Ohio law does not allow Allstate to include labor costs when calculating the amount of depreciation for a property damage claim, a split panel of the 6th Circuit Court of Appeals ruled, resolving a split among state appellate districts and reversing a lower court’s ruling.
The question of whether labor costs should be included when calculating depreciation to determine actual cash value has led to disputes between insurers and policyholders around the country. Only last month, the North Carolina Supreme Court ruled that insurers can deduct depreciation for labor costs, saying to do otherwise “makes little sense.”
Two judges on the 6th Circuit found just the opposite to be true. Ohio law requires any ambiguous language in a policy to be interpreted for the insured if the insured’s interpretation is reasonable, the court’s majority opinion said.
“Because depreciation traditionally refers to lost value from the physical deterioration of the structure, ‘it is reasonable that a homeowner would understand that depreciation would only be applicable to material goods that can age and experience wear and tear,'” the opinion states, quoting a Tennessee Supreme Court decision.
North Carolina is not within the 6th Circuit’s jurisdiction, so the ruling won’t have any bearing there. Tennessee is, however, within the 6th Circuit. The Tennessee Supreme Court 2019 ruling in Lammert v. Auto-Owners (Mut.) Ins. Co. helped the 6th Circuit resolve a question that has divided Ohio courts.
Andrea Perry filed a claim for water damage to her home with Allstate Indemnity Co. The carrier determined that it would cost $32,956.09 to repair the damage, but “depreciation” reduced the actual cash value to $28,394.74.
Perry filed suit, arguing that Allstate could include depreciation of materials when determining actual cash value, but not labor costs. Allstate argued that any calculation for depreciation must include both labor and materials costs.
District Court Judge Christopher A. Boyko in Cleveland agreed and dismissed Perry’s suit, finding that she had failed to state a valid claim.
A majority opinion written by Circuit Judge Karen Nelson Moore said the Ohio Administrative Code does not define depreciation. Two Ohio appellate courts have determined labor costs cannot be depreciated, but in a different context. Two other Ohio appellate courts have ruled that labor costs can be depreciated, but also in a different context.
Two Ohio trial courts have addressed the question in cases with similar facts to Perry’s lawsuit and reached opposite conclusions. “We simply have no clear answer from Ohio law on whether labor costs are depreciable in calculating (actual cash value,” the 6th Circuit said.
The panel majority said the Tennessee Supreme Court addressed the depreciation question and noted that courts across the country were split over whether depreciation should include labor costs. The court determined that both the carrier’s and the policyholder’s arguments were reasonable.
Under Tennessee law, like Ohio law, any ambiguous policy term must be interpreted in favor of the policyholder.
“Because Perry’s interpretation of ‘depreciation’ is a fair reading of an ambiguous term, her interpretation prevails against the insurer,” the majority concluded.
Circuit Judge Chad A. Readler wrote a separate opinion that dissented, in part. He said he agreed that the district court should not have dismissed Perry’s suit with summary judgment because Perry’s interpretation of the policy was not unreasonable at first blush. But that doesn’t mean that the appellate court should have decided the question on appeal, he said.
Readler said he would have remanded the case to give the district court a chance to rule on the question after hearing evidence and arguments from both sides.
“Evidence developed in discovery may allow Allstate to resolve any ambiguity in the policy language,” Readler wrote. “But the majority opinion cuts that opportunity off at the pass.”
Readler added that the Circuit Court’s ruling ultimately will have no bearing on how the depreciation question is decided in Ohio because ultimately state courts decide how to interpret state law.
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