A Missouri appellate court ruled that, absent an express policy provision stating otherwise, labor is not depreciable from an ACV calculation. The case is Franklin v. Lexington Ins. Co., 652 S.W.3d 286 (Mo. Ct. App. 2022). 

After the Franklins' roof suffered damage in a storm, Mrs. Franklin filed a homeowners claim with Lexington. The carrier sent an adjuster to conduct an inspection and determine both the ACV and RCV of the home, with specific instructions to "depreciate materials and sales tax only" (emphasis original). The adjuster used a computer program called Xactimate to determine the ACV and the RCV for the Franklins' claim. However, the adjuster included a depreciation for labor in addition to the depreciation of materials and sales tax. 

Lexington issued a payment to Mrs. Franklin for $24,073.32 and sent a letter advising her that she "needed to submit paid repair invoices or receipts, showing the repairs were completed" before she could "recover [the] applicable depreciation" for the newly repaired item. Mrs. Franklin performed some repairs and timely submitted the information to Lexington. A desk adjuster employed by Lexington made periodic attempts to contact Mrs. Franklin to get more information about the repairs she'd made, but could not reach her. After three months of unsuccessful attempts, the adjuster noted in Mrs. Franklin's claim file that she could not be reached and that her damages and adjusted living expenses had been paid before closing the claim. Lexington did not receive any further invoices, receipts, or other payment documents from Mrs. Franklin. The insurer had not paid her any more for repairs or for damages. 

The next year, Mrs. Franklin sued Lexington for breach of contract, alleging Lexington had improperly depreciated labor in determining the amount of her ACV payment and therefore committed breach when it sent her a lower payment than she was due. She made clear, however, that she only wanted the amount that had been wrongfully withheld due to labor depreciation. In Lexington's motion for summary judgment, the company argued it could not have committed breach because Mrs. Franklin could not prove damages. 

The amount due for the depreciated labor, as stipulated by the parties before a bench trial, was $5,424.79. The desk adjuster testified she had had no knowledge of the labor depreciation before litigation began and "would have requested a correction from the [field] adjuster, and… ultimately issued a higher ACV payment to Mrs. Franklin." The judge found in favor of Mrs. Franklin; she was awarded court costs and post-judgment interest in addition to the funds she would receive for the improperly withheld labor depreciation. Lexington appealed. 

Labor Depreciation 

The court pointed out that, in the absence of a policy provision stating how to calculate actual cash value, courts determined the amount of ACV coverage for damaged property using the property's market value; replacement cost minus depreciation; or the "broad evidence rule," which took into account "any evidence that logically tends to establish a correct estimate of the value of damaged or destroyed property." 

Lexington argued that its use of the "replacement cost minus depreciation" method to determine the ACV of Mrs. Franklin's damages, including a depreciation for labor, was permissible under Missouri law. Mrs. Franklin contended the policy was ambiguous regarding whether Lexington could depreciate labor from her ACV payment, and the court was therefore obligated to interpret the policy in her favor, as the trial court had done.

There was no direct authority from the Missouri Supreme Court, so they looked to cases from other states for guidance. In one of the more well-known decisions on depreciating labor from ACV, Redcorn v. State Farm Fire & Casualty Co., 55 P.3d 1017 (Okla. 2002), the majority, using the broad evidence rule, determined that the "actual cash value" of damages to a roof included a depreciation for labor because "a roof [was] the product of materials and labor." However, three dissenting judges in Redcorn said labor "was not logically depreciable" because labor, unlike roofing shingles, did not suffer damages from wear and tear or otherwise lose value over time. 

In the time since Redcorn, state and federal court decisions have varied on whether the depreciating labor costs from a claim's total ACV is permissible. The policy at issue in Adams v. Cameron Mutual Insurance Co., 430 S.W.3d 675 (Ark. 2013), like Mrs. Franklin's Lexington policy, did not define "actual cash value." The Arkansas Supreme Court said the meaning of "actual cash value" was ambiguous, but the justices agreed with the dissenting justices in Redcorn that "labor is not logically depreciable." 

Then, in Lammert v. Auto-Owners (Mutual) Insurance Co., 572 S.W.3d 170 (Tenn. 2019), the Tennessee Supreme Court ruled that an insurer could not depreciate labor costs when subtracting depreciation from replacement costs to determine the ACV of a claim because "it would be reasonable for a homeowner to understand that depreciation only applied to material goods that can age and experience wear and tear."

The court in the present case acknowledged that, unlike the cases described above, some courts had followed the majority opinion in Redcorn and ruled it was permissible to include labor depreciation when calculating ACV. However, the court found these opposing opinions unconvincing because there was still no language in Missouri law or regulation, or in Mrs. Franklin's policy, expressly permitting labor depreciation. 

The judges found Mrs. Franklin's policy was ambiguous concerning the depreciation of labor in ACV calculation, ultimately ruling that insurers cannot deduct the costs of labor depreciation from the ACV of a claim unless "labor depreciation" is expressly included in the definition for ACV or depreciation. 

The trial court's decision was affirmed. 

Editor's Note: Labor is a service, not a physical product, so it doesn't suffer from wear and tear, marring, or deterioration like tangible property. Insureds understand how a roof can be depreciated, but not how labor to install the roof can be depreciated. Courts vary on their interpretation as to whether labor can be depreciated or not. FC&S maintains that unless the policy specifically states that labor is depreciated, that it should not be depreciated in a claim. 

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