On Behalf of | Nov 10, 2022 | Insurance Law

In response to a certified question from a federal district court, the South Carolina Supreme Court held in Butler v. Travelers Home & Marine Insurance Co., 858 S.E.2d 407 (S.C. 2021) that insurance companies were entitled to include depreciation of embedded labor costs in their calculations regarding actual cash value because, according to the Court, it made no sense to do otherwise.  In the abstract, the Court noted that RCV and ACV were simple concepts.  According to the Court, RCV was “simply the amount of money it would take to pay a contractor to repair or replace damaged structure, including costs for materials and labor.”  Describing ACV, the Court described ACV as “the amount of money a willing buyer would pay, and a willing seller would accept, in a transaction with no unnatural constraints,” or “what the structure was worth at the time it was damaged.”  The South Carolina Supreme Court also noted that RCV, as applied, was a straightforward calculation.  The Court stated that “[t]o calculate RCV, one determines the extent of damage and solicits bids to have the damage repaired or replaced.  The amount of RCV is thus determined by the market and is readily ascertainable.”  However, determining ACV was not quite that simple because there was no relevant marketplace for the buying and selling of “aged to partially deteriorated portions of homes,” the Court pointed to the example of a 15-year-old roof.  A 15-year-old roof was not available for purchase in the market, nor was there any market on which to sell it.  In that regard, an ACV value regarding the part of a home was “a fiction and [was] not possible to precise ascertation.”

Turning to the issue at hand, the depreciation of embedded labor costs, the Court noted that it took both material and labor to manufacture shingles and roofing nails.  By the time the shingles and roofing nails were sold to the roofer, the two had been combined and the roofer then paid one price for the finished product.  The process of bidding on the replacement of a roof the cost and the materials is initially separate from the cost of the labor.  But in the finished, completed roof, the two have become inseparable and the labor was embedded in the completed roof.  In that regard, when a homeowner paid for a new roof, the homeowner paid for the roof as a single unit.  As the Court noted, “[n]obody bargains for the purchase of nails by separating out how much the nail manufacturer spent on labor, as opposed to materials.”

The South Carolina Supreme Court concluded that the mere fact labor costs are embedded in the materials themselves made it impractical, if not impossible, to include depreciation for materials and not for labor to determine ACV of the property damage.  The value of the damaged property was reasonably calculated as a unit.  Therefore, it made no sense for an insurance company to include depreciation for materials, and not for embedded labor.