Over the last few years, courts have disagreed over whether labor — as opposed to materials — can be depreciated when determining actual cash value (ACV); two of our 2015 posts addressed cases in which the District of Kansas said yes while a Kentucky federal court said no.  On Thursday of last week, in a split decision, Arkansas’s highest court sided with the naysayers in Shelter Mut. Ins. Co. v. Goodner, 2015 Ark. 460, 2015 WL 8482788 (Ark., Dec. 10, 2015).  Two of the justices filed a vigorous descent.  At the present time, the case has no LEXIS citation.

The insureds owned a mobile home in Texarkana that sustained a covered loss in July of 2012.  The policy provided that the company would pay the ACV, which was defined to mean “total restoration costs less depreciation.”  Depreciation itself was then defined, and the contract of insurance expressly stated that when paying ACV, the carrier would “include the depreciation of the materials, the labor, and the tax attributable to each part which must be replaced[.]”  In accordance with that, the amount paid by the insurer depreciated both materials and labor.

The policyholders filed a declaratory judgment action, seeking an adjudication that the carrier had “violated Arkansas law and public policy by depreciating labor costs,” and the trial court agreed in reliance upon Adams v. Cameron Mut. Ins. Co., 2013 Ark. 475 (Ark. 2013), a case in which Arkansas’ Supreme Court had held that labor could not be depreciated under a policy which did not define ACV.  The court in Adams bottomed its decision on both the old canard of ambiguity and also a finding that depreciating labor was “illogical” and “inconsistent” with the principle of indemnity.

On December 10th, the high court handed a 4-2 affirmance.  The majority opinion was written by Justice Paul Danielson.  Three of the court’s permanent justices did not participate, so 3 special justices were assigned, and all 3 sided with Justice Danielson.

On appeal, the insurer argued that Adams was not controlling because the contract of insurance at issue defined ACV and specifically defined it to mandate depreciation of labor.  The majority pointed out, however, that ambiguity was not the only basis for their holding in Adams.  In the words of the opinion:

It is settled Arkansas law that an insurer may contract with its insured upon whatever terms the parties may agree, so long as those terms are not contrary to statute or public policy.  . . . The term in the Goodners’ policy providing for depreciation of labor violates established principles of indemnity, as explained in Adams.  . . . Whether the term is ambiguous or unambiguous is a question we need not answer; in either case, the provision is contrary to Arkansas law.  . . . Consistent with Adams, we hold that labor may not be depreciated in calculating the actual cash value of a covered loss under an indemnity insurance policy.  To do so would violate Arkansas law.

Justice Rhonda Wood and the chief justice dissented.  In Justice Wood’s view, the majority was effectively “reward[ing] the Goodners by giving them the benefits of an insurance policy they declined to purchase.”  The two dissenters read Adams as applicable only to contracts of insurance that did not define ACV, and they also parted company with the majority over whether the depreciation of labor violates public policy.  As the dissent explained:

The Arkansas legislature enacts public policy through its statutes, and there is no statute on the depreciation of labor.  Nor can we say that this contract term interferes with the public welfare to the extent that we would take the unprecedented step of creating public policy in the absence of legislation.

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The Goodners had the option to choose between an actual cash value and a replacement costs policy.  They chose the cheaper actual cash value policy, which unambiguously stated that Shelter would deduct depreciation.  This included depreciation for labor, which the policy also clearly defined.  The premiums on the Goodners’ policy were calculated based on the policy terms.  Nevertheless the Goodners claim they are entitled to an inflated actual cash value.  . . . The Goodners should not get the benefit of the greater policy coverage without paying the greater premium.