I’ve been following closely a series of class actions around the country alleging that, in calculating the “actual cash value” of property damage under a homeowners or commercial property insurance policy, insurance companies should not be applying depreciation to the labor component of the replacement cost of a damaged structure. When insurers estimate “actual cash value,” they typically estimate the replacement cost of the damage based on the materials, labor and other costs necessary to make the repairs, and then apply depreciation to that amount, to arrive at the actual cash value.
Plaintiffs’ lawyers have filed numerous class actions arguing that labor costs are not depreciable, and that the actual cash value thus should be calculated based on the full cost of labor and depreciated value of materials. If you haven’t been following this issue and would like more background, I suggest you read my August 10, 2015 and March 29, 2015 blog posts. This is, in my view, the hottest area in insurance class actions right now.
One of the benefits of modern technology for those who like to follow important cases closely nationwide is that many state supreme courts are now recording oral arguments and posting them online, or in some instances streaming the argument live (as the Massachusetts Supreme Judicial Court did in a case I recently argued).
The Minnesota Supreme Court recently heard oral argument on the issue of depreciation of labor costs (on a certified question from the Minnesota federal district court) in Wilcox v. State Farm Fire & Casualty Company. (In the interests of full disclosure, I wrote an amicus brief for the American Insurance Association in this case.) The oral argument video was recently posted online. The court dug deeply into both sides of the issue. Here are a few observations I had:
- The court focused some of its initial questioning on how an appraiser of real estate, using the “cost approach” to valuation, will depreciate the full value of the building, including the labor component, as economically appropriate. Plaintiffs’ counsel appeared to concede that this approach is correct for a total loss, but argued that it is not appropriate for a partial loss. Those justices who commented on that issue did not seem persuaded by his argument that partial losses should be treated differently in this respect.
- There was some discussion about a hypothetical where a roof was nearing the end of its useful life, with some justices appearing to take the view that it would not be an accurate method of calculating the actual cash value of the roof to apply depreciation only to the materials and not to the labor component.
- Some of the court’s questions focused on how the State Farm policy at issue (like most homeowners’ policies) provides replacement cost coverage if the insured makes the repairs. One justice appeared to suggest that this demonstrates that State Farm is correct about what is intended by actual cash value.
- There was a fair amount of discussion about how Minnesota’s adoption of the “broad evidence rule” for determining actual cash value impacts the question presented. One justice pointed out that the “broad evidence rule” allows for methods of calculation other than replacement cost less depreciation, which is the method that State Farm used here. He suggested that there may be circumstances where there are issues of fact.
- One justice asked about a hypothetical scenario in which the repairs involved $200 of materials, but $10,000 of labor, and how that loss would be treated.
- The chief justice asked whether State Farm would lose if the court found an ambiguity, and why State Farm had not revised its policy language to specifically address the issue.
- One justice suggested that the plaintiffs’ argument is equating actual cash value with replacement cost.
This was the first time I’ve watched an argument in the Minnesota Supreme Court, so any prognostication I make is not based on experience with that court but my experience with the issue presented. My guess (and I could be wrong) is that the court will rule that depreciation may be applied to labor costs in appropriate circumstances.