Edward Eshoo | Property Insurance Coverage Law Blog | December 7, 2018
Whether labor can be depreciated in arriving at an actual cash value property loss settlement has been a hot topic of debate over these past five years. A federal district court in Ohio recently weighed in on the issue in ruling on motions to dismiss two putative class action lawsuits, one against State Farm Fire & Casualty Company1 and one against Allstate Indemnity Company.2
The insureds in both cases challenged whether labor could be depreciated in arriving at an actual cash value settlement. In concluding that it was proper to do so, resulting in the dismissal of the lawsuits, the district court reasoned that the term “actual cash value,” which was undefined in the State Farm and Allstate policies, meant replacement cost less depreciation and that the plain and ordinary meaning of the term “depreciation” was inclusive of labor. The district court also found persuasive those decisions from other courts that had likewise found that labor should be included in depreciation.3
The results reached in Perry and Cranfield are contrary to the results reached in Hicks v. State Farm Fire & Casualty Company,4 and Titan Exteriors, Inc. v. Certain Underwriters at Lloyd’s, London,5 two recent decisions in which the Sixth Circuit Court of Appeals and a federal district court sitting in Mississippi concluded that labor costs should not be depreciated in arriving at an actual cash value settlement using a replacement cost less depreciation formula. Unlike the district court in Perry and Cranfield, the courts in Hicks and Titan Exteriors found no reason to decide which of the competing legal decisions were correct. Instead, they concluded that all of the interpretations offered by courts considering the labor depreciation issue were reasonable, rendering the term actual cash value ambiguous when defined as replacement cost less depreciation.
While the labor depreciation issue is an interesting legal debate, insurers can put this debate to rest simply by drafting its policy like State Farm has done in its “Actual Cash Value Endorsement” to clearly and unambiguously state that labor is subject to depreciation.6 Until they draft their policies to reflect their intent for labor to be subject to depreciation, insurers will be left to deal with decisions like Hicks and Titan Exteriors.
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1 Cranfield v. State Farm Fire & Cas. Co., No. 1:16-cv-1273, 2018 WL 6162900 (N.D. Ohio Nov. 26, 2018).
2 Perry v. Allstate Indem. Co., No. 1:16-cv-01522, 2018 WL 6169311 (N.D. Ohio Nov. 26, 2018).
3 The district court referred to these cases as the current majority view among state and federal courts. But, as the Hicks court observed, these cases are not similarly situated. Many of them were not decided using the replacement cost less depreciation formula; instead, they employed the broad evidence rule, or some form of fair market valuation. See, e.g., Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780 (Minn., 2016) . Under both the market value test or the broad evidence rule, all relevant evidence is considered in in calculating actual cash value.
4 Hicks v. State Farm Fire & Cas. Co., No. 18-5104, 2018 WL 4961391 (6th Cir. Oct. 15, 2018).
5 Titan Exteriors, Inc. v. Certain Underwriters at Lloyd’s, London, 297 F. Supp. 3d 628 (N.D. Miss. 2018).
6 Under this endorsement, all components of the estimated actual cash value, defined as the estimated cost to repair or to replace damaged property, are subject to depreciation, including labor, materials, taxes, and overhead and profit.