Depreciation of labor when determining actual cash value is being raised in cases throughout the country with mixed results. In,
Tennessee Tornado Terror and The Insurance Claim Aftermath, I noted that Tennessee recently ruled labor will not be deprecated for tornado policyholders. So, what would be the result if those tornados had gone slightly east and hit North Carolina? Does North Carolina allow insurance companies to depreciate labor of a structure to arrive at actual cash value?

On February 28, 2020, the North Carolina Supreme Court ruled that depreciation of labor is appropriate to determine actual cash value.1 The result had some puzzling conclusions after stating some general principals of law.

For example, for the first time, a court has called what the entire insurance industry advertises as a “replacement cost policy,” a “hybrid” policy. The court called it a hybrid because the insurance company first pays on an actual cash value basis and then later, on a replacement cost basis. When I read this, it was obvious to me that the justices deciding the case and their law clerks simply had little prior understanding of the property insurance industry and property insurance law.

Next, the North Carolina Supreme Court noted:

Courts outside of North Carolina are split on whether the term ‘depreciation’ includes both labor and materials. See Arnold v. State Farm Fire & Cas. Co., 268 F. Supp. 3d 1297, 1304 (S.D. Ala. 2017) (holding that defendant had not shown that the term “ACV,” which was undefined, could only be interpreted to include depreciation of labor costs); see also Hicks v. State Farm Fire & Cas. Co., 751 F. App’x 703, 708 (6th Cir. 2018) (holding that even though Kentucky law defines ACV as replacement cost minus depreciation, the policy is ambiguous because it does not specifically address what can be depreciated). But see Papurello v. State Farm Fire & Cas. Co., 144 F. Supp. 3d 746, 770 (W.D. Pa. 2015) (holding that labor cost was baked into the roof and, therefore, the policy insured ‘the finished product in issue—the result or physical manifestation of combining knowhow, labor, physical materials (including attendant costs, e.g., the incurrence of taxes), and anything else required to produce the final finished roof itself.’) (emphasis omitted); Redcorn v. State Farm Fire and Cas. Co., 2002 OK 15, 55 P.3d 1017 (holding that the general principle of indemnity supports including depreciation of labor). Decisions from other jurisdictions, however, provide little guidance to this Court because the policy language in each case differs meaningfully, as do the insurance laws of each state.

So, where does this insurance law in North Carolina differ significantly from other states?

When interpreting the relevant provisions of the insurance policy at issue, North Carolina courts have long held that any ambiguity or uncertainty as to the words used in the policy should be construed against the insurance company and in favor of the policyholder or beneficiary.

This is common to most states. It would seem if some judges in sister courts could read the term differently, that a lay North Carolina policyholder could read it differently as well.

Should all legal briefs start citing and then providing the judges making these decisions a copy Bill Wilson’s book, When Words Collide Resolving Insurance Coverage and Claims Disputes? Lawyers and judges should stop thinking that we know more about the insurance product than those making and selling it. We should study and seek to understand what they do.

The end result: The North Carolina court found labor could be depreciated because the policyholder would have to read in a term to make that particular policy only deprecate materials. I guess it opens the possibility that other policies with slightly different wording in North Carolina could only apply to material cost depreciation.

I also ask how “labor” wears out or depreciates so that we ever get to this analysis.

Thought For The Day

When you get in a job, the tendency is to say, ‘I’ve got to know it. I’ve got to give direction to others. I’m in this job because I’m better and smarter.’ I always took a different view, that the key was to identify the people who really knew and learn from them.
—Anne M. Mulcahy
1 Accardi v. Hartford Underwriters Ins. Co., No. 42A19 (N.C. Feb. 28, 2020).