Minnesota Supreme Court allows jury to consider use of labor cost depreciation in determining actual cash value of a loss. Will Wisconsin Follow Suit?
Wisconsin law has long followed the “broad evidence rule” in property damage cases, allowing juries to consider virtually any type of probative evidence when determining the value of a loss. Wisconsin courts have not, however, addressed whether an insurer may include depreciation of labor costs when determining the “actual cash value” of a loss. A recent Minnesota case, however, could have persuasive value when Wisconsin is finally asked to resolve this issue.
In a decision favorable to insurers, the Minnesota Supreme Court recently ruled that when a homeowner’s insurance policy does not define the term “actual cash value,” it is for the trier of fact to determine whether labor costs included in the cost of repairing or replacing damaged property are depreciable when calculating the actual cash value of the property.
Wilcox v. State Farm Fire & Casualty Co. arose out of a hail loss. The policy in question stated that State Farm will pay “only the actual cash value at the time of the loss of the damaged part of the property” until the property has been repaired or replaced, at which time State Farm will pay the full repair or replacement cost. The policy did not define “actual cash value.”
After the hail loss, State Farm calculated the loss and included depreciation of embedded labor costs. The policyholder objected and filed a putative class action lawsuit, alleging that the practice breached State Farm’s duty to indemnify the policyholders for the actual cash value of the damaged property.
The Minnesota Supreme Court rejected the homeowners’ arguments, holding that the term “actual cash value” is not ambiguous and clarified that the issue before the court concerned what methods may be used to calculate the value of the loss. The court recognized that Minnesota uses the broad evidence rule, which “allows the trier of fact to weigh multiple relevant facts” to calculate the actual cash value of damaged property, did not specifically discuss or foreclose the possibility of embedded labor cost depreciation. Thus, depreciation of labor costs could be proper in determining the value of the loss, depending on the facts and circumstances of that particular case.
The Court took a pragmatic approach, stating that “it is not the rule of the judiciary to define best practices for appraisers without regard to the facts and circumstances of the case presented.” Rather, arguments about whether labor-cost depreciation is “logical … are best presented to an appraisal panel or via expert testimony before a jury.”
No Wisconsin appellate court has determined whether it is proper for an insurer to depreciate embedded labor costs in adjusting property claims. Whether Wisconsin courts would follow the Wilcox decision and allow a jury to determine whether depreciation of labor costs is properly included in the determination of the “actual cash value” of a given loss is unclear.
In Coppins v. Allstate Indemnity Co., the Wisconsin Court of Appeals reversed a trial court ruling that approved the insurer’s valuation of a property loss. In that case, the policy did not define “actual cash value.” The insurer argued that it used the “broad evidence rule” to determine the value of the loss, which is intended to determine the property’s market value. The court stated that just because an insurance “policy does not define ‘actual cash value’ does not mean the determination is some sort of free-for-all where an appraiser can utilize any calculation of his or her choosing.” Instead, the court stated that in the absence of a policy definition, insurers should use “standard definitions” such as those promulgated by the Wisconsin Office of the Commissioner of Insurance, which do not address depreciation of labor costs.
Since this issue is still undecided in Wisconsin, the Wilcox decision may prove to be persuasive precedent.