Shane Smith | Property Insurance Coverage Law Blog | February 21, 2016
In Minnesota, The broad evidence rule determines “actual cash value.”1
In Wilcox v. State Farm Fire and Casualty Company,2 the Minnesota Supreme Court recently ruled that in the absence of specific language in a policy identifying a method of calculating actual cash value (“ACV”), the trier of fact must determine whether depreciation of embedded labor components “logically tend[ed] to the formation of a correct estimate of the loss.”
The Wilcoxes property was damaged by hail and they filed a claim against their insurer, State Farm Fire and Casualty Company (“State Farm”). State Farm provided the Wilcoxes with an estimate of the ACV of the damaged property. In the estimate, State Farm calculated the replacement costs of individual items (i.e. roof flashing, siding, fascia, gutters, and window screens). Then, State Farm subtracted the pre-loss depreciation of some, but not all, individual items. For example, State Farm depreciated the cost of removing and replacing certain materials, such as siding. State Farm, however, did not depreciate the cost of the new siding separately from the cost of the labor required to install the new siding on the home (the “embedded labor costs”). Rather, State Farm calculated the removal and replacement of the siding as a single cost, then depreciated the removal-and-replacement cost as a whole. The court referred to the cost of labor to repair or replace the damaged property as “embedded labor costs.”
The Wilcoxes alleged that State Farm breached the terms of their homeowners policy when calculating the ACV of the damaged property. Their policy did not define ACV or how it was to be calculated. The Wilcoxes argued that State Farm could not depreciate labor costs embedded in the cost of repairing or replacing damaged property.
The district court certified the following question to the Minnesota Supreme Court:
May an insurer, in determining the “actual cash value” of a covered loss under an indemnity insurance policy, depreciate the costs of labor when the term “actual cash value” is not defined in the policy?
The Minnesota Supreme Court reformulated the question as follows:
When a homeowner’s insurance policy does not define the term “actual cash value,” may the trier of fact consider labor-cost depreciation in determining the “actual cash value” of a covered loss when the estimated cost to repair or replace the damaged property includes both materials and embedded labor components?
The Minnesota Supreme Court answered…