Labor Depreciation Class Action Update

Robinson+Cole Class Actions Insider
Contact

It’s been a while since I updated you on the status of class action litigation regarding the application of depreciation to labor costs on property insurance claims. There have been three decisions since my last update, with sharply conflicting results. So what does this mean? I expect that 2016 will bring a significant number of additional class action filings on this issue, including both filings against additional insurers in jurisdictions where the issue has been decided favorable to plaintiffs, and new filings in additional jurisdictions. Until there is more appellate law on this issue that is favorable to insurers’ position, plaintiffs’ attorneys are likely to file more class actions.

  • Arkansas: In Shelter Mutual Ins. Co. v. Goodner, 2015 Ark. 460, 2015 Ark. LEXIS 658 (Ark. Dec. 10, 2015), the Arkansas Supreme Court majority held that, where the insurance policy expressly provided for the application of depreciation to labor costs, this provision was contrary to public policy because “providing for depreciation of labor violates established principles of indemnity . . . .” The court did not explain how depreciation of labor costs violates principles of indemnity. The basic principle of indemnity – that an insured should be placed in the same economic position as prior to the loss, and should not profit from a loss – supports the application of proper depreciation. Without application of the correct amount of depreciation, an insured that replaces, for example, an old roof with a new one with a much longer life expectancy will profit from the loss. The Arkansas Supreme Court had previously ruled, in Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675 (Ark. 2013), that an insurance policy that did not define the term “actual cash value” was ambiguous and, construing the policy against the insurer, application of depreciation to labor costs was improper. Arkansas has now taken this ruling a step further and concluded that an insurer cannot apply depreciation to labor costs even if the policy explicitly provides for that result. A strong dissent by Justice Wood, joined by Chief Justice Brill, stressed that “public policy lies almost exclusively in the legislative domain,” and the dissent could not “say that this contract term interferes with the public welfare to the extent that we would take the unprecedented step of creating public policy in the absence of legislation.” The dissent also emphasized freedom of contract, and that the insureds chose to purchase actual cash value rather than replacement cost insurance. In my mind, the Goodner decision demonstrates how Arkansas is an outlying jurisdiction on this issue. I would be surprised if other courts follow this decision. Even courts that may be perceived as hostile to the insurance industry rarely will usurp the prerogative of the legislature with respect to public policy.
  • Missouri: In Labrier v. State Farm Fire & Cas. Co., 2015 U.S. Dist. LEXIS 160020 (W.D. Mo. Nov. 30, 2015), a Missouri federal district court denied State Farm’s motion to dismiss a putative class action concerning depreciation of labor costs. The court concluded that: (1) certain Missouri statutes concerning loss payment under property policies applied only to fire losses (and thus were inapplicable to a hail loss); (2) the term “actual cash value” was ambiguous in State Farm’s policy where the policy did not define “actual cash value,” and the court therefore adopted the plaintiff’s definition of “actual cash value” as replacement cost less depreciation; and (3) under a replacement-cost-less-depreciation definition of “actual cash value,” the term “depreciation” was ambiguous with respect to whether labor costs could be included in estimating the depreciation. The court appeared to recognize that State Farm’s application of depreciation made more economic sense when applied to specific examples, but nevertheless found ambiguity.
  • Pennsylvania: In Papurello v. State Farm Fire & Cas. Co., 2015 U.S. Dist. LEXIS 154536 (W.D. Pa. Nov. 16, 2015), a Pennsylvania federal district court granted State Farm’s motion to dismiss with respect to the putative class claims. With respect to depreciation of labor costs, the court explained that “[w]hen a roof is in issue, as it is here, the ‘plain and ordinary’ meaning of the ‘property’ to which the Policy refers is the finished product in issue – the result or physical manifestation of combining knowhow, labor, physical materials (including attendant costs, e.g., the incurrence of taxes), and anything else required to produce the final, finished roof itself.” The court explained that the “property” to be depreciated could not refer to only the materials, as the plaintiffs asserted. This was because it was the full value of the finished roof that suffered depreciation over time, not merely the materials. The court further found that the plaintiffs’ position would convert actual cash value coverage into a form of replacement cost coverage (which was payable only where replacement was completed).

The next significant decision on this issue appears likely to come from the Minnesota Supreme Court, which has heard oral argument on the issue (see my November 8, 2015 blog post), but has not yet issued a decision.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Robinson+Cole Class Actions Insider | Attorney Advertising

Written by:

Robinson+Cole Class Actions Insider
Contact
more
less

Robinson+Cole Class Actions Insider on:

Reporters on Deadline

Related Case Law

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.