Recently the Tennessee Supreme Court held that in calculating actual cash value, depreciation was part of the calculation. Where the policy does not define what depreciation means, the insurance company may depreciate the cost of the materials used in a repair reconstruction, but not the cost of labor. See, Lammert v. Auto-Owners (Mutual) Insurance Co., 2019 WL 1592687 (Tenn. April 15, 2019). In the Lammert case, the Tennessee Supreme Court was asked by the Federal District Court to certify the following question:
Under Tennessee law, may an insurer, in making an actual cash value payment, withhold a portion of repair labor as depreciation when the policy (1) defines actual cash value as “the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss,” or (2) state that ‘actual cash value includes a deduction for depreciation.’
The court began its analysis by first looking at the insurance policy to determine if the policy unambiguously resolved the question. If the question was not resolved by the policy, the court would need to examine the parties’ competing interpretations to determine if they were reasonable. If both interpretations were reasonable, the policy would then be ambiguous and construed against the insurance company. However, looking at the language of the policy after considering both the insured and the insurance company’s view on the issue, the court determined that the policy was ambiguous because it did not state explicitly whether labor costs were depreciable. Notwithstanding this ambiguity determination, the court also found that the insured homeowners could reasonably construe the policies to apply depreciation only to those things that actually depreciate. The court found that the homeowners had contracted to have their homes restored to their condition just before the storms, or their value in money. The homeowners, therefore, should not bear any of the cost of installing new materials because that would deprive the homeowner of that for which they contracted for, i.e., being made whole as if the damage had not occurred.