Depreciation typically is deducted from the actual cash value (“ACV”) of property when the insured elects to have its property damage claim paid on an ACV basis. No one doubts that depreciation includes the cost of materials. The question is, however, whether the cost of labor can be depreciated as well. In a few recent cases, two courts in different jurisdictions reached different results.
In Accardi v. Hartford Underwriting Insurance Co., No. 42A19, 2020 N.C. LEXIS 83 (N.C. Feb. 28, 2020), the North Carolina Supreme Court determined, that when calculating ACV under the policy construed, depreciation included the cost of labor. A hailstorm damaged the insured’s roof, siding and garage. The insurance policy provided that the insurer would initially pay the ACV. The base policy did not define ACV. A separate endorsement for roof damage defined ACV. It provided that if there was a covered “hail loss to your roof, [the insurer] will deduct depreciation from the cost to repair or replace the damaged roof. In other words, [the insurer] will reimburse for the actual cash value of the damaged roof surfacing less any applicable policy deductible.”
The insurer calculated the ACV cost of repair by depreciating labor and materials. Plaintiff sued on his own behalf and seeking to represent a putative class of all North Carolina residents whose ACV payments had been decreased due to the depreciation of labor costs. The insurer successfully moved to dismiss the claim, arguing that the definition of ACV in the roof endorsement defined ACV as used throughout the policy.
The court agreed, stating that an “[a]mbiguity is not established by the mere fact that the insured asserts an understanding of the policy that differs from that of the insurance company.” Because the definition of ACV should be read in harmony with the definition included in the endorsement, the court held that ACV was not susceptible to multiple meanings and unambiguously meant that the cost of labor would be depreciated.
In Perry v. Allstate Indemnity Co., No. 18-4267, 2020 U.S. App. LEXIS 8555 (6th Cir. Mar. 18, 2020), a panel majority of the Sixth Circuit Court of Appeals reached the opposite result. The court vacated the district court’s dismissal and remanded the case effectively to enter judgment for the insured. The insured’s home sustained water damage, which the insurer readily agreed to pay. The policy provided that “if you do not repair or replace the damaged, destroyed or stolen property, payment will be on an actual cash value basis. This means there may be a deduction for depreciation.” The insurer deducted both material and labor as part of the depreciation cost when calculating the claim payment. The insured argued that the insurer could only depreciate the cost of materials. Neither Ohio’s laws, regulations, nor its Supreme Court addressed this issue.
In reaching its decision, the Sixth Circuit said that in order for the insurer to succeed, it would not be enough for it to show that its interpretation of depreciation was more reasonable than the insured. Instead, it had to show that its “interpretation is the only one that can fairly be placed on the language in question” (emphasis in original). Because the insured’s interpretation was a “fair reading of an ambiguous term,” the court held, as a matter of law, “that it was improper . . . to depreciate labor costs . . . .”
Newly appointed Sixth Circuit Judge Chad Readler concurred in part and dissented in part, stating that the proper course of action was not to effectively grant judgment for the plaintiff as a matter of law. Rather, the court should remand the case to the district court to allow the record to be developed because the parties may have “additional interpretative tools” which could include “extrinsic evidence of custom and usage, industry practice, and the like . . .” and then decide the case on summary judgment.
Five days later the Sixth Circuit, in Cranfield v. State Farm Fire & Casualty Co., No. 19-3004 (6th Cir. Mar. 23, 2020) (Not Recommended for Publication), relied on its decision in Perry to reverse the dismissal of a putative class action. The policy defined ACV as the “repair or replacement cost of the damaged part of the property less depreciation and deductible.” Depreciation was defined as the “decrease in the value of property over a period of time due to wear, tear, condition, and obsolescence.”
The insured’s home was damaged, and he made a claim. The insurer, when calculating ACV, depreciated the cost of labor. The insured filed a class action on his behalf and all other similarly situated Ohioans. The district court dismissed the complaint. The court of appeals reversed, based on its decision in Perry “that an Ohio insurer may not deduct the cost of labor depreciation pursuant to an actual cash value insurance policy that does not expressly provide for such deductions.” As a result, this case will be returning to the district court.