Paper
Actual Cash Value and Depreciation of Labor on Homeowner’s Policies
Published Mar 22, 2017 · J. Peterman
Missouri law review
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Abstract
LaBrier v. State Farm Fire & Casualty Company, 147 F. Supp. 3d 839 (W.D. Mo. 2015) I. INTRODUCTION There are approximately eighty-seven million homeowners in the United States. (1) Although not every homeowner carries insurance coverage, it is estimated that 97% do. (2) That means there are approximately eighty-five million homeowner insureds in the United States. Property and casualty insurance companies are now facing the "next big wave" of class actions regarding depreciation on homeowner's policies. (3) Specifically, policy language referring to labor depreciation and the actual cash value ("ACV") of that labor is currently is currently being litigated all across the country. (4) Courts in Alabama, Arkansas, Kentucky, Missouri, Oklahoma, and Pennsylvania are currently reviewing this issue or have already done so. (5) State Farm Fire and Casualty Company ("State Farm") has about 20% of the national market share in homeowner's insurance. (6) State Farm's homeowner's claims payouts in 2015 were around twelve billion dollars. (7) Although the exact number of disputed claims dealing with this issue is unknown, it is safe to assume that the exposure to the entire insurance industry is at least in the hundreds of millions of dollars. (8) Needless to say, this is a huge issue for property and casualty insurers around the country. This Note will examine the arguments concerning the definition of ACV and whether labor can or should be included in the ACV depreciation calculation in Missouri. In addition, this Note will review case law on this issue around the country and the impact of these holdings on insurance companies and consumers. II. FACTS AND HOLDING This case came before the U.S. District Court for the Western District of Missouri on diversity jurisdiction grounds; the defendant, State Farm, filed a motion to dismiss for failure to state a claim. (9) Amanda LaBrier owned a home insured by State Farm. (10) The home was damaged in a hail storm, which was a covered loss under her homeowner's policy. (11) LaBrier's homeowner's policy was a "replacement cost" policy. (12) These types of policies involve a two-step payout. (13) Prior to the repair, a payment is made based on the ACV of the damaged property at the time of the loss. (14) After the repair, a second payment is made to cover the additional amount the insured actually and necessarily spent to repair or replace the damaged property. (15) In the case at hand, a State Farm claims adjuster assessed damages to LaBrier's home at $8087.57. (16) This cost represented the total cost of repair, including labor, materials, and sales tax on the materials. (17) The adjuster then subtracted $1421.00 for the deductible and $2009.79 for depreciation, leaving a total payout of $4657.28. (18) In calculating the depreciation, State Farm included certain types of labor costs. (19) "Mixed" labor costs, which are costs representing both labor and materials, were included in the depreciation cal-culation. (20) "Pure" labor costs, which do not include the cost of materials, were not included in the depreciation calculation. (21) For example, certain labor costs, such as general contractor profit and overhead, as well as debris removal, are pure labor costs that an insured must "incur" in order for the insured to be compensated for them. (22) The insured cannot "incur" those costs unless the repairs have actually been made. (23) Therefore, they are not included in an ACV estimate. The State Farm policy did not define ACV, nor did it mention labor costs when defining depreciation. (24) However, in the estimate given to LaBrier, a definition of ACV was provided that stated ACV is "[t]he repair or replacement cost of the damaged part of the property less depreciation and deductible." (25) The estimate defined depreciation as "[t]he decrease in the value of property over a period of time due to wear, tear, condition, and obsolescence. …
The case highlights the importance of defining actual cash value and labor depreciation in homeowner's policies, as it could impact insurance companies and consumers.
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