Whether labor costs can be depreciated when determining the actual cash value of a covered loss is an issue that comes up frequently for policyholders and those who represent them. I recently researched the issue and was surprised to find the paucity of case decisions across the country that touch on the subject. I know of only four states where courts have weighed in one way or another — California (labor cannot be depreciated); Texas (labor can be depreciated); Oklahoma (labor can be depreciated); and the most recent being Arkansas (labor cannot be depreciated). If there are any states I have missed, I would very much like to know.
The case out of Arkansas, Adams v. Cameron Mutual Insurance Company,1 I find particularly interesting. In Adams, the Supreme Court of Arkansas held that costs of labor could not be depreciated when determining actual cash value of a covered loss under a homeowner’s insurance policy that did not define "actual cash value." The court in Adams gave considerable weight to the dissenting opinion in the Oklahoma case that addressed the issue as it relates to a roof claim.2 In particular, the court thought the following dissenting opinion’s discussion on the concept of depreciating labor more sound:
The shingles are of course logically depreciable. As they age, they certainly lose value due to wear and tear…. Labor, on the other hand, is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value of time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of depreciating the value of labor is illogical.
Of note, the court in Adams also considered Arkansas Insurance Department Bulletin 13A-2013,3 stating that "labor of any kind related to the repair, rebuild, or replacement of covered property cannot be depreciated."
In sum, depending on your state or jurisdiction, the depreciation of labor costs when determining actual cash value may or may not be permissible. If there are no case authorities that provide guidance, then perhaps look into whether your state’s Department of Insurance has issued any bulletins on the subject.
1 Adams v. Cameron Mutual Ins. Co., 2013 Ark. 475 (2013).
2 Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017 (Okla. 2002).
3 Replaced in its entirety by Bulletin 13B-2013.