When a property insurer pays for losses under a first-party property insurance policy, they are often paid at actual cash value. Actual cash value is calculated by taking the replacement cost, i.e., the amount it would cost to repair or replace an item of similar kind and quality, less depreciation, i.e., the decrease in the property’s value because of use, wear, obsolescence, or age. For an insurer, this often begs the question, what costs are depreciated when calculating actual cash value?
This question often arises because the insurance policy fails to explicitly define the term “actual cash value.” In the absence of this definition, there is arguably no clear direction in the policy as to what costs are depreciable. Generally, there are two types of costs to be considered – the cost of materials and the cost of labor. It is undisputed that the costs of materials are depreciable and will always be considered when calculating actual cash value. However, whether the cost of labor is depreciable has been disputed in various cases across the country. The North Carolina and South Carolina Supreme Courts have recently answered this dispute in favor of the insurers, ruling the cost of labor is depreciable.
In Accardi v. Hartford Underwriters Ins. Co., 373 N.C. 292, 294–95, 838 S.E.2d 454, 456 (2020), the North Carolina Supreme Court determined that because a damaged property must be considered as a whole, it would be illogical to differentiate between labor and material costs when calculating depreciation. “The policy language provides no justification for differentiating between labor and materials when calculating depreciation, and to do so makes little sense. The value of a house is determined by considering it as a fully assembled whole, not as the simple sum of its material components.” Id. The Accardi decision was also rooted in equity because to conclude otherwise would impose additional liability upon the insurance company that it did not assume. “To conclude that labor is not depreciable in this case would impose liability upon the company which it did not assume and provide a benefit to plaintiff for which he did not pay. We will not do so.” Id.
Similarly, in Butler v. Travelers Home & Marine Ins. Co., 858 S.E.2d 407, 408 (2021), the South Carolina Supreme Court answered the certified question of whether an insurer can depreciate the cost of labor in determining actual cash value when the estimated cost to repair or replace the damaged property includes both material and embedded labor components in the affirmative. The Supreme Court noted the value of the damaged home must be calculated as a unit and it would be impractical to include the depreciation of materials and not labor. “When the labor cost associated with an item of property is embedded, the value of the item is necessarily calculated as to the unit, not as to the individual parts. Similarly, the fact the labor cost is embedded makes it impractical, if not impossible, to include depreciation for materials and not for labor to determine ACV of the damaged property. Rather, the value of the damaged property is reasonably calculated as a unit. Therefore, we answer the certified question “yes,” because it makes no sense for an insurer to include depreciation for materials and not for embedded labor.” Id.
Whether the cost of labor is depreciable in calculating actual cash value continues to be disputed in other Courts across the country, who may likely look to these North and South Carolina opinions for guidance.
Regardless, the Carolinas are aligned on this core question of property insurance law.