Recently a reader came across my blog post discussing whether depreciation of labor is allowed in California when calculating ACV. In California, the answer is no. The reader wanted to know whether the same holds true for Oklahoma and, more specifically, on a roof replacement claim.
The answer can be found in the case of Branch v. Farmers Insurance Company.1 In Branch, the insured property owner sued the insurance company challenging its method of calculating payment for hail damage to roof. The policy defined "actual cash value" (ACV) as "replacement cost of the property at the time of loss less depreciation." In calculating the ACV, the insurance company depreciated the labor costs for the roof tear-off as well as the new installation. Ruling on a summary judgment motion, the federal district court agreed with the insurance company and held that the cost to tear off damaged shingles and the labor cost to install new shingles were both subject to depreciation.
The insured appealed the district court’s decision and the 10th Circuit Court of Appeals held that the labor cost to remove damaged shingles should not be depreciated, but the labor to install new shingles is subject to depreciation. The Court of Appeals, in reaching its decision, had deferred to the Oklahoma Supreme Court. (At the time of the appeal, there was no relevant Oklahoma case law offering guidance on the issue and a conflict existed in the Western District of Oklahoma, so the Oklahoma Supreme Court was asked to weigh in.) The Oklahoma Supreme Court’s rationale was that the tear off of the old roof to install a new roof must be treated as rubble or wreckage, and because it is "debris removal" and not a necessary part of the replacement costs of installing a new roof, then it should not to be depreciated.2
In sum, under Oklahoma law, if the insurance policy defines ACV as replacement cost less depreciation, then labor costs for installing a new roof is depreciable, but the labor cost of removing damaged roof materials is not.