For the past few years, I’ve been involved in several labor depreciation cases around the Southeast, including one right here in Tennessee against Auto-Owners. The threshold legal question in that case, Lammert et al. v. Auto-Owners Mutual Ins. Co., was whether an insurance company can depreciate the cost of labor when determining its actual cash value payment obligations. The Supreme Court’s answer was a resounding “No”.
The Lammert case was filed as a class action in federal court in Nashville, but Judge Crenshaw certified this critical legal question to the TN Supreme Court. Here is the exact question that Judge Crenshaw asked the Supreme Court to answer:
Under Tennessee law, may an insurer in making an actual cash value payment withhold a portion of repair labor as depreciation when the policy (1) 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 (2) states that “actual cash value includes a deduction for depreciation”?
In answering the question, the Supreme Court first explained the problem with an example, borrowing from a hypothetical we provided in our brief:
The following hypothetical illustrates the dilemma. Suppose that laminate flooring with half of its useful life remaining is damaged by a sewer backup and that the homeowner has an insurance policy providing that the insurance company will cover the actual cash value of damaged property, calculated by deducting depreciation from the replacement cost. Further suppose that it would cost $10,000 to replace the floor, with $5,000 in labor costs and $5,000 in material costs. If depreciation is deducted from material costs alone, then the actual cash value for the floor is $7,500. If depreciation is deducted from the total replacement cost, then the actual cash value of the floor is $5,000.
In the end, the Supreme Court’s based its decision on the general rule that any ambiguity must be construed in favor of the policyholder, and in light of the fact that the policy could be construed in two ways, the Court held as follows:
We conclude that the language regarding depreciation in the policies in question is ambiguous. Under Tennessee law, ambiguities in insurance contracts are strictly construed against the insurance companies and in favor of the insured. Therefore, with the insured’s interpretation controlling, labor may not be depreciated when the insurance company calculates the actual cash value of a property using the replacement cost less depreciation method.
This was a huge win for Tennessee policyholders. Millions of dollars have been shortchanged over the past several years, and this decision is the first step putting that money into the pockets of who it belonged to in the first place – – the policyholders.
A copy of the opinion can be downloaded here.