In Kansas, when a property is a total loss, Kansas Statute Annotated § 40-905(a) provides:
Statement of value in policy; evidence of ownership of property; exceptions
(a)(1) Whenever any policy of insurance or an increase in the amount of coverage in an existing policy of insurance shall be written to insure any improvements upon real property in this state against loss by fire, tornado, windstorm or lightning, and the property insured shall be wholly destroyed, without criminal fault on the part of the insured or the insured’s assigns, the amount of insurance written in such policy shall be taken conclusively to be the true value of the property insured, and the true amount of loss and measure of damages, and the payment of money as a premium for insurance shall be prima facie evidence that the party paying for such insurance is the owner of the property insured.
For a partial loss, Kansas courts have held that the term actual cash value means “the cost to repair without any reduction for depreciation.”1
One issue that frequently arises when discussing actual cash value is whether an insurer may depreciate labor when calculating actual cash value. A recent Kansas federal court, addressed this issue in a case involving hail damage to the insured’s roof and water damage to the kitchen ceiling.2
In Graves, the policy provided that when the policyholder does not repair or replace the damaged property, the insurance company “will pay the actual cash value at the time of loss of that part of the building damaged up to the limit applying to the building, but not exceeding the replacement cost of the damaged building.” The policy also defined “actual cash value” as “[t]he amount which it would cost to repair or replace damaged property with property of like kind and quality, less allowance for physical deterioration and depreciation, including obsolescence.”
The insurance company argued that it was entitled to summary judgment because it properly calculated the interim payment amount for Graves’s policy claim using the property’s actual cash value prior to completion of repairs or replacement of the damaged property. Second, the insurance company contended that, consistent with Kansas law and the Kansas Insurance Department’s recommendation, the policy language allows the depreciation of labor costs in determining actual cash value.
The insured responded that the policy language only allows depreciation concerning items that can be subject to physical deterioration, and that labor is not subject to physical deterioration and therefore cannot be depreciated.
This was a case of first impression:
No Kansas court has addressed the specific issue of this case—whether an insurer may depreciate the cost of labor when calculating the actual cash value for a covered partial loss, where the policy’s definition of “actual cash value” specifically provides for depreciation. But this Court is not altogether left without guidance from Kansas precedent. Kansas law explains that this Court ought to look to the policy language and consider whether a reasonable insured would understand its provisions to authorize the insurer’s actions. When examining insurance policies, the court must construe the policy to ascertain the parties’ intent. Generally, the court must consider that the purpose of an insurance contract is to indemnify the insured against loss. But in discerning the parties’ specific intent, the court must determine what a reasonable person in the insured’s position would understand the language to mean. If that language is unambiguous, it must be taken in its plain, ordinary, and popular sense, without consideration of extrinsic evidence. Terms will be deemed ambiguous only through a “natural and reasonable interpretation of [the provision’s] language. If that interpretation suggests ambiguity—that the policy’s terms either conflict or are susceptible to multiple constructions—“the construction most favorable to the insured must prevail.”3
Siding with the insurance company, the court held that actual cash value includes depreciation of both materials and labor (“Graves’s policy defines “actual cash value,” and that definition provides an “allowance for physical deterioration and depreciation, including obsolescence”).4
1 Thomas v. American Family Mut. Ins. Co., 233 Kan. 775, 778-79 (1983).
2 Graves v. American Family Mut. Ins. Co., 2015 WL 4478468, 2015 U.S. Dist. LEXIS 95127 (D. Kan., Jul. 22, 2015).
3 Id., at *2.
4 Id., at *5.