An insurer can’t depreciate labor in calculating the actual cash value (ACV) of an insured property in the event of a covered loss, Arkansas high court justices have determined.
In an opinion delivered on Dec. 10, 2015, the Arkansas Supreme Court agreed with the finding of the Miller County Circuit Court “that depreciation of labor in the calculation of actual cash value is against Arkansas public policy.”
The high court described the undisputed facts in Shelter Mutual Ins. Co. v. Goodner as follows:
“The Goodners’ property in Texarkana, Arkansas, was insured under a Mobile Homeowners Insurance Policy (the policy) issued by Shelter. The policy provided that, in the event of a covered loss, Shelter would pay the Goodners ‘the actual cash value of all the damaged parts of the covered property’ or the limit of liability, whichever was less. (Emphasis in original.) The policy defined ‘actual cash value’ to mean ‘total restoration cost less depreciation.’ (Emphasis in original.)”
The Goodners’ property suffered a covered loss, the restoration cost of which Shelter estimated to be $10,319.23. After deducting $3,97.24 for depreciation, including depreciation for labor, the insurer determined the actual cash value of the property to be replaced was $6,921.99. The Goodners’ policy had a $1,000 deductible, so Shelter paid the insureds $5,921.99.
The Goodners filed for a declaratory judgment “that Shelter violated Arkansas law and public policy by depreciating labor costs in calculating the actual cash value of the covered loss. They later filed a motion for summary judgment, arguing in pertinent part that Arkansas law prohibits the depreciation of labor,” the Supreme Court opinion states.
The circuit court granted the Goodners’ summary judgment, holding that “depreciation of labor in the calculation of actual cash value under any policy that pays actual cash value is against the public policy of the State of Arkansas.”
In its finding, the lower court relied on the Arkansas Supreme Court’s ruling in Adams v. Cameron Mutual Insurance Co., 2013 Ark. 475, 430 S.W.3d 675.
In that case, the Supreme Court justices considered a certified question from the United States District Court for the Western District of Arkansas that asked whether labor costs could be depreciated when determining actual cash value under an indemnity insurance policy “when the term ‘actual cash value’ is not defined in the policy.”
The Arkansas Supreme Court answered “no.”
The Court in Goodner also rejected Shelter’s argument that because its policy explicitly defines “actual cash value” and expressly includes depreciation of labor the policy language should prevail.
“We are not persuaded by Shelter’s suggestion that the policy language controls. It is settled Arkansas law that an insurer may contract with its insured upon whatever terms the parties may agree, so long as those terms are not contrary to statute or public policy,” the opinion states.
To depreciate labor in calculating the actual cash value of a covered loss “would violate Arkansas law,” the justices said.
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