While I often argue that depreciating labor simply does not make sense, insurers continue to push the question of whether the depreciation of labor costs in Actual Cash Value policies is acceptable. Though several jurisdictions have rejected the depreciation of labor, surprisingly, the recent trend of jurisdictions touching upon the subject has been to allow for the depreciation of labor.
Courts allowing for the reduction of depreciation for labor appear to base their reasoning upon one simple key issue – whether the definition for Actual Cash Value within the policy is ambiguous. Generally, where the term is found ambiguous, reductions for depreciation of labor are inappropriate as a reasonable policyholder would not expect labor to be depreciated. Similarly, when a court finds Actual Cash Value unambiguous, they typically hold that reductions for depreciation of labor are appropriate to prevent unjust enrichment.
Unfortunately, on July 28, 2017, the United States District Court for the District of Colorado held the term Actual Cash Value in a USAA homeowners policy unambiguous, allowing USAA to depreciate labor when issuing its actual cash value payment.
In Basham v. United Services Automobile Association,1 USAA’s policy provided a two-step approach for resolving property damage claims above $5,000.00:
(1) USAA would pay only the “actual cash value” for the loss, defined as –
the amount it would cost to repair or replace covered property, at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence.
(2) However, if the homeowner completed the repairs or replacement within one year and timely submitted notice, USAA would pay for the replacement cost without a deduction for depreciation.
The policyholder partially repaired her home and was reimbursed without a deduction for depreciation. However, the policyholder was left with the lesser actual cash value—after a depreciation deduction of both the cost of materials and the cost of labor—for the property damage that she did not fix within one year. While the policyholder accepted USAA’s depreciation deduction for the cost of materials, she argued that USAA violated her policy by taking a depreciation deduction for the cost of labor.
USAA’s policy language provided:
Actual cash value means the amount it would cost to repair or replace covered property, which is evaluated at the time of loss or damage, with material of like kind and quality, and subject to a deduction for deterioration, depreciation and obsolescence.
In determining the policy language to be unambiguous, Judge Jackson relied heavily upon the presence of commas to conclude that their presence signaled the independence of each phrasing from the prior and subsequent grouping. The court took it one step further, concluding that each of these independent phrases referred back to the cost of repairing or replacing covered property. Based upon this interpretation, the court interpreted the policy as unambiguously providing:
Actual cash value means “the amount it would cost to repair or replace covered property, which is evaluated:
- At the time of loss or damage,
- with material of like kind and quality, and
- subject to a deduction for deterioration, depreciation and obsolescence.
In other words, the amount it would cost to repair or replace a covered property is subject to a deduction for depreciation. Therefore, at least in this one federal trial court, both the cost of materials and the cost of labor are subject to a depreciation deduction where Actual Cash Value is unambiguous.
What does this recent decision mean for Colorado policyholders? The good news is that this decision is not binding upon Colorado state courts. However, it can be used as persuasive argument in support of an insurers justification for reductions for depreciation of labor in state court. Therefore, policyholders should always carefully read their policy language to determine its coverages and limitations. For instance, a policy could provide language forbidding the depreciation of labor costs, or as in this case, even providing circumstances where reductions are not made where the property is repaired within a defined timeframe. Finally, this trend emphasizes the importance of purchasing a Replacement Cost Policy.
1 Basham v. USAA, No. 16-cv-03057 (D. Colo. July 28, 2017).