On November 21, 2013, Arkansas’ highest court held that “the costs of labor may not be depreciated when determining the actual cash value of a covered loss under an indemnity insurance policy that does not define the term ‘actual cash value.’” In addition, the court bottomed its decision on both the old canard of ambiguity and on the notion that depreciating labor is both illogical and inconsistent with the principle of indemnity. As a result, even a change in policy language to expressly provide for labor’s depreciation might not pass muster in the state.
Adams v. Cameron Mutual Ins. Co., 2013 Ark. 475 (Ark., Nov. 21, 2013) arose after a tornado damaged the Adamses’ home in Mena, Arkansas. Their homeowners insurance carrier, Cameron Mutual Insurance Company, depreciated the entire repair estimate including the labor-only services such as the removal of roof decking, siding, and carpet and vinyl flooring. The policyholders asserted that the contract of insurance did not allow for such depreciation, and they brought a would-be class action against the insurer in the Western District of Arkansas. The federal court then certified the following question to Arkansas’ Supreme Court:
Whether an insurer in determining the “actual cash value” of a covered loss under an indemnity insurance policy may depreciate the costs of labor when the term “actual cash value” is not defined in the policy.
The decision began by finding the undefined term “actual cash value” to be ambiguous.
The policy at issue fails to define the term “actual cash value;” however, both parties seem to agree that in determining “actual cash value,” some form of depreciation is allowed. Indeed, Black’s Law Dictionary defines “actual cash value” as “[r]eplacement cost minus normal depreciation.” Black’s Law Dictionary, 1690 (9th ed. 2009). However, the Adamses contend that only materials can be depreciated, while Cameron argues that both materials and labor may be; both positions are tenable. Because the term “actual cash value” as used in the policy is fairly susceptible to more than one reasonable interpretation, we are of the opinion that the term is ambiguous.
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[H]aving found the term “actual cash value” ambiguous as used in the policy at issue, we must construe the policy liberally in favor of the Adamses and strictly against Cameron.
Justice Danielson’s opinion did not stop there, however; the decision also quoted extensively from the dissenting opinion in Redcorn v. State Farm Fire & Cas. Co., 55 P. 3rd 1017 (Okla. 2002). In that case, the supreme court in a neighboring jurisdiction had allowed labor to be depreciated because it found that a roof was “a single product consisting of both materials and labor.” The dissenters disagreed strenuously, however, arguing that:
- labor is “not logically depreciable” because, unlike materials, it does not lose value due to wear and tear nor does it lose value over time; and
- “[A]llowing [the insurer] to depreciate the cost of labor would leave [the insured] with a significant out-of-pocket loss, a result that is inconsistent with the principle of indemnity.”
It is noteworthy that two of the seven justices, while concurring in the finding of ambiguity, disagreed with the balance of the majority’s opinion, stating that Justice Danielson’s decision “goes further and defines the term ‘actual cash value’ [and] [i]n doing so, exceeds the scope of the certified question presented.”