Key Takeaways:

  • The term ACV is not susceptible to more than one reasonable interpretation and unambiguously includes depreciation of both material and labor costs
  • Split decisions in other jurisdictions on whether ACV includes depreciation of both labor and materials does not result in the term being ambiguous under North Carolina law

The Supreme Court of North Carolina held that the term Actual Cash Value (ACV) in a homeowners policy is unambiguous and is calculated by depreciating both labor and material costs. The decision in Thomas Accardi v. Hartford Underwriters Ins. Co., No. 42A19 (N.C. Feb. 28, 2020) is available here.

The policy at issue in Accardi provided for payment using a hybrid ACV/replacement cost method. Under this method, the insurer would initially pay ACV—calculated by subtracting depreciation from the total current repair or replacement cost for damaged property—and then would pay the full replacement cost if the policyholder repaired or replaced the damaged property. The policy did not define the term ACV in the base policy. However, a separate endorsement discussing roof damage stated that ACV would be calculated by deducting depreciation from the cost to repair or replace the damaged roof.

The policyholder in Accardi submitted a claim under his homeowners policy after the home’s roof, siding, and garage were damaged in a hailstorm. The insurer calculated the ACV by reducing the estimated cost of repair by depreciation of both property and labor. The policyholder objected, arguing that the insurer was required to separately calculate the materials and labor costs and depreciate only the material costs. Based upon this argument, the policyholder ultimately filed suit, seeking to pursue not only his own claim, but also to represent a class of all North Carolina residents to whom the insurer had made ACV payments where the labor costs were depreciated.

The insurer moved to dismiss the action for failure to state a claim, contending that the plain meaning of ACV includes the depreciation of both labor and materials. In ruling on the motion to dismiss, the business court concluded that “the term ACV as used in [t]he [p]olicy is not ‘reasonably susceptible to more than one interpretation,’ and that the term ACV unambiguously includes depreciation for labor costs.”

Affirming the business court’s decision, the North Carolina Supreme Court first held that “[a]lthough the base policy fails to define the term [ACV], the roof coverage addendum provides a definition that must be read in harmony with the remainder of the policy.” Second, the court held that the term “depreciation” as used in the policy’s definition of ACV was unambiguous, and included depreciation of both material and labor costs. In so holding, the court rejected the policyholder’s argument that “labor does not depreciate in value over time,” and therefore, cannot be a component of depreciation. Rather, the court held that it would “make[] little sense” to differentiate between labor and materials when calculating depreciation given that the value of a house is determined by considering it as a fully assembled whole, not as the simple sum of its material components.

The court also refused to find that the term “depreciation” was ambiguous—and therefore, should be construed against the insurer—simply because courts in other jurisdictions are split on whether depreciation includes both labor and material costs. Instead, the court noted that “[t]o conclude that labor is not depreciable would impose liability upon the company which it did not assume, and provide a benefit to the policyholder for which he did not pay.” (Internal quotes and citations omitted.)

As a decision of first impression under North Carolina law—and given the split decisions in other jurisdictions—the Accardi case will have significant practical importance in supporting the calculation of ACV by depreciating both material and labor costs.