Producers aren’t involved in loss settlement decisions. As a practical matter, however, they can’t avoid being impacted by them, as they’re the first-line contact with insureds. That affects what you need to know.
DEPRECIATING LABOR COSTS
Challenges persist to an important practice
By Joseph S. Harrington, CPCU
When it comes to actual cash value (ACV) settlement of a damaged roof, insurance professionals can’t be surprised that most home owners would think of it the way Daniel Boudreau did back in 2002.
At the time, Boudreau was a justice of the Oklahoma Supreme Court hearing a case that involved the depreciation of labor costs in ACV settlements. In a dissent, he wrote:
The shingles are of course logically depreciable. As they age, they certainly lose value due to wear and tear. They typically have a useful life of twenty years. It makes sense, then, that sixteen-year-old shingles have lost sixteen/twentieths, or eighty percent, of their value over time.
Labor, on the other hand, is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? . . . The very idea of depreciating the value of labor is illogical. The image that comes to me is that of a very old roofer with debilitating arthritis who can barely climb a ladder or hammer a nail. The value of his labor, I suppose, has depreciated over time.[i]
The court’s majority was not swayed by Boudreau’s colorful characterization, however; nor are property insurers in general. As odd as it may seem to Boudreau and others that labor can depreciate in value, the ability to depreciate labor costs is fundamental to ACV settlements—and will be subject to renewed challenge.
Within a week at the end of February, a federal court in Kentucky certified a class action against State Farm [ii] over the practice of depreciating labor costs and a federal court in Arkansas was asked to give class action status to a similar suit filed against Progressive, Ameriprise Auto & Home, and other insurers. The cases involve personal lines, but could have precedential importance for all property insurance.
The point of ACV
Technically, producers aren’t involved in loss settlement decisions. As a practical matter, however, they can’t avoid being impacted by them, as producers are the first-line contact with insureds. If pressed on the issue by a disgruntled policyholder, a producer would find it hard to refute Boudreau’s reasoning; he or she might even share it.
When it comes to describing ACV coverage, it’s probably best to lead with the obvious: you get what you pay for. If one wants to pay meaningfully reduced premiums for ACV coverage, one has to expect meaningfully reduced recovery following a loss.
The simplest response might be this: If insurers can’t depreciate labor costs in ACV settlements, they may not be able to offer meaningful ACV coverage at all.
To that point, it’s no accident that many of the cases involving ACV labor depreciation come from Plains states, where windstorm losses over the past decade have created severe stress for property insurance markets. ACV coverage, especially for roofs, has been seen as a way to preserve affordable coverage in remote, wind-prone areas with older structures.
If one carries Boudreau’s argument to its logical conclusion in a roofing claim, an insurer under an ACV policy would pay a fraction of the cost for new roofing materials, but the full cost for the labor to install it. It’s hard to see where the insurer would see enough benefit to be able to provide ACV coverage for an appreciably lower premium than replacement cost coverage.
Some courts get that.
In 2016, the Minnesota Supreme Court ruled that establishing ACV was a finding of fact, not a matter of law, and thus properly left to appraisers to consider the various factors that determine the value of property.[iii]
The following year, the Nebraska Supreme Court ruled against a claimant seeking full labor cost reimbursement in the initial ACV payment under a replacement cost policy. “Payment of the full amount of labor would amount to a prepayment of benefits to which the insured is not yet entitled,” the court held. “Depreciating the whole is merely one way to arrive at a value that represents the depreciated value of the property … .”[iv]
One policy, not two
Circling back to the 2002 case where Justice Boudreau issued his dissent, the prevailing majority then reasoned that the claimant purchased a single policy insuring one roof, not two policies—an ACV policy for shingles and a replacement cost policy for labor. “To construe the policy in such a manner would unjustly enrich the policyholder,” the court ruled.[v]
So far, that seems to be the prevailing, though not unanimous, opinion in most jurisdictions.
Producers know there’s no fun and little value in trying to explain the logic of insurance law and economics to buyers.
In the view of Merlin Law Group, which provides extensive commentary on insurance coverage topics, “insurers can put this debate to rest simply by drafting [a] policy … to clearly and unambiguously state that labor is subject to depreciation.”[vi]
Maybe, maybe not. In 2015, the Arkansas Supreme Court rejected depreciation of labor costs in an ACV settlement even when the policy in question explicitly stated that “when calculating depreciation, we will include the depreciation of the materials, the labor, and the tax attributable to each part …”[vii]
When it comes to describing ACV coverage, it’s probably best to lead with the obvious: you get what you pay for. If one wants to pay meaningfully reduced premiums for ACV coverage, one has to expect meaningfully reduced recovery following a loss.
If that isn’t possible, there may not be any ACV option to consider.
[i] Redcorn v. State Farm Fire & Cas. Co., 2002 Okla. 15 (Okla. 2002), accessed at https://law.justia.com/cases/oklahoma/supreme-court/2002/365470.html
[ii] Hicks v. State Farm Fire & Cas. Co., 2019 WL 846044, 2019 U.S. Dist. LEXIS 27584 (E.D. Ky. Feb. 21, 2019); accessed at https://law.justia.com/cases/federal/appellate-courts/ca6/18-5104/18-5104-2018-10-15.html
[iii] Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780 (Minn. 2016); available at https://www.leagle.com/decision/inadvmnco160519000067
[iv] Henn v. American Family Mut. Ins. Co., 295 Neb. 859 (Neb. Feb. 7, 2017); available at https://law.justia.com/cases/nebraska/supreme-court/2017/s-16-597.html
[v] Redcorn v. State Farm, op. cit.
[vi] Edward Eshoo, “Federal District Court Weighs in on Whether Labor Can Be Depreciated in Arriving at an Actual Cash Value Loss Settlement,” Property Insurance Coverage Law Blog, Dec. 7, 2018; accessed at https://www.propertyinsurancecoveragelaw.com/2018/12/articles/allstate/federal-district-court-weighs-in-on-whether-labor-can-be-depreciated-in-arriving-at-an-actual-cash-value-loss-settlement/
[vii] Shelter Mut. Ins. Co. v. Goodner, 2015 Ark. 460, 477 S.W.3d 512 (2015); available at https://casetext.com/case/shelter-mut-ins-co-v-goodner
