Property policies typically provide, if there is coverage, that the insured can recover for the costs to repair or replace the property damaged by loss. But when an insured does not repair or replace the damaged property (or until such repairs are made), the insured is only entitled to the actual cash value of the property. The calculation of actual cash value varies state to state, but generally courts either define it as replacement cost less depreciation or courts use the broad evidence rule.
Certain courts across the United States have considered whether an insurer, in determining actual cash value, can depreciate labor in determining actual cash value. Some have said yes, and some have said no.
The Supreme Court of Nebraska is the most recent court to weigh in on the issue. Answering a certified question from the U.S. District Court for the District of Nebraska, the Supreme Court in Henn v. American Family Mutual Insurance Company, 295 Neb. 859 (2017), said “yes.”
The Court was asked the following question: “May an insurer, in determining the ‘actual cash value’ of a covered loss, depreciate the cost of labor when the terms ‘actual cash value’ and ‘depreciation’ are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated.”
The Court stated that, to answer the question, it must determine “whether the term ‘actual cash value’ unambiguously allows for depreciation of labor in the insurance policy.”
The Court first examined the three approaches it has used in determining actual cash value: (1) market value, where market value can be easily determined; (2) if there is no market value, repair or replacement cost less depreciation; or (3) failing the other two tests, any evidence tending to formulate a correct estimate of value may be used, also referred to as the broad evidence rule. The Court, examining these approaches, found that, each of these methods allows for depreciation. As it stated, under each, “it is a well-accepted principle that ‘actual cash value’ is the value of the property in its depreciated condition.”
The Court then stated, however, that it has “not explicitly addressed depreciation of labor as opposed to materials, or addressed indemnification in terms of actual cash value.”
The Court then reviewed a number of cases from other jurisdictions, which are split on the issue. The Court focused on Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017 (Okla. 2002), in which the Oklahoma Supreme Court determined that, under the broad evidence rule, labor was depreciable. The dissent in Redcorn disagreed, noting that labor is not logically depreciable. The Henn Court reviewed other cases around the country. Some states have agreed with Redcorn, including Pennsylvania and Indiana. Others, such as Arkansas and Kentucky, have agreed with the dissent in Redcorn and found that labor is not depreciable.
The Henn Court sided with Redcorn and found that labor is depreciable. The Court rejected Plaintiff’s argument that the term ‘actual cash value’ is ambiguous; instead relying on Nebraska’s well-developed definition of actual cash value to be depreciation of the whole. The Court also rejected Plaintiff’s argument that historical practice in the insurance industry dictates that only materials are depreciable. The Court concluded:
We hold, as in the majority opinion in Redcorn, that an insured is properly indemnified when the amount calculated for actual cash value equals the depreciated value of the property just prior to the loss, which includes both labor and materials.
We hold that payment of the full amount of labor would amount to a prepayment of benefits to which the insured is not yet entitled. Depreciating the whole is merely one way to arrive at a value that represents the depreciated value of the property to which the insured is entitled. We hold that payment of actual cash value, which depreciates both materials and labor, does not under-indemnify the insured.