Actual cash value and depreciation of labor on homeowner's policies.

Author:Peterman, Jessica

LaBrier v. State Farm Fire & Casualty Company, 147 F. Supp. 3d 839 (W.D. Mo. 2015)


    There are approximately eighty-seven million homeowners in the United States. (1) Although not every homeowner carries insurance coverage, it is estimated that 97% do. (2) That means there are approximately eighty-five million homeowner insureds in the United States. Property and casualty insurance companies are now facing the "next big wave" of class actions regarding depreciation on homeowner's policies. (3) Specifically, policy language referring to labor depreciation and the actual cash value ("ACV") of that labor is currently is currently being litigated all across the country. (4) Courts in Alabama, Arkansas, Kentucky, Missouri, Oklahoma, and Pennsylvania are currently reviewing this issue or have already done so. (5) State Farm Fire and Casualty Company ("State Farm") has about 20% of the national market share in homeowner's insurance. (6) State Farm's homeowner's claims payouts in 2015 were around twelve billion dollars. (7) Although the exact number of disputed claims dealing with this issue is unknown, it is safe to assume that the exposure to the entire insurance industry is at least in the hundreds of millions of dollars. (8) Needless to say, this is a huge issue for property and casualty insurers around the country.

    This Note will examine the arguments concerning the definition of ACV and whether labor can or should be included in the ACV depreciation calculation in Missouri. In addition, this Note will review case law on this issue around the country and the impact of these holdings on insurance companies and consumers.


    This case came before the U.S. District Court for the Western District of Missouri on diversity jurisdiction grounds; the defendant, State Farm, filed a motion to dismiss for failure to state a claim. (9) Amanda LaBrier owned a home insured by State Farm. (10) The home was damaged in a hail storm, which was a covered loss under her homeowner's policy. (11) LaBrier's homeowner's policy was a "replacement cost" policy. (12) These types of policies involve a two-step payout. (13) Prior to the repair, a payment is made based on the ACV of the damaged property at the time of the loss. (14) After the repair, a second payment is made to cover the additional amount the insured actually and necessarily spent to repair or replace the damaged property. (15)

    In the case at hand, a State Farm claims adjuster assessed damages to LaBrier's home at $8087.57. (16) This cost represented the total cost of repair, including labor, materials, and sales tax on the materials. (17) The adjuster then subtracted $1421.00 for the deductible and $2009.79 for depreciation, leaving a total payout of $4657.28. (18) In calculating the depreciation, State Farm included certain types of labor costs. (19) "Mixed" labor costs, which are costs representing both labor and materials, were included in the depreciation cal-culation. (20) "Pure" labor costs, which do not include the cost of materials, were not included in the depreciation calculation. (21) For example, certain labor costs, such as general contractor profit and overhead, as well as debris removal, are pure labor costs that an insured must "incur" in order for the insured to be compensated for them. (22) The insured cannot "incur" those costs unless the repairs have actually been made. (23) Therefore, they are not included in an ACV estimate.

    The State Farm policy did not define ACV, nor did it mention labor costs when defining depreciation. (24) However, in the estimate given to LaBrier, a definition of ACV was provided that stated ACV is "[t]he repair or replacement cost of the damaged part of the property less depreciation and deductible." (25) The estimate defined depreciation as "[t]he decrease in the value of property over a period of time due to wear, tear, condition, and obsolescence. A portion or all of this amount may be eligible for replacement cost benefits." (26)

    LaBrier alleged that State Farm improperly applied a deduction for depreciation to the labor costs in the estimate and thus breached its obligations under the policy. (27) LaBrier sought to represent a class of insureds whose payments were reduced by State Farm for labor depreciation dating from March 30, 2005, to the end of trial. (28) To illustrate mathematically what LaBrier was requesting, consider the following example: under normal conditions, if the replacement cost of a roof is $15,000, the standard lifetime of a roof is fifteen years, and the age at loss is ten years old, the actual cash value would be $5000 ($15,000 * [15-10]/15). That is only the basic calculation; the condition of the roof may cause an adjuster to further revise that number up or down. (29) For the sake of simplicity, further assume that the depreciated amount ($10,000) includes both the labor costs and the materials, at 50% each ($5000 for labor and $5000 for materials). LaBrier would claim that the $5000 depreciated amount that represents labor costs should not have been depreciated at all. (30) The actual cash value, according to LaBrier, should be $10,000 and not $5000. (31) LaBrier was seeking a refund of the difference between the actual cash value that includes the labor costs versus the actual cash value that does not include the labor costs. (32) In the case at hand, the actual amount of depreciation totaled $2009.79. (33) Some of that amount included labor costs. (34) LaBrier is seeking a refund of those labor costs. (35)

    State Farm made a motion to dismiss for failure to state a claim, listing several arguments in response. (36) First, State Farm argued that LaBrier's breach of contract claim failed because LaBrier did not allege enough facts to show the ACV of the insured loss. (37) State Farm believed that ACV means the fair market value of the home before and after the loss, whereas LaBrier contended that ACV means replacement cost less depreciation. (38) State Farm argued that "replacement cost minus depreciation... may or may not reflect the fair market value of the property before and after the [] loss." (39) State Farm also stated that the breach of contract claim should be dismissed because LaBrier did not state whether the damaged property was actually replaced. (40) According to State Farm, if LaBrier replaced the damaged property, then she would be entitled to a payment that compensated her for any amount previously withheld as depreciation. (41)

    State Farm alleged that Missouri case law defined ACV to mean the fair market value of the home before and after the loss. (42) State Farm then claimed that even if ACV means replacement cost less depreciation, LaBrier's claim failed because labor was properly depreciated. (43) By contrast, LaBrier pointed to other out-of-state cases that reached the opposite conclusion. (44) State Farm argued that LaBrier's interpretation was unreasonable because it allowed LaBrier to get replacement cost for labor, even though LaBrier did not repair the roof. (45) State Farm noted that this kind of policy could create a windfall for insureds. (46) For example, an insured with a roof that has a thirty-year life expectancy that was thirty years old at the time of the loss would get thousands of dollars in labor costs, which would put him or her in a much better position than before the loss occurred. (47)

    After examining both parties' positions, as well as the case law around the country, the district court held that, while State Farm's interpretation of ACV and depreciation of labor may be "more reasonable," LaBrier's interpretation is not unreasonable. (48) Therefore, State Farm's motion to dismiss was denied. (49) As of the publication of this Note, this case has been certified as a class action, which is currently under review by the Eighth Circuit, and a trial date is pending. (50)


    ACV coverage has existed in the United States since at least 1849. (51) In Missouri, ACV coverage dates back to at least 1919. (52) In Joyce v. St. Paul Fire & Marine Insurance Co., the court stated:

    The burden of proof was upon plaintiff to show the actual cash value of the property destroyed at the time of the fire in question... in case there had been deterioration in the value of the property between the time it was insured and the time of the fire. (53) Traditionally, insurers have provided two different types of property insurance for homeowners. one is the ACV policy, and the other is a replacement cost policy. (54) Both types of policies are typically subject to a maximum limit of coverage. (55) The most prominent form of homeowner's coverage is currently a hybrid between the two types of policies. (56) Coverage is first provided on an ACV basis until the repairs are completed. (57) Then, a supplemental payment is made so the total cost of the repair or replacement is paid, less the deductible. (58)

    In Missouri, the case law and statutory law relating to ACV and depreciation are sparse. There is no precedent in Missouri that provides a controlling definition of ACV, and the statutory law deals only with homeowners' claims caused by fire. (59) Missouri Revised Statutes sections 379.140 and 379.150 address the assessment of damage done to a property when a loss is caused by fire. (60) Section 379.140 states that "the measure of damage shall be the amount for which the same was insured, less whatever depreciation in value," which clearly allows depreciation. (61) Section 379.150 states that insurers shall pay "a sum of money equal to the damage done to the property... so that said property shall be in as good condition as before the fire," which means that the insured should be paid a sum to put him or her back into the position he or she was in before the loss occurred. (62) These statutes apply only to claims caused by fire. (63) Three Missouri cases cite to these statutes: Wells v. Missouri Property Insurance Placement...

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