DEPENDING ON THE JURISDICTION, PROPERTY VALUE, GENERAL CONTRACTOR OVERHEAD AND PROFIT ("GCOP") AND SALES TAX MAY OR MAY NOT BE DEPRECIATED IN DETERMINING THE ACTUAL CASH VALUE (“ACV”) PAYMENT.
Whether
labor costs can be depreciated when determining the actual cash value of a
covered loss is an issue that comes up frequently for policyholders and those
who represent them. I recently researched the issue and was surprised to find
the paucity of case decisions across the country that touch on the subject. I
know of only four states where courts have weighed in one way or another —
California (labor cannot be depreciated); Texas (labor can be depreciated; see
footnote 4); Oklahoma (labor can be depreciated); and the most recent being
Arkansas (labor cannot be depreciated). If there are any states I have missed,
I would very much like to know.
The case
out of Arkansas, Adams v. Cameron Mutual Insurance Company,1 I find
particularly interesting. In Adams, the Supreme Court of Arkansas held that
costs of labor could not be depreciated when determining actual cash value of a
covered loss under a homeowner’s insurance policy that did not define “actual
cash value.” The court in Adams gave considerable weight to the dissenting
opinion in the Oklahoma case that addressed the issue as it relates to a roof
claim.2 In particular, the court thought
the following dissenting opinion’s discussion on the concept of depreciating
labor more sound:
The
shingles are of course logically depreciable.
As they age, they certainly lose value due to wear and tear…. Labor, on
the other hand, is not logically depreciable. Does labor lose value due to wear
and tear? Does labor lose value over time? What is the typical depreciable life
of labor? Is there a statistical table that delineates how labor loses value of
time? I think the logical answers are no, no, it is not depreciable, and no.
The very idea of depreciating the value of labor is illogical.
Of note,
the court in Adams also considered Arkansas Insurance Department Bulletin
13A-2013,3 stating that “labor of any kind related to the repair, rebuild, or
replacement of covered property cannot be depreciated.”
In sum,
depending on your state or jurisdiction, the depreciation of labor costs when
determining actual cash value may or may not be permissible. If there are no
case authorities that provide guidance, then perhaps look into whether your
state’s Department of Insurance has issued any bulletins on the subject.
1. Adams v. Cameron Mutual Ins. Co., 2013 Ark.
475 (2013).
2. Redcorn v. State Farm Fire & Cas. Co., 55
P.3d 1017 (Okla. 2002).
3. Replaced in its entirety by Bulletin 13B-2013.
4. The Texas case which discusses this
issue is: Tolar v. Allstate Texas Lloyd's Co., 772 F.Supp.2d 825, 832 (N.D.Tex.
Mar 22, 2011). You can access the opinion here:
Source: http://www.propertyinsurancecoveragelaw.com/2015/01/articles/insurance/depreciation-of-labor-when-calculating-actual-cash-value-the-great-divide/index.html
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Coverage
experts reading "ISO standard" policy language generally conclude
that depreciation applies to the value of the property, not labor. Usually
policy language pays the lesser of ACV or the actual cost to repair.
As
for other court cases:
Supreme
Court Rules Repair Costs Not Depreciable
The
Supreme Court of Nebraska has ruled on a dispute involving actual cash value,
and this ruling has prompted a reaction on the part of the Nebraska Department
of Insurance. The case is Olson v. Le Mars Mutual Insurance Company of Iowa,
696 N.W.2d 453 (Neb. 2005).
There
was no dispute over the facts in this case. Olson owned a grain storage
building that was insured under a policy written by Le Mars; the building was
approximately forty years old. The building was partially damaged by hail and
the cost of repair was set at $95,040. Olson had a $500 deductible and had not
purchased the optional replacement cost coverage. Olson demanded the amount of
his loss, minus the deductible, but the insurer deducted $36,710.40 for
depreciation and offered Olson the sum of $57,365.60. Olson refused that amount
and he filed a lawsuit against Le Mars. The lower court found in favor of Olson
and the appeal went to the state Supreme Court.
The
Supreme Court noted that the dispute involved whether Le Mars was obligated
under its policy to pay the amount Olson claimed was due, or whether the
insurer was permitted to deduct a depreciation factor from the repair cost in
order to arrive at a net amount due. The court also noted that the policy in
question here did not include a specific definition of actual cash value. In
such circumstances, the court said, there was a priority of rules to determine
actual cash value. The rules are:
·
where market value is easily
determined, actual cash value is market value;
·
if there is no market value,
replacement or reproduction cost may be used;
·
failing these two tests, any evidence
tending to formulate a correct estimate of value may be used.
(In
two previous cases, the Nebraska Supreme Court had held that actual cash value
was the market value, which is the amount for which property may be sold by a
willing seller who is not compelled to sell it to a buyer who is willing but
not compelled to buy it. The court further stated that, in determining such
value, the finder of fact should consider the situation and the condition of
the property as it was at the time of loss, and all other facts and
circumstances shown by the evidence that affected or had a tendency to
establish its value.)
The
insurer contended that, because it insured the building for actual cash value
(at Olson's choosing), the deduction of depreciation was proper. Le Mars also
urged the court to adopt the broad evidence rule which permits a finder of fact
to consider every fact and circumstance that would logically tend to the
formation of a correct estimate of the building's value. Such facts and
circumstances would include the original cost of the building, the economic
value of the building, the income derived from the use of the building, the
age, condition, and market value of the building, and the deterioration to
which the building had been subjected over the years.
The
Supreme Court indicated that it had no particular quarrel with that definition,
but stated that actual cash value must still be measured as an economic unit,
or fair market value. The court also looked to other jurisdictions for guidance
on whether depreciation should be deducted from repair costs under actual cash
value coverage; the court cited cases from Kansas, South Dakota, Pennsylvania,
Florida, Montana, Indiana, and New Jersey. The court found that most of the
cases addressing the issue focused on the principle that an insured under an
actual cash value policy is entitled to be indemnified for the actual amount of
property loss, but should not be permitted to benefit from the loss. And, using
this guidance, the court found that Le Mars was not permitted to depreciate its
payment to Olson.
The
court said that there was undisputed evidence in this case that the value of
the building as an economic unit was $200,000 immediately prior to the hail
damage. The repair costs would not cause the actual cash value to exceed this
amount. Therefore, recovery of the full repair costs without a depreciation
deduction would simply restore the value of the insured property that existed
immediately prior to the loss, but would not enhance that value. Accordingly,
the court concluded that under an actual cash value policy that does not
expressly provide otherwise, an insurer could not deduct depreciation from the
cost of repairing partial damage to insured property where the actual cash
value of the property, as repaired, did not exceed its actual cash value at the
time of the loss.
This
ruling by the Nebraska Supreme Court prompted the state Department of Insurance
to notify insurers that deduction for depreciation will not be permitted under
Nebraska law.