(Article from Insurance Law Alert, January 2016)
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In a plurality decision, the Supreme Court of Arkansas ruled that state law prohibits including the depreciation of labor costs in calculating the actual cash value of a covered loss even where a policy provision expressly allows for such depreciation. Shelter Mut. Ins. Co. v. Goodner, 2015 WL 8482788 (Ark. Dec. 10, 2015).
The property policy at issue provided that, in the event of a covered loss, the insurer would pay the actual cash value of damaged property. Actual cash value is defined as “total restoration cost less depreciation.” The policy defines depreciation as “the amount by which any part of the covered property . . . has decreased in value since it was new,” and explicitly provides that “[w]hen calculating depreciation, we will include the depreciation of the materials, [and] the labor . . . .” In accordance with this provision, the insurer issued payment to the homeowners that reflected total restoration costs, less the policy deductible and a deduction for the depreciation of material and labor costs. The homeowners filed suit seeking a declaration that the depreciation clause violated public policy. A trial court agreed and granted the homeowners’ summary judgment motion. The Supreme Court affirmed.
In finding the policy provision unenforceable as against state law, the court relied solely on a prior decision in which the term “actual cash value” was undefined and thus deemed ambiguous. Adams v. Cameron Mut. Ins. Co., 430 S.W.3d 675 (Ark. 2013). Notwithstanding this significant distinction, the Shelter Mutual court ruled that Adams was controlling state law that prohibited the depreciation of labor costs in calculating actual cash value.
As the dissent noted, the plurality’s reliance on Adams is curious because there, the court answered a certified question that addressed whether labor cost depreciation could be included in actual cash value calculation when the term is undefined and therefore deemed ambiguous, which was not the case here. The dissent also took issue with the trial court’s conclusion that allowing for the depreciation of labor costs violated public policy, noting that “there is no statute on the depreciation of labor” nor any interference with public welfare that would warrant “the unprecedented step of creating public policy in the absence of legislation.”