Yesterday the Minnesota Supreme Court issued its opinion in Wilcox v. State Farm Fire & Casualty Company, a putative class action alleging that State Farm, in estimating the “actual cash value” of property damage under homeowners’ insurance policies, improperly applied depreciation to the labor component of the replacement cost of damaged structures. A question pertaining to whether depreciation can properly be applied to labor costs was certified by Minnesota’s federal district court to the state supreme court. In a prior post, I covered the oral argument in the Minnesota Supreme Court. I represented the American Insurance Association as an amicus curiae in this case.

Today, the court held that “absent specific language in the insurance policy that identifies a method of calculating actual cash value, the trier of fact must determine whether depreciation of embedded labor components ‘logically tend[s] to the formation of a correct estimate of the loss.” (Slip op. at 3.) In other words, the court concluded that determining the correct amount of the “actual cash value,” based on all applicable factors, is an issue that should generally be decided by an appraisal panel or the finder of fact at trial, typically based on expert testimony. The court further concluded that this determination “depends on the facts and circumstances of the particular case (id. at 10), which means that class certification on this issue is unlikely. This decision is more favorable to insurers’ positions than some of the other recent decisions on this issue (see my January 18 blog post for more on those).

Key points from this decision include:

• The court ruled that “actual cash value” is not ambiguous because it is “a legal term of art that refers to the ‘actual loss’ sustained by the insured.” (Slip op. at 7.) The term “actual cash value” is well-defined by case law in most jurisdictions.
• The court relied on its prior adoption of the “broad evidence rule” for determining actual cash value. It explained that the “broad evidence rule” is “a flexible approach that allows the trier of fact to consider ‘every fact and circumstance which would logically tend to the formation of a correct estimate of the loss.’” (Slip op. at 7.) The court explained that “the broad evidence rule does not dictate whether labor is depreciable or is not depreciable.” Rather, it is a factor to consider, and “certain embedded labor costs may be depreciable, depending on the facts and circumstances of the particular case.” (Id. at 8.)
• The court rejected the position that depreciation of embedded labor costs is illogical, explaining that “arguments about whether labor-cost depreciation is ‘logical’ according to accepted methods of appraisal in a given case are best presented to an appraisal panel or via expert testimony before a jury.” (Id. at 9.) The court noted that “[t]he appraisal of real estate includes elements of both art and science,” and “[i]t is not the role of the judiciary to define best practices for appraisers without regard for the facts and circumstances of the case presented.” (Id. at 9.)
• The court also noted that insurers can revise their policy language to specifically address this issue.

Overall, this is a significant victory for insurers who are defending putative class actions on this issue across the country. The court’s ruling that the question of whether embedded labor costs are appropriately depreciated is a case-by-case determination means that class certification is likely to be denied. This is because any common issues of law and fact (if any exist) likely will not predominate over individual issues concerning the nature and extent of the damage to each individual property, and the appropriate calculation of the actual cash value of the damage at issue.