Years ago, there was a comedy ensemble variously called “The Dead End Kids,” “The East Side Kids,” and, finally, “The Bowery Boys.” (They were made famous in the 1938 Cagney/Bogart film, “Angels With Dirty Faces.”) The protagonist of the group was a character named “Slip” Mahoney, played by the actor Leo Gorcey. Slip would routinely butcher the English language, by saying things like, “Here’s a token of my depreciation.”
Depreciation often isn’t a “token” in property insurance claims, though. It can result in substantial reductions from the amount of a claim. Insurance companies can be fairly aggressive in calculating depreciation, and, in a recent case in Arkansas, an interesting question came up: Can the insurance company depreciate not only the value of the property, but also the value of the labor involved in restoring the property?
The case, Shelter Mut Ins. Co. v. Goodner, involved damage to a mobile home, and while the case didn’t involve big money in the scheme of things, it involved an important issue. The carrier estimated the total restoration cost to be about $10,000, but deducted $3397.24 for depreciation. The deduction for depreciation included depreciation of both materials and labor. The carrier’s in-house counsel, in an affidavit submitted to the Court, explained: “The same amount of depreciation (expressed as a percentage of its full repair or replacement cost) is applied to both the labor and materials required to repair or replace that damaged component.” In other words, there was no separate formula for labor depreciation.
The Arkansas Supreme Court, quoting prior authority, refused to allow the carrier to depreciate labor costs, writing as follows: “Labor…is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value over time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of depreciating the value of labor is illogical.”
In ruling against the carrier, the Court also emphasized the need to fulfill the basic purpose of insurance: “It is important to keep in mind that indemnity is the basis and foundation of all insurance law. The objective of indemnity is to put the insured in as good a condition, as far as practicable, as he would have been in if the loss had not occurred, that is to reimburse the insured for the loss sustained, no more, no less. To properly indemnify [the policyholder], [the carrier] should pay him the actual cash value of the [damaged property], depreciated for wear and tear, plus the cost of [its] installation.… Allowing 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.”
In short, even though the policy specifically stated that labor would be depreciated in calculating actual cash value, the Court held that depreciating labor violated public policy, and would not be allowed.
One of the justices on the panel filed a sharp dissent, on the ground that policyholders and insurance companies are free to contract as they see fit, and that policies should therefore be enforced as written. (This, of course, is a fiction. Most insurance policies are preprinted forms containing an impenetrable thicket of insurance jargon, and few policyholders – individual or corporate – are in a position to analyze the language and to anticipate every coverage situation that may arise.) The dissenting justice wrote in part: “This is not an area of paramount public concern where the court should offend traditions of separation of powers and create public policy. The majority rewards [the policyholders] by giving them the benefits of an insurance policy that they declined to purchase…[The parties] were free to contract as to policy terms…Today there is a vast marketplace of insurance providers and policies. Some providers and some policies provide greater restrictions and exclusions than others.”
Here are some takeaways from this case. First, just because the carrier prints a number on a piece of paper doesn’t mean you have to accept it. I’m not necessarily advocating filing coverage litigation (which is expensive and energy-draining), but I am advocating questioning all calculations and assumptions with objective data. (Note the Court’s pointed questions: what objective data exists justifying the depreciation of labor costs?) Second, replacement cost coverage is better for you and your company than actual cash value coverage, because ACV coverage takes into account depreciation, while replacement cost coverage does not. So always try to get replacement cost coverage. And finally, this case illustrates why litigation is always a last resort. You have two written opinions in the same case in which two different judges looked at the same fact pattern and policy language and reached diametrically opposed conclusions. Lesson: Whenever you go to court, you’re gambling.
(By the way, it’s a bit difficult for me to understand why the carrier would have spent the time and resources to appeal a $10,000 case. The cost of the appeal surely dwarfed the amount claimed. I guess the carrier’s representatives felt that in a smaller case, they’d be dealing with less experienced counsel, and might be able to create good law for themselves. Oops.)
You can read the full decision here.