The Supreme Court of Tennessee ruled on April 15 that insurance companies cannot depreciate the costs of labor when calculating the actual cash value of property damage claims. The case before the Court, Lammert v. Auto-Owners (Mutual) Insurance Co., involved two policyholders whose properties were damaged by separate hail storms. No. M2017-02546-SC-R23-CV, 2019 WL 1592687 (Tenn. Apr. 15, 2019).
The policyholders submitted claims under their property insurance policies for the damage their properties sustained as a result of the hail storms. The insurer settled claims under the policies on an actual cash value basis, meaning the amount of the loss was determined by subtracting depreciation from the cost to repair or replace the damaged property.
One of the policies at issue defined actual cash value as “the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss.”
The other policy at issue did not define actual cash value, but stated that “actual cash value includes a deduction for depreciation.” When calculating the actual cash value of the policyholders’ losses, the insurer depreciated both materials and labor costs.
The policyholders filed a class action in the Middle District of Tennessee alleging that the insurer improperly depreciated labor costs in calculating the actual cash values of the policyholders’ property loss claims. The policyholders argued the policies were ambiguous as to whether depreciation applied to labor costs. The Middle District of Tennessee certified the following question of state law to the Tennessee Supreme Court:
Whether an insurer making an actual cash value payment may withhold a portion of labor as depreciation when the policy defines actual cash value as “the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss,” or the policy states that “actual cash value includes a deduction for depreciation”?
In resolving the certified question of law, the Tennessee Supreme Court analyzed various decisions from around the country involving labor depreciation, some of which were resolved in favor of insureds while others were resolved in the insurers’ favor. Most of the cases holding in favor of insurance companies applied the broad evidence rule for determining actual cash value. The Tennessee Supreme Court rejected the insurer’s proposition that the court should follow other state’s case law applying the broad evidence rule to find in favor of the insurers, reasoning that the Court had never adopted the broad evidence rule.
In ruling in the policyholders’ favor, the Tennessee Supreme Court reasoned that the terms of the policies – neither of which expressly stated that depreciation was applied to labor – were to be construed according to their plain meaning and that ambiguities were to be resolved in favor of the insured and against the insurance company. In analyzing the plain meaning of the term “depreciation,” the Court reasoned that a policyholder could reasonably understand that depreciation applies to physical materials, but not to labor, because materials can age and experience wear and tear while labor cannot. Ultimately, the court held the policies were ambiguous concerning labor depreciation such that depreciation could only be applied to material costs, but not to labor costs.
This is a very important ruling by the Tennessee Supreme Court. Beasley Allen lawyers are handling cases involving insurance companies undervaluing property claims by depreciating labor costs, which results in policyholders being underpaid – or not being paid at all – for their property damage claims. If you or a client have made a claim for property damage under a homeowners, dwelling, manufactured home, or similar policy in the last six years, our lawyers would like to review the insurance policy and adjuster’s estimate to determine if the claim was underpaid. Contact Dee Miles, Paul Evans, or Rachel Boyd.
Source: Lammert v. Auto-Owners (Mut.) Ins. Co., No. M2017-02546-SC-R23-CV, 2019 WL 1592687 (Tenn. Apr. 15, 2019).
This story appeared in the May 2019 edition of The Jere Beasley Report. For more like this, visit the Report Online and subscribe.