Nebraska SC sides with insurer on question of ‘actual cash value,’ depreciation of labor

By Jessica Karmasek | Mar 1, 2017

Nebraska Supreme Court chambers  

LINCOLN, Neb. (Legal Newsline) - The Nebraska Supreme Court, in a ruling this month, found that the term “actual cash value” is unambiguous and that depreciation of labor does not lead to under-indemnification of an insured.

The state’s high court, in its Feb. 17 opinion, sided with defendant American Family Mutual Insurance Company.

The U.S. District Court for the District of Nebraska certified the following question to the Supreme Court:

“May an insurer, in determining the ‘actual cash value’ of a covered loss, depreciate the cost of labor when the terms ‘actual cash value’ and ‘depreciation’ are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated?”

The high court answered the question in the affirmative, ruling against plaintiff Rosemary Henn.

Chief Justice Mike Heavican authored the opinion, and Justices John Wright, William B. Cassel, Max J. Kelch and Jeffrey Funke agreed. Everett Inbody and Riko E. Bishop, who are judges on the Nebraska Court of Appeals, also heard the case and agreed. Justices Lindsey Miller-Lerman and Stephanie F. Stacy did not participate.

The Supreme Court ruled in favor of the insurer, holding that an insurer may apply depreciation to the cost of labor when determining actual cash value under a standard policy that did not define the term “actual cash value.”

“Both materials and labor are elements that help establish the value of the property immediately prior to the time of loss,” Heavican wrote. “We hold that actual cash value applies to the insured property as a whole. We cannot agree with the distinction in depreciation that Henn is attempting to read into the policy.”

The parties agree that actual cash value is replacement cost minus depreciation, but disagree as to whether the labor component can be depreciated.

No class has yet been certified -- Henn filed the lawsuit on her behalf and others similarly situated -- and the case has been stayed pending the outcome of the certified question.

In September 2011, Henn submitted a homeowner’s claim under her insurance policy issued by American Family. The claim was submitted due to damage that occurred to her home’s roof vent caps, gutters, siding, fascia, screens, deck and air-conditioning unit during a hailstorm on Aug. 18, 2011.

Henn’s insurance policy provides, in relevant part, that an insured may recover, following a covered loss, “the cost to repair the damaged portion or replace the damaged building, provided repairs to the damaged portion or replacement of the damaged building are completed,” or “[i]f at the time of loss, ... the building is not repaired or replaced, [American Family] will pay the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building.”

Therefore, under the policy, the insured has two options for recovery following a covered loss: (1) receive “the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building” or (2) receive the full replacement cost value upon completion of the repair or replacement of the damaged property.

American Family’s adjuster determined that the cost to repair and replace the damaged portions of Henn’s home with new materials would be $3,252.60. From this amount, American Family subtracted $276.67 in depreciation, to arrive at an actual cash value amount of $2,975.93. American Family then subtracted Henn’s $1,000 deductible, leaving her with an actual cash value payment of $1,975.93.

The depreciated amount includes both material costs and labor costs. The estimate did not show how much it depreciated from building materials as opposed to labor.

Henn filed her lawsuit in Douglas County District Court. American Family removed the case to the District of Nebraska.

The company subsequently filed a motion for summary judgment, arguing that “actual cash value” as used in the policy is not ambiguous because the term incorporates the concept of depreciation from the cost of repairs, which includes both materials and labor.

The insurer contends that actual cash value is merely an interim payment and that depreciation of both materials and labor properly indemnifies the insured.

Henn argues the language in the policy does not unambiguously allow for labor depreciation and that American Family’s depreciation of labor resulted in under-indemnification of her loss.

The District of Nebraska certified the question to the state Supreme Court.

The high court, in its 19-page ruling, explained that it is a “well-accepted principle that ‘actual cash value’ is the value of the property in its depreciated condition.”

“Nebraska has a well-developed case law on the definition of actual cash value,” Heavican wrote. “We therefore find that the term is not ambiguous in the policy. The unambiguous definition of actual cash value is a depreciation of the whole. As such, the insured is not under-indemnified by receiving the depreciated amount of both materials and labor.

“We agree with American Family that a payment of actual cash value that included the full cost of labor would amount to a prepayment of unearned benefits.”

The court ruled that an insured is properly indemnified when the amount calculated for actual cash value equals the depreciated value of the property just prior to the loss, which includes both materials and labor.

“The policy does not distinguish between materials and labor, and we refuse to read that distinction into the policy,” Heavican noted in the opinion.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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