Depreciation of Labor Issues Are Largely Being Determined in Class Action Cases | Property Insurance Coverage Law Blog

Most cases developing the law in the depreciation of labor issue, recently noted in Depreciation of Labor—One Simple Example Involving the Installation of a Washer or Dryer Shows Why the Topic Is So Complex, are class action lawsuits. A quick count of the term “depreciation of labor” in pending federal court cases since the beginning of the year resulted in me finding 15 of 16 filings being in class action lawsuits.

This was predicted two years ago in an American Bar Association article, Belaboring Depreciation: The “Labor Depreciation” Class Action Tidal Wave: 1

Imagine your house has been hit by a windstorm, causing significant damage to your 10-year-old roof. Fortunately, you are not worried: you have homeowners insurance that entitles you to the ‘actual cash value’ of any damaged property. But when your insurance check arrives, it is smaller than you had hoped. Curious, you call your insurer and ask to see a detailed estimate of the loss. What you get back is an itemized estimate of the cost to repair your roof, minus depreciation to account for the roof’s age. That the insurer is applying depreciation does not surprise you; you know that your insurance policy permits that. But you are surprised to see that your insurer is depreciating not just the cost of the materials needed to repair your roof but also the cost of the repair labor itself. Can that be right? you ask yourself. How can something intangible like labor depreciate in value? But when you raise this with your insurer, your insurer explains that not only does your policy permit it to depreciate labor costs, but it has to do so to accurately value your roof and avoid giving you a windfall. Unsatisfied, your next call is to your attorney …

If this fact pattern seems at all far-fetched, it should not—it has been the genesis of scores of class action lawsuits nationwide over the last decade, which have collectively cost insurers hundreds of millions of dollars in settlement payments. These lawsuits all ask the same question: When estimating the actual cash value of damaged property, can an insurer depreciate the total value of the property–including both the material and labor components of its value–or just the cost of the materials alone? This seemingly simple question has divided courts across the country, and it continues to do so with remarkable frequency….

Many insurers set their depreciation settings to depreciate both the cost of materials and the cost of repair labor. Insureds discovering this have not always been pleased. They often conclude, upon reviewing their loss estimates, that depreciation should only be applied to tangible items like shingles or drywall, and not an intangible item like repair labor. Insurers disagree. The result has been lots of litigation.

The article noted the three major methods courts have been resolving the depreciation of labor issue:

  1. Decisions focusing on the policy language and holding it permits labor depreciation.
  2. Decisions focusing on the policy language and finding it ambiguous.
  3. Decisions focusing on whether labor depreciation is “logical” or appropriately indemnifies the insured.

The author represented insurance companies at the time of the article and made an interesting comment:

First, courts have all too often simply assumed that, to indemnify insureds, ACV payments must allow them to restore their property to its pre-loss condition. This, however, conflates ACV coverage with RCV coverage. Unlike RCV, ACV is designed to pay the pre-loss cash value of damaged property, not its replacement cost. In other words, ACV indemnifies insureds by returning them to their pre-loss economic condition, not their pre-loss physical condition. There is nothing inherently inconsistent between labor depreciation and this form of indemnification.

There is something inherently wrong with this determination in many instances, and that is why before replacement costs policies came into existence, courts had such difficulty arriving at one definition or criteria of actual cash value. Many simply gave up and followed a “broad evidence rule” test, allowing the jury to consider from a number of tests the best method to determine actual cash value. I noted some of these considerations in Reflection About Historical Policy Change and Depreciation of Partial Losses Requiring Only Repair.

Returning to the class action battleground, a Massachusetts federal judge noted some of the developing law on the depreciation of labor topic in a March ruling: 2

Plaintiffs assert that under the laws of Arizona, Illinois, Kentucky, Mississippi, Ohio and Tennessee, labor depreciation is a breach of contract where there is no provision in an insurance policy that expressly permits the practice when calculating ACV payments pursuant to the RCLD methodology Plaintiffs also note that Connecticut and Vermont prohibit labor depreciation pursuant to statutory or regulatory law and point to public statements in which Virginia’s Bureau of Insurance takes the position that labor is not an appreciable item. Plaintiffs appear to concede that Maryland, Utah and Wisconsin have yet to address the issue but insist that they will advance similar legal arguments on behalf of policyholders in these states.

Defendants acknowledge that there is support for Plaintiffs’ assertion that, as in Plaintiffs’ home states of Arizona, Illinois and Ohio, labor depreciation may support a breach of contract claim under the laws of Kentucky, Mississippi and Tennessee. Consistent with Plaintiffs’ position, Defendants add that Maryland, Utah and Wisconsin do not prohibit labor depreciation. Defendants, however, disagree with Plaintiffs’ characterization of the laws of Connecticut, Vermont and Virginia.

Given that there exists some legal authority prohibiting labor depreciation in Kentucky, Mississippi and Tennessee, and the proffered support for this position, Plaintiffs have demonstrated that their interests in proving that Defendants impermissibly depreciated labor costs from ACV payments are sufficiently aligned with the interests of these unnamed plaintiffs…

As to the remaining states of Connecticut, Maryland, Utah, Vermont, Virginia and Wisconsin, the parties seem to agree, at least, that courts have not conclusively addressed whether depreciation of labor costs is unambiguously permitted where there is no provision in an insurance policy that expressly permits the practice….

The trend is that these class action lawsuits will continue to develop the law on the depreciation of labor. I will try to keep readers abreast of the developments. Please use the search function of this blog to help locate the law for any specific state.

Remember that many policies now define actual cash value using very non-traditional methods. Why regulators are approving these forms, which usually allow insurers to reduce payments owed for traditional concepts of actual cash value, is beyond me and simply wrong.

Thought For The Day

The bitterness of poor quality remains long after the sweetness of low price is forgotten.
—Benjamin Franklin

1 Noteboom, T. A., & Thomson, W. D. (2022/Winter). Belaboring Depreciation: The “Labor Depreciation” Class Action Tidal Wave. The Brief, 51(2), pp. 50-57. Available online, subscription required:
2 Glasner v. American Economy Ins. Co., No. 21-cv-11047, 2024 WL 1018448 (D. Mass. Mar. 8, 2024).

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