Insurance: “Actual Cash Value” &  Depreciation

Walker v. Auto-Owners Ins. Co., No. Cv-21-0236-CQ (September 27, 2022) (j. King) https://www.azcourts.gov/Portals/0/OpinionFiles/Supreme/2022/CV210236CQ.pdf

HOMEOWNER'S POLICY THAT ALLOWS FOR DEPRECIATION IN CALCULATING “ACTUAL CASH VALUE” ALLOWS FOR DEPRECIATION OF MATERIAL COSTS BUT NOT LABOR COSTS AND “BROAD EVIDENCE” RULE APPLIES WHERE POLICY DOES NOT DICTATE OTHERWISE

Class action by Auto--Owners homeowner's policyholders against Auto-Owners claiming plaintiffs' property damage claims were underpaid—should not have included depreciation of labor. Auto Owners defined "actual cash value [ACV] as replacement cost minus depreciation [RCLD] and included labor in the depreciation calculation. Case filed in United States Federal District Court in Arizona. The district court certified two questions to the Arizona Supreme Court:

1) When a homeowner's insurance policy does not define the terms “actual cash value” or “depreciation,” may an insurer depreciate the costs of both materials and labor in determining the actual cash value of a covered loss?; and

(2) Is the broad evidence rule applicable in Arizona such that an insurer and/or fact finder may consider labor depreciation as a pertinent factor in determining actual cash value?

The pertinent language I the policy states:  “If you do not repair or replace the damaged covered property, we shall pay the actual cash value of the property at the time of loss. Actual cash value includes a deduction for depreciation.” The Arizona Supreme Court held that this language allowed Auto-Owners to depreciate materials but that it did not meet the reasonable expectations of the consumer that the calculation would include depreciation of labor costs.

The court was very specific to narrow its holding's application to homeowner's policies with the same language as the Auto-Owner's policy at issue and answered the certified questions both in the negative based upon this language.  However, the court then went on to state that if the language in a homeowner's policy fails to adequately give guidance on the question of depreciation the “broad evidence” rule should be followed. The broad evidence rule allows the court to "consider every fact and circumstance which would logically tend to the formation of a correct estimate of the building's value, including the original cost, the economic value of the building, the income derived from the building's use, the age and condition of the building, its obsolescence, both structural and functional, its market value, and the depreciation and deterioration to which it has been subjected."