Recently, Minnesota’s highest court ruled in Wilcox v. State Farm Fire & Cas. Co. on whether or not labor can be depreciated in determining Actual Cash Value (ACV). Answering a certified question from the United States District Court of Minnesota, the Minnesota Supreme Court held that “[w]hen a homeowner’s insurance policy does not define the term ‘actual cash value’ or otherwise state whether embedded labor costs are depreciable for the purpose of calculating actual cash value, the trier of fact may consider embedded-labor-cost depreciation when such evidence logically tends to establish the actual cash value of a covered loss.”
The Wilcox court noted that Minnesota uses the “broad evidence rule” to define ACV when the policy is silent in defining ACV. Under the broad evidence rule, a court can consider “every fact and circumstance that would logically tend to the formation of a correct estimate of the loss.” These factors may include, but are not limited to the original cost of the property, the market value of the property at the time of the loss, the loss of reconstruction, the cost of removing debris, the amount of salvage, the potential remaining use of the property and opinions regarding the value of the property from experts. Given the preference for the broad evidence rule by Minnesota’s Supreme Court, the Court held it only made sense that depreciation of labor be another factor that can be taken into account when valuing ACV.
The Wilcox decision will provide further clarity for other jurisdictions on the issue of whether labor can be depreciated. Additionally, this decision shows how critical a jurisdiction can be when it comes to the factors that can be used in valuing a loss. The Arkansas Supreme Court recently held that depreciating labor in calculating ACV violates public policy, even if the policy itself suggests labor can be depreciated. Such a ruling is undoubtedly at odds with the Wilcox decision. To that end, the nuances of each jurisdiction must be carefully examined prior to valuing a loss.
As this case shows, many property insurance policies provide for payment of a claim on an ACV basis, at least until the damaged property is repaired or replaced. However, many policies do not contain a definition of ACV. As an aid, Tressler has a 50 State Survey on Methods of Calculating Actual Cash Value of a Claim, examining how courts treat ACV in various jurisdictions.