A House is not Built by Magic

Posted on May 21, 2021 by Barry Zalma

Depreciation of Labor & Materials is Needed to Determine ACV

I have argued against those courts who claim insurers, when determining, ACV, should only depreciate materials and not labor. To reach such a conclusion those courts need to conclude that a house is built magically by materials only that never require the labor of a person to bring those materials together to make a home. In Thomas Accardi v. Hartford Underwriters Insurance Company, No. 42A19, 373 N.C. 292, 838 S.E.2d 454, Supreme Court of North Carolina (February 28, 2020) the Supreme Court ruled with logic and common sense when asked to rule that ACV can only be determined by depreciation of materials and not the labor required to complete a repair.

FACTS

Plaintiff owns a home in Fuquay Varina, North Carolina that was damaged in a hailstorm on or about 1 September 2017. The storm caused damage to the roof, siding and garage of plaintiff’s home and required repair and restoration. At the time of the damage, the home was insured by defendant.

Plaintiff submitted a claim to defendant requesting payment for the damage to the home. Defendant confirmed the damage was covered under plaintiff’s policy and sent an adjuster to inspect the home on or about 26 September 2017. The adjuster inspected the property and prepared an estimate of the cost to repair or replace the damaged property. According to the estimate, plaintiff’s home suffered $10,287.28 in loss and damages. This estimate included costs for materials and labor to repair the home, as well as sales tax on the materials.

The terms of the policy provided that defendant would initially pay plaintiff the ACV. Once the item was repaired or replaced, defendant would settle the claim at RCV. In other words, defendant would reimburse plaintiff for any extra money paid to repair or replace the item, up to the RCV. While not defined in the base policy, the term ACV was defined in a separate endorsement limited to roof damage, which provided the following:

You will note your policy includes Actual Cash Value (ACV) Loss Settlement for covered windstorm or hail losses to your Roof. This means if there is a covered windstorm or hail loss to your roof, [defendant] will deduct depreciation from the cost to repair or replace the damaged roof. In other words, [defendant] will reimburse for the actual cash value of the damaged roof surfacing less any applicable policy deductible. (emphasis added)

In the current action, defendant calculated the ACV by reducing the estimated cost of repair by depreciation of property and labor, as provided in the limited endorsement. Thus, plaintiff’s total estimated cost of repair for the dwelling and other structures, $10,287.28, was reduced by the $500 deductible and depreciation in the amount of $3,043.92—which included the depreciation of both labor and materials. This resulted in plaintiff being issued an ACV payment of $6,743.36. According to plaintiff, in determining the ACV, defendant was required to separately calculate the materials and labor costs of repairing or replacing his damaged property and depreciate only the material costs, not the labor costs, from the total repair estimate. Based on this argument, plaintiff sought to represent a class of all North Carolina residents to whom defendant paid ACV payments, where the cost of labor was depreciated.

Defendant moved to dismiss for failure to state a claim contending that the plain meaning of ACV includes the depreciation of both labor and materials. The Business Court concluded that “the term ACV as used in [t]he [p]olicy is not ‘reasonably susceptible to more than one interpretation,’ and that the term ACV unambiguously includes depreciation for labor costs.” The Business Court determined that while the “definitions” section of the insurance policy does not provide a definition of the term “ACV,” the definition used in the roof coverage addendum sufficed. Thus, the definition from the roof coverage addendum should be read in harmony with the use of the term “ACV” throughout the policy. Regarding the term “depreciation,” as used in calculating ACV, the court determined that the term was unambiguous because the policy did not distinguish between depreciation of labor and depreciation of material costs.

To hold otherwise, the court stated, would be to read a nonexistent provision into the policy that excludes labor costs. In the court’s view, “it does not make logical sense to separate the cost of labor from that of physical materials when evaluating the depreciation of a house or its component parts,” when the value of a house is more than simply the costs of the materials used.

ANALYSIS

Courts outside of North Carolina are split on whether the term “depreciation” includes both labor and materials. Decisions from other jurisdictions, however, provide little guidance to this Court because the policy language in each case differs meaningfully, as do the insurance laws of each state.

The Supreme Court concluded that “Actual Cash Value,” as used in the policy, is not susceptible to more than one reasonable interpretation and the term unambiguously includes costs for the depreciation of labor. Although the base policy fails to define the term, the roof coverage addendum provides a definition that must be read in harmony with the remainder of the policy.

Neither is the term “depreciation” ambiguous. The policy language provides no justification for differentiating between labor and materials when calculating depreciation, and to do so makes little sense.

The value of a house is determined by considering it as a fully assembled whole, not as the simple sum of its material components. To conclude that labor is not depreciable in this case would “impose liability upon the company which it did not assume,” and provide a benefit to plaintiff for which he did not pay.

The Supreme Court of North Carolina refused to do so and concluded that the insurance policy at issue unambiguously allows for depreciation of the costs of labor and materials.

ZALMA OPINION

Until technology creates a method to build a home without the labor of any human when determining ACV by using the common technique of determining replacement value and then depreciating that cost to reach ACV, it only makes sense to depreciate the full cost of the repair or replacement. Since building a house or repairing a roof without labor is impossible the North Carolina Supreme Court’s decision is obvious and those that rule labor cannot or should not be depreciated are illogical and a means to punish an insurer by making insurers pay a benefit it did not assume and for which the insured did not pay.

? 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at https://www.zalma.com and [email protected].

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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