N.C. High Court: Actual Cash Value Includes Depreciation for Labor Costs

By Jim Sams | March 3, 2020

An insurer whose policy covers the “actual cash value” of a property may deduct for depreciation of labor costs when it calculates the amount of the loss, the North Carolina Supreme Court ruled.

The court noted that the question of whether to depreciate for labor when determining the actual cash value has been addressed by courts in several states, and the answer has varied depending on the facts and the specific statutes.

In North Carolina, the high court held in a published decision Friday, the term “actual cash value” in unambiguous and includes depreciation of labor.

“The policy language provides no justification for differentiating between labor and materials when calculating depreciation, and to do so makes little sense,” the Supreme Court said in an opinion written by Chief Justice Cheri Beasley. “The value of a house is determined by considering it as a fully assembled whole, not as the simple sum of its material components.”

In North Carolina and other states, homeowners can buy a policy that covers the actual cash value or the replacement cost value of their home. The actual cash value pays only what it would take to repair or replace damage after depreciation, while a replacement cost value policy would pay what it takes to restore the home with materials of similar kind at current prices.

The policy that Thomas Accardi bought Hartford Underwriters Insurance Co. for his house in Fuquay Varina, North Carolina included an endorsement that limited coverage for windstorm or hail losses to the roof to actual cash value.

After the roof of Accardi’s house was damaged in a hailstorm, and adjuster estimated that the home suffered $10,287.28 in damages. The insurer deducted $500 for the policy’s deductible and an additional $3,042.92 for deprecation of both labor and materials. That resulted in a net payment of $6,743.36 for Accardi’s claim.

Accardi filed a lawsuit, arguing that the policy was ambiguous and that The Hartford should have deducted depreciation for only material costs, not labor and materials. Accardi’s attorney attempted to certify the civil complaint as a class action on behalf of all policyholders who had filed claims against The Hartford but where paid amounts that included a depreciation for labor costs.

The case was referred to the North Carolina Business Court, which is a specialized forum that hears disputes involving corporate and commercial law. The Business Court found that The Hartford’s policy actually wasn’t very complicated.

The court determined that the term “actual cash value” as stated in the endorsement was unambiguous because the policy did not distinguish between depreciation of labor and depreciation of material costs. The Business Court said “it does not make logical sense to separate the cost of labor from that of physical materials when evaluating the depreciation of a house or its component parts.”

Other state courts have found ambiguity in similar disputes. U.S. District Court Judge William H. Steele found that a State Farm Fire and Casualty policy was ambiguous because it was not clear whether actual cash value included depreciation for material costs only, or both labor and materials. A Pennsylvania state appellate court, on the other hand, found there was nothing ambiguous about a State Farm policy that allowed the insurer to deduct depreciation of labor costs from its damage payment.

Some disputes over actual cash value have dragged on for years. In Arkansas, State Farm has asked the Western District of Arkansas to approve a settlement of a class-action lawsuit filed against in in 2014. A hearing on whether to approve the settlement has been scheduled for June 1.

State Farm noted in a briefing filed with the appellate court that the state legislature has since amended the statute that the plaintiff’s in the class-action suit has used to argue that depreciation for labor cost cannot be deducted. The carrier told the court it was agreeing to the settlement to avoid the cost and uncertainty of further litigation and because the plaintiff’s had narrowed the size of the class.

The North Carolina Supreme Court found that state law clear supported Hartford Underwriters in its dispute with Accardi.

“To conclude that labor is not depreciable in this case would ‘impose liability upon the company which it did not assume,” and provide a benefit to plaintiff for which he did not pay,'” the court said, citing a finding in another case.

About Jim Sams

Sams is editor of the Claims Journal. He can be reached at jsams@wellsmedia.com.

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