It is a well-settled principle that the plain language of insurance policies prevail. In coverage disputes, it is rare to see a court purposefully ignore the application of unambiguous policy language. The Arkansas Supreme Court, however, recently ignored specific contract language, holding it is against public policy to depreciate labor in calculating actual cash value (ACV), even if the parties bargained for a policy allowing for the depreciation of labor.

In Shelter Mut. Ins. Co. v. Goodner, the Goodner family purchased a Mobile Homeowners Insurance Policy from Shelter Mutual Insurance Company (Shelter). The policy provided that, in a covered loss, Shelter would pay “the actual cash value of all the damaged parts of the covered property.” The policy defined “actual cash value” as “total restoration cost less depreciation.” The policy also included a methodology for calculating depreciation, which expressly stated that labor was depreciable.

The Goodners cited to a prior Arkansas Supreme Court decision, Adams v. Cameron Mut. Ins. Co., in arguing that it is against public policy to depreciate labor. Shelter attempted to distinguish the Goodners’ predicament from that presented in Adams. Whereas in Adams the policy neglected to define “actual cash value,” the Goodners’ policy both defined ACV and also stated that labor could be depreciated.

The Court ultimately ruled in favor of the Goodners and held labor can never be depreciated, regardless of what the policy says. Of importance, the Court noted that “an insurer may contract with its insured upon whatever terms the parties may agree, so long as the terms are not contrary to…public policy.” The Court cited an Oklahoma Supreme Court decision, Redcorn v. State Farm Fire & Cas. Co., reasoning that while property itself can be depreciated because of “wear and tear,” the same cannot be said of labor. According to the Arkansas Supreme Court, any holding allowing for the depreciation of labor would thus be “illogical” and against public policy.

This holding demonstrates a situation where a court can ignore the policy language in order to achieve a certain outcome. It remains to be seen whether other states will follow in Arkansas’ footsteps in disallowing the depreciation of labor.