In an opinion issued yesterday, the Tennessee Supreme Court held that labor cannot be depreciated when considering actual cash value.1 Merlin Law Group participated in this victory for policyholders by writing an amicus curiae brief on behalf of United Policyholders.

The court’s conclusion and rationale for it is straight forward:

Ultimately, it is not necessary for this Court to reach the decision of whether labor can logically depreciate or whether indemnity is accomplished. It is enough that we find the contracts ambiguous and that under our standard of review, the interpretation of the insured must prevail. We conclude that the answer to the district court’s certified question is no, the insurance company cannot withhold a portion of the labor costs as depreciation under either policy.

. . . . .

We conclude that the language regarding depreciation in the policies in question is ambiguous. Under Tennessee law, ambiguities in insurance contracts are strictly construed against the insurance companies and in favor of the insured. Therefore, with the insured’s interpretation controlling, labor may not be depreciated when the insurance company calculates the actual cash value of a property using the replacement cost less depreciation method.

The Tennessee justices indicated that they simply found that the policies were ambiguous and did not have to base the ruling on other reasons. We similarly argued on behalf of United Policyholders that the policies were ambiguous:

To the extent any ambiguity in the policies at issue in this case exists, that ambiguity must be resolved in favor of the policyholders. Where the language of an insurance policy is fairly susceptible of more than one meaning and therefore ambiguous, Tennessee law directs that the ambiguity be construed against Auto-Owners and in favor of the Plaintiffs. Tata v. Nichols, 848 S.W.2d 649, 650 (Tenn. 1993).

It is illogical to assume that insureds, such as the Plaintiffs in this case, would be able to infer that labor would depreciate from an ACV coverage policy when the term “actual cash value” possesses no definition. See Adam J. Babinat, Ensuring Indemnity: Why Insurers Should Cease The Practice of Depreciating Labor, 22 Drake J. Agric. L. 65, 78, 85 (Spring 2017)(recommending that Iowa adopt a regulation similar to California that the expense of labor to repair, build or replace damaged property is not a component of physical depreciation.) Here, holding in favor of Auto-Owners would place a burden on the insureds, which unjustly benefits Auto-Owners….

Allowing insurers to depreciate labor would be contrary to the reasonable expectations of the policyholders, would cause them significant financial harm, and would create a windfall for the insurers. The reasonable expectation of the policyholders is that the indemnity policy they purchased will provide coverage sufficient to actually indemnify them, or put them back in the position they were in prior to the loss. If the policyholders’ property had a roof before the loss, indemnity requires that they be paid the depreciated value of the roofing materials and the cost of installing those depreciated materials. As discussed in the Plaintiffs’ brief, even the Tennessee Department of Insurance has indicated that “[i]t is generally the belief that labor is not depreciable” and that it “do[es] not believe insurers are depreciating labor unless their [insurance policy] calls for it.

There are other reasons that exist for not depreciating labor, including, but not limited to these, which we noted:2

The National Underwriter Company publishes under the name FC&S, or Fire, Casualty & Surety, a comprehensive library of reference books for insurance professionals. FC&S also provides online bulletins in which its experts respond to questions from insurance professionals. The bulletin is used by insurance agents and brokers to interpret standard insurance policy provisions. FC&S has stated that its position is that depreciation should not apply to labor unless a policy explicitly states that it should. FC&S Bulletin, Should depreciation be applied to demolition, cleaning, and odor control costs following a fire loss? (Nat’l Underwriter Co. December 5, 2014).

Auto-Owners and other insurance carriers should not be allowed to reap the benefit of a term that it chose not to define in its policies. Even the International Risk Management Institute (“IRMI”), an independent insurance industry entity that provides instruction to risk management and insurance industry professionals concerning the application of policy provisions, has explained that if an insurance company wants its own interpretation to apply, it can define that term in its own policy. Mike McCracken, International Risk Management Institute, Inc., What Exactly is Actual Cash Value? Better Yet, How Do You Calculate It? available at (Dec. 2007).

The only worrisome part of the decision is that it seems to invite the insurance industry’s strong lobbying army to convince insurance regulators to allow insurance companies to write policies which specifically depreciate labor. These discussions and submittals are often done quietly and with no public comment. Most of these insurance regulators come from—or eventually look for jobs with—the insurance industry.

Thought For The Day

Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.
—Abraham Lincoln
1 Lammert v. Auto-Owners Ins. Co., No. M2017-02546-SC-R23-CV (Tenn. April 15, 2019).
2 Brief for United Policyholders as Amicus Curiae, p. 10, Lammert v. Auto-Owners Ins. Co., No. M2017-02546-SC-R23-CV (Tenn. April 15, 2019).

  • Chris Pce

    Interesting… What were the insurance carrier’s main arguments on why depreciation on labor should be applied, though?

    • Chris,

      The main argument is that the policyholder gets a windfall which is incorrect but
      they keep arguing this wrongful logic.

      I plan to write a blog showing how illogical it is.

      • Stephen Sarasohn

        I can’t wait to argue this with you Chip!

        • Steve,
          You were born to be wil…no, an argumentative type of guy! Lol.

          You will lose. The labor which can be depreciated is the labor to make the nail and make the shingle because it is a cost of the material. The labor to nail, haul it up and even put it in place before nailing it never depreciates. Indeed, the insurance companies often claim that a policyholder can harvest older shingles just like the ones damaged and if put up there, be just in the same position as before. If one depreciate the labor I described, that will not happen. The insured will not be in the same position because only a part of the nailing, hauling and placing of the shingles would be paid for. The insurers logic is flawed.
          Always good to hear from you. I am certain you are still quite successful and I was talking about Ira with some friends earlier this week. Cheers!

          • Stephen Sarasohn

            So, if you have to repaint the exterior of a building every ten years and the ten years are up, you have to add new paint and new labor. What value does the labor from the previous paint job have? None, the best I can tell. The value of the previous paint and the value of the labor to “install” the paint are both used up. They both had the same life expectancy and that time has expired. If you put on a new coat of paint, does the labor from the previous paint job still have value along with the value of the new paint job? Is the ACV of the paint on a repainted building now greater than 100% of RCV?

  • Max Bray

    Great article & great win MLG!
    The concept of depreciating labor has always eluded logic and certainly favored the insurance carrier.
    But, as stated…wait for the Lobbyists to crank up with the various Commissioners.
    A reasonable rate of return should be part & parcel to any service industry that assists those in catastrophic need.
    Every State Commissioner should receive a copy of this ruling!

    • Max,

      For over two decades, United Policyholders has gone to National Association of Insurance Commissioner meetings held four times a year advocating for policyholder interests on this and other issues. I encourage everybody to support this organization.

  • Edward Fako

    How Can Insurance Regulators Themselves Be Regulated?

    Too bad there is seemingly little to no oversight in the various Insurance Regulators to prevent new definitions that would otherwise be deemed unconscionable if not for Insurance Policies being Contracts Of Adhesion.

    It would seem as if the Pro Insurance Carrier Lobby can skate past any reasonable man interpretation by creating illusory definitions that only have a one sided benefit.

    An infitismal percentage of the Voting Public would not ever even notice that their financial asset recovery could be stifled at the stroke of a pen, done in a back room office with zero ramifications.

    How can this type of unilateral contract adaptation be better scrutinized by the Consumers and their Advocates Chip?

    • wmerlin


      That is a tough question to answer. Many departments of insurance do not have the sophistication regarding property insurance to understand the changes. Many forget that the standard 165 line policy was made just to prevent these type of shannigans.

      Electing consumer advocates to the position of Commissioner or the positions appointing the Commissioner is a big help.

      Supporting United Policyhholders and Consumers Union also helps because historically, these two organizations through Amy Bach and Robert Hunter have been the only ones showing up for policyholders with the various departments of insurance.

  • Noble C McCulley

    Well played, and a huge thank you to the Merlin Law Group.
    I have fought depreciation of labor on an occasion or two.

    • Noble,

      Thank you. I encourage everybody to use the search function on our blog because we have many articles on this issue.

  • Jonathan Sadick

    As a public adjuster, I suspect that I am taking the contrarian view. I’ve used the example before of a worn out couch. Do you depreciate the couch as a whole, or only the labor to construct/manufacture it?

    Also, tax laws permit the depreciation of buildings and equipment over prescribed time periods. Should this depreciation only be for the materials used in constructing the office building or injection molding machine?

    As long as labor is non-depreciable, I’d like to add this thought. The framing of a house is achieved through construction labor and wood framing materials. The labor is non-depreciable, how about the materials? To be consistent, the labor to manufacture the 2”x4” should be non-depreciable. So the worker’s labor to run the wood through a planer should not be depreciated. And the wood to make that joist or stud presumably came from a tree that was cut down. Why should that labor to harvest that tree be depreciated?

    Based on the absurdity of this example, I now subscribe to the theory that depreciation of any kind should be non-existent.

    Jonathan Sadick, SPPA

    • wmerlin


      Your example with the couch is fine. You deprecate the cost of the couch including the labor to make the couch because that is a material cost. Indeed, if there is a couch down the street exactly as old and depreciated exactly as much, the value and cost of the used couch should be the same. But, you do not depreciate the labor cost to move it to the insured’s premises. The insurance industry wants to depreciate that non-material labor cost.

  • Jim Johnson

    I agree with the ruling in this case of Tennessee Law where any ambiguity is in favor to the policyholder. However, all the carriers have to do is clarify in the policy that labor and materials to install is depreciated as one unit and this ruling will be nullified in most cases. I believe State Farm has already done this by endorsement.

    Also, agree wit Chip that the policyholder’s don’t receive a windfall, as they pay the premiums that keep the whole industry rolling, even our jobs are tied to the policyholder’s paying their premiums…

    • wmerlin


      I was originally taught to never deprecate the cost of a repair, but even that lesson is being challenged by insurers as they race their way to the bottom to pay their own customers less.

      Thanks for your comment.

  • Stephen Sarasohn

    I like this ruling because it gives the insured flexibility. If you want to take more depreciation to reduce the ACV for coinsurance penalty purposes, you can. If you want to take less depreciation to establish a higher ACV, you can. Aside from policy language preventing it, labor depreciates at least as fast as the materials.

    As I’ve stated here before, the labor has a life expectancy that’s never greater than the life expectancy of the materials and is often shorter. When you repaint a building, the value of the labor expended on the previous paint job is gone as is the value of the materials. You must use new paint and new labor. If the original labor still had value, after repainting the building, the ACV of the paint job would exceed the RCV.

  • Edward Fako

    For a good analysis of how one Court views Depreciation Of Labor as a proper calculation, look up the Oklahoma Case and others.

    A Really Great Source for reference us the FC&S.

    Two similar cases reached the Oklahoma Supreme Court and were answered within a day of each other in 2002. Both cases involved damage to roofs and an ACV settlement, and both addressed depreciation of labor.

    In the first, Redcorn v. State Farm, the court said that a “roof is the product of both materials and labor,” and so depreciation of labor costs were allowable. But in a dissenting opinion, three justices argued that labor costs should not be depreciated. A roof, they stated, was not a single product consisting of “labor-and-shingles,” but was a combination of products (shingles and nails) and a service (labor to install). Labor cannot lose value over time.

    One dissenting justice also pointed out that prior to the loss the insured had an installed sixteen-year old roof, and to be indemnified meant he was entitled to the value of the sixteen year old shingles plus the cost of installing them.

    The second case before the same court (Branch v. Farmers Ins.) also dealt with depreciation of labor. In this instance the court was asked to determine if labor costs for tear-off of a damaged roof could be depreciated, or whether these costs properly should be covered as “debris removal”? In answer to the first question, the court said that labor to install the new roof was a cost the insured was reasonably likely to incur, and so it was rightly included within the meaning of “replacement cost.” It followed, then, that labor could be depreciated along with materials.

    But having said that, the court noted that homeowners policies contained a separate coverage for debris removal following a covered loss. If a roof were damaged to the extent it had to be replaced, then, said the court, the damaged portion was rubble, or debris. And, if the whole roof had to be torn off to repair or replace the damaged portion, then those torn off pieces must also be considered rubble. Therefore, although the cost of the labor to replace the roof could be depreciated, the cost to remove the debris of the old roof could not.