As an update to my March 29, 2015 blog post on the status of class actions on the labor depreciation issue, a Kansas federal court recently granted summary judgment in favor of an insurer.
In Graves v. American Family Mutual Insurance Company, 2015 WL 4478468 (D. Kan. July 22, 2015), the homeowners’ policy at issue (as is typical) provided coverage on a replacement cost basis if the insured actually made the repairs, but only an actual cash value basis if repairs were not made, and documentation thereof provided to the insurer, within one year of the loss. The policy defined “actual cash value” as “[t]he amount which it would cost to repair or replace damaged property with property of like kind and quality, less allowance for physical deterioration and depreciation, including obsolescence.” Id. at *1. The plaintiff sustained damage to the roof of her home and the kitchen ceiling. The roof damage was repaired but not the ceiling, for which she recovered only the actual cash value. She brought a putative class action seeking to recover the amount of depreciation attributable to the labor component of the cost of repairing the ceiling. Id. at *1-2.
The court concluded that the insurer properly applied depreciation because it is the damaged property, not merely the labor component thereof, that loses value over time. Here are some key portions of the court’s reasoning:
The key word, which neither party emphasizes, however, is “property.” Though comprised of tangible (materials) and intangible (labor) inputs, property is ordinarily understood as an indivisible output. And it is that indivisible output, not its original tangible and intangible components, that is the object of this policy. True, that indivisible output is itself tangible and can lose its useful form over time. But it is a concern for the value of that useful, ultimate tangible form that the policy contemplates. . . . The value of the finished product diminishes. And that loss is measured by determining the expense of recreating the property (including the costs of its tangible and intangible inputs) and offsetting through depreciation those expenses to approximate the value of the property’s pre-loss, useful condition. Through this process, the insured is placed in a position as good, but no better, than s/he occupied prior to the damage. A reasonable insured would understand that the policy allows depreciation of all costs associated with (re)creating the insured property in order to compensate the insured at—and not above—the property’s pre-loss value.
Id. at *3.
The reasoning here seems strong and will be welcomed by insurers, given the recent adverse decision by a Kentucky federal district court.
The issue is also in the process of being briefed in the Minnesota Supreme Court. Blog readers who are following this issue may be interested in The American Insurance Association’s Amicus Curiae Brief I recently filed in that case. It highlights the history and purpose of actual cash value insurance, and how insurers’ position on this issue is consistent with how depreciation is applied in other relevant contexts (including property tax assessments, eminent domain valuations and real estate appraisals).
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