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).