Insurer Faces Class Action for Depreciating Labor in Actual Cash Value Payments

By Andrew G. Simpson | March 2, 2023

Two Trumbull Insurance customers who believe they were short-changed on claims payments have filed a proposed class action suit against the insurer, alleging Trumbull has been incorrectly calculating some property claim payments by deducting labor depreciation.

The complaint (Grawe v Trumbull) estimates there are “hundreds of thousands” of claimants in 15 states who have potentially been underpaid more than $5 million because of what the plaintiffs allege is an error in actual cash value (ACV) payments

Property owners from Carylyle, Illinois — Betty and Daniel Grawe— filed the proposed class action in federal court in Connecticut against Trumbull, a subsidiary of The Hartford.

The Hartford declined to comment on the lawsuit when contacted by Insurance Journal.

The complaint notes that 15 states by court decision, statute or regulatory order preclude property insurers from depreciating labor in calculating ACV when using the replacement cost value methodology, unless the property insurance forms expressly state that labor is to be depreciated. The states are Arizona, California, Connecticut, , Illinois, Kentucky, Maryland, Mississippi, Missouri, Ohio, Tennessee, Texas, Utah, Vermont, Washington and Wisconsin, according to the lawsuit.

The Grawe policy did not have a “labor depreciation permissive” form. Thus, the complaint maintains, Trumbull should depreciate only material costs, not labor, for purposes of determining ACV.

The suit claims “it is reasonable to assume” there are “hundreds of thousands” of other insureds who have been underpaid and that the total amount underpaid likely tops $5 million.

The Grawes submitted a property damage claim in May, 2021, one that Trumbull agreed was covered by its policy. Trumbull calculated a replacement cost value of $11,307.51, which included the cost of new materials and labor to repair the damage. To arrive at the ACV, it then deduced the $1,000 deductible plus an additional amount of $1,504.70 for depreciation, resulting in a net payment of $8,802.81, according to the complaint.

The Grawes contend that the $1,504.70 depreciation included labor as well as materials but they cannot tell the exact amount of the labor depreciation without access to the software Trumbull uses.

According to the complaint, Trumbull uses a software, Xactimate (a Verisk product) which allows for the depreciation of materials only, or the depreciation of both materials and labor.

The case is similar to one decided by the Arizona Supreme Court last September in Walker v. Auto Owners. That court held that under the Walker’s’ homeowners policy from Auto Owners, the insurer could not depreciate the cost of labor in determining the ACV because of the ambiguity in the policy language over labor depreciation and the reasonable expectations of the insured .

The Arizona court noted that courts have differed on this issue, with some courts ruling labor can be depreciated when determining actual cash value and others saying labor may not be depreciated for various reasons.

In a commenting on that Arizona ruling, Patrick Gorman, a partner with Jones Skelton & Hochuli, suggested that an insurer is unlikely to be able to depreciate labor if the policy language is ambiguous but exactly what language would suffice is unclear. “The language necessary to inform an insured that the insurer may depreciate labor with an ACV payment is still an open question. Future cases might need to answer that question,” Gorman wrote of the Arizona situation.

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