When calculating the actual cash value (ACV) amount of property damage, the labor component cannot be depreciated according to the Tennessee Supreme Court in a unanimous decision answering a certified question. Lammert, et. al v. Auto-Owners (Mutual) Ins. Co., 2019 WL 1592687 (Tenn. April 15, 2019).
At issue were two homeowner policies, one policy which contained a definition of ACV and the other which did not, but neither policy explicitly stated whether labor costs were included within the scope of depreciation. While it was agreed that the ACV amount should be calculated based upon the replacement cost less depreciation method, whether labor costs could be depreciated was disputed.
The insurer took the position that depreciation of property is taken from the total replacement cost – which includes both labor and materials – because the property being insured is a hybrid of materials and labor. Furthermore, the failure to depreciate labor would result in over indemnification and a windfall to the insured. The policyholders took the position that the term depreciation was ambiguous because labor, unlike materials, does not depreciate over time. Labor costs are incurred post-loss, and as such should not be depreciated.
The Tennessee Supreme Court noted that the question of depreciation of labor has been the subject of recent litigation in other states, and the outcomes being divided. The Oklahoma Supreme Court ruled in 2002 that labor could be depreciated. The Arkansas Supreme Court ruled in 2013 and again in 2015 that labor could not be depreciated; however, the legislature overruled the decisions in 2017 enacting a statute explicitly stating that labor was to be depreciated in calculating ACV. The Nebraska Supreme Court ruled in 2017 that labor could be depreciated. The Minnesota Supreme Court ruled in 2016 that depreciation was a question of fact to be determined by a jury or appraisal panel. Recent federal court opinions held that under Kansas law labor could be depreciated (2017), but under Kentucky law labor could not be depreciated (2018).
Ultimately, the Tennessee Supreme Court declined to adopt any of the legal theories advanced for or against the depreciation of labor by other state Supreme Courts, and simply held that the term “depreciation” was ambiguous because there were two reasonable interpretations. As such, the policy language was strictly construed against the insurer holding that labor could not be deprecated.
As evidenced by this most recent decision, the issue of whether labor can be depreciated is an open question and being actively litigated in many jurisdictions. Property adjusters who handle claims in multiple states need to be alert and check whether or not the jurisdiction allows for depreciation of labor. This is especially true for national claims adjusters who rely on independent field adjusters to write property damage estimates that conform to local rules.