds That Replacement Cost Less Depreciation Does Not Allow for Depreciation of Labor When Calculating Actual Cash Value of a Property Loss

Heidi Hudson Raschke | Property Casualty Focus | May 2, 2019

Insurance policies are designed to indemnify an insured by putting the policyholder in the same position he or she would have been in had no loss occurred. In the context of property insurance policies, damaged property is typically valued based on its estimated actual cash value (ACV) if it is not repaired or replaced. In order to calculate ACV, an insurer will often calculate the replacement cost (RCV) based on the cost to repair or replace the property with materials of like kind and quality, and then depreciate that amount to account for age, wear, obsolescence, or market value. When making that calculation, there can be a question as to whether labor should be appreciated. In Lammert v. Auto-Owners (Mutual) Insurance Co., No. M2017-02546-SC-R23-CV (Tenn. Apr. 15, 2019), the Supreme Court of Tennessee joined the states that have ruled that labor cannot be depreciated.

To Depreciate Labor or Not

In this case, the petitioners filed a putative class action seeking a ruling that Auto-Owners impermissibly depreciated labor when calculating ACV under certain homeowners policies. When calculating ACV, Auto-Owners acknowledged that it depreciated both materials and labor.

There were two policies at issue. One 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 the loss.” The second policy did not define ACV, but stated that actual cash value includes a deduction for depreciation. The policyholders argued that these definitions do not allow for depreciation of labor “because labor is intangible, and ‘prior to the loss’ likewise eliminates labor costs because the labor costs at issue are post-loss costs.” The policyholders also pointed to the definition of “depreciation,” which was defined as “a decrease in value because of age, wear, obsolescence or market value,” to argue that labor cannot be depreciated “because it does not age, wear out, become obsolete, or (generally speaking) decrease in market value.” In response, Auto-Owners argued that the policies are not ambiguous and “that depreciation of a property is taken from the total replacement cost, which includes both labor and materials.”

The district court determined that the dispute over whether labor can be depreciated is a question of state law for which there was no controlling precedent, and certified the following question to the Tennessee Supreme Court:

Under Tennessee Law, may an insurer in making an actual cash value payment withhold a portion of repair labor as depreciation when the policy (1) defines actual cash value 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 the loss,” or (2) states that “actual cash value includes a deduction for depreciation”?

The Question of Indemnity

The question of coverage is always determined by the policy terms and conditions. Insurance policies are interpreted based on their plain language. However, if the language at issue is susceptible to more than one reasonable interpretation, a policy will be considered ambiguous and is most often construed in favor of the insured and coverage.

The Tennessee Supreme Court noted that “[c]entral to the discussion in this opinion are the concepts of indemnity, actual cash value, and depreciation.” Insurance policies, as contracts of indemnity, are intended “to reimburse the insured; to restore him as nearly as possible to the position he was in before the loss” (quoting Braddock v. Memphis Fire Ins. Corp., 493 S.W.2d 453, 459-60 (Tenn. 1973)). When property is damaged, “if an insured were able to replace a loss ‘with a substitute identical in kind and quality’ then ‘complete indemnity’ would be accomplished” (quoting McAnarney v. Newark Fire Ins. Co., 159 N.E. 902, 904 (N.Y. 1928)). Because such substitution is often not possible, “indemnity is instead accomplished through recovery of the actual cash value of a damaged property.”

The court observed that there are several methods for calculating ACV, including market value, replacement cost less depreciation, and the broad evidence rule. In this case, the parties agreed that the method for calculating ACV was replacement costs less depreciation.

What they disagree on is whether depreciation applies only to the materials or to both materials and labor. The homeowners claim that applying depreciation to both materials and labor defeats the indemnity purpose of insurance by not making the homeowners whole, while Auto-Owners counters that applying depreciation only to materials results in a windfall to the homeowners, thus also defeating the purpose of indemnity.

The court reviewed decisions from around the country that have come down on either side of the question presented. Some courts find that labor cannot be depreciated. See, e.g., Titan Exteriors, Inc. v. Certain Underwriters at Lloyd’s, London, 297 F. Supp. 3d 628 (N.D. Miss. 2018); Arnold v. State Farm Fire & Cas. Co., 268 F. Supp. 3d 1297 (S.D. Ala. 2017); Brown v. Travelers Cas. Ins. Co. of Am., No. 15-50-ART, 2016 WL 1644342 (E.D. Ky. Apr. 25, 2016); Lains v. Am. Family Mut. Ins. Co., No. C14-1982-JCC, 2016 WL 4533075 (W.D. Wash. Feb. 9, 2016). Other courts find that labor can be depreciated, or at least that the depreciation of labor can be considered when determining ACV. See, e.g.Graves v. Am. Family Mut. Ins. Co., 686 F. App’x 536 (10th Cir. 2017); In re State Farm Fire & Cas. Co., 872 F.3d 567 (8th Cir. 2017); Henn v. Am. Family Mut. Ins. Co., 894 N.W.2d 179 (Neb. 2017); Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017 (Okla. 2002). In addition, “[t]he Minnesota Supreme Court took a third approach to answering the issue by determining that the depreciation of labor costs is an issue of fact rather than law” (citing Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780, 785 (Minn. 2016)).

The court noted that the most recent appellate court to address the issue was the Sixth Circuit Court of Appeals in Hicks v. State Farm Fire & Casualty Co., 751 F. App’x 703 (6th Cir. 2018). In that case, “the Sixth Circuit concluded that under Kentucky law, the term ‘actual cash value’ was ambiguous, not because it was undefined but because the word ‘depreciation’ as used in the statutory definition of ‘actual cash value’ was itself ambiguous.” The court based this finding of ambiguity on the fact that the parties presented two reasonable interpretations of the word depreciations — one allowing depreciation of both labor and materials, and one allowing depreciation of materials only. The Sixth Circuit found that those cases allowing depreciation of both labor and materials were typically in states following the broad evidence rule for determining ACV.

While Auto-Owners argued that Tennessee is a broad evidence state, the Supreme Court stated that it had never adopted the broad evidence rule. Rather, it had “merely acknowledged that the broad evidence rule and the replacement-cost-less-depreciation method both accomplished indemnity.” Moreover, the court determined that whether Tennessee is a broad evidence state is not at issue since the parties agreed that actual cash value was to be calculated based on the replacement cost method.

Turning to general principles for interpreting insurance contracts, the Tennessee Supreme Court found that “both parties have presented plausible interpretations of the policies, neither of which explicitly states whether labor expenses are depreciable when calculating the actual cash value.” The court decided that Auto-Owners argued for a “technical definition” of depreciation that is not evident on the face of the policies, while taken in its “ordinary sense” depreciation means “physical depreciation,” which is the meaning that the court found had been attributed to it by the policyholders. As a result of its determination that the provisions were susceptible to more than one reasonable interpretation, the court found the provisions ambiguous and construed them in favor of the insured, holding that “depreciation can only be applied to the cost of materials, not to labor costs.”

Auto-Owners argued “that if the homeowners’ interpretation is correct, then indemnity is not accomplished because instead of receiving the actual value of their property in terms of money, the insured would never receive less than the cost of the labor, even if the labor was worth more than the actual property prior to the loss.” In contrast, the policyholders argued that “depreciating labor costs would underindemnify the insureds because they would bear the out-of-pocket costs of reinstalling the damaged asset.” The court did not address the indemnification dispute holding:

Ultimately, it is not necessary for this Court to reach the decision of whether labor can logically depreciate or whether indemnity is accomplished. It is enough that we find the contracts ambiguous and that under our standard of review, the interpretation of the insured must prevail. We conclude that the answer to the district court’s certified question is no, the insurance company cannot withhold a portion of the labor costs as depreciation under either policy.

Unanswered Questions

As an initial matter, it is worth noting that this decision left open the question of whether Tennessee is a broad evidence state. The regulations promulgated by the Tennessee Department of Insurance further leaves this question open. While it provides that “[w]hen the insurance policy provides for the adjustment and settlement of losses on an actual cash value basis on residential fire and extended coverage, the insurer shall determine actual cash value as follows: replacement cost of property at time of loss less depreciation, if any,” it also states that “[i]n cases in which the insured’s interest is limited because the property has nominal or no economic value, or a value disproportionate to replacement cost less depreciation, the determination of actual cash value as set forth above is not required.” Tenn. Comp. R. & Regs. 0780-01-05-.10(2) (effective Oct. 2017). Giving an insurer an alternative to calculating ACV, when replacement cost less depreciation does not seem to provide an appropriate valuation, suggests that broad evidence can be considered in at least some instances in Tennessee.

The case also arguably leaves open the question of whether labor can be depreciated if an insurance policy specifically defines depreciation as including the depreciation of labor. In this decision, the court noted multiple times in reaching its decision that the policies did not state whether labor expenses could be depreciated. Without controlling language in the policy, the court held that the insurance provisions were susceptible to more than one interpretation, making them ambiguous and construed in favor of the insured and coverage. If, however, the policy defined depreciation as including labor, it is not clear from the face of the opinion that such a provision would not be upheld. Again, the scope of coverage should be governed by the specific language of the policy.