Introduction

When an insured has a property loss, he expects his insurance company to restore him to his preloss condition. With replacement cost policies this is readily done. Some policies however are insured on an actual cash value (ACV) basis. In these policies, the property is depreciated based on age and wear, and the insured is compensated on that basis. One issue that comes up frequently is the labor necessary to make the repairs. The insured has damage to his roof; his roof is ten years old with a twenty-year life span, so the insured is going to be paid 50 percent of the value of a new roof. But what about the labor involved in repairing or replacing that roof? Should the labor be depreciated?

Labor is not a tangible item the way a roof is; you don't buy labor in a package, labor is the effort and skills used by a workman to repair or replace the property. The value of that labor doesn't depreciate over time, if anything it appreciates. Labor is a service and not a product that loses value as it ages.

In the case law of the past decade, courts have tended to rule in favor of insureds when neither "actual cash value" nor "depreciation" is clearly defined in the policy. Most states have established case law, if not actual law, that ambiguities in insurance contracts must be construed in favor of the insured. The key question in many cases centered on whether labor depreciation was permitted under policies that did not define "actual cash value."

Cases against Depreciation of Labor

In Sproull v. State Farm Fire & Cas. Co., 2021 IL 126446 (Ill. 2021), the insured's home had suffered wind damage, a covered loss. The State Farm adjuster depreciated the costs of labor when calculating the ACV of the home to the insured, which resulted in a lower payment than the insured believed he was due. The insured filed suit, alleging that the insurer had a duty to disclose how such payments were calculated. State Farm defended by saying both that its method of calculating ACV complied with regulations promoted by the Illinois Department of Insurance (Department), and that the insured had unreasonably interpreted the policy because "actual cash value" was defined in the Department regulation. The Illinois Supreme Court, however, rejected both arguments, stating that the Department had not expressly approved or rejected the depreciation of labor, and pointing out that the policy in question did not define "actual cash value"; this lack of clear definitions tipped the scales in the insured's favor. The court ruled that the ambiguity of the term meant the insured's (reasonable) interpretation had to be accepted, and that, "…[when] the policy does not itself define actual cash value, only the property structure and materials are subject to a reasonable deduction for depreciation, and depreciation may not be applied to the intangible labor component." (Id.).