In a putative class action pending Arkansas federal court, a question of law was certified to the Arkansas Supreme Court regarding whether labor may be depreciated on property insurance claims, if the insurance policy does not define the term “actual cash value” (see my May 8, 2013 blog post on the federal court’s certification of the question). 

Today, the Arkansas Supreme Court issued an opinion in Adams v. Cameron Mutual Insurance Company, 2013 Ark. 475, No. CV-13-456 (Nov. 21, 2013).  The court concluded that “we hold that the costs of labor may not be depreciated when determining the actual cash value of a covered loss under an indemnity insurance policy that does not define the term ‘actual cash value.’”  (Opinion, at 7.)  The insurance policy at issue required payment of “actual cash value” of the loss.  The court defined “actual cash value” as replacement cost less depreciation.  The insurer argued that the entire replacement cost was properly depreciable, and the labor and materials that go into constructing a roof, for example, were not segregable.  The insured argued that labor does not decrease in value over time the way some building materials do.  The court found an ambiguity in the policy because both parties’ positions were “tenable,” and under Arkansas law the ambiguity was construed in favor of the insured (with two concurring justices noting that there was no extrinsic evidence submitted).  The court also relied upon a dissenting opinion in Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017 (Okla. 2002), in which the dissenters suggested that labor costs were “not logically depreciable.”

So what does this mean for the insurance industry?  The federal district court in Adams has not yet decided whether a class can be certified on this issue, and the insurer likely will have viable defenses to class certification (including the need to review each file to determine how it was handled).  We’ll need to wait for that decision to see how that case proceeds.  In the meantime, Arkansas has been a “hot” jurisdiction for class actions, so I would expect to see more class action filings on this issue in Arkansas.  Putative class actions on this issue also might be filed in other states that have not yet decided the issue.  Insurers will also need to decide whether they wish to take any other steps, such as amending their policy language to expressly provide for depreciation of labor.