The Arkansas Supreme Court was asked a certified question by the federal district court: In determining the "actual cash value" of a covered loss, may the insurer depreciate the costs of labor when the term "actual cash value" is not defined in the policy? Adams v. Cameron Mut. Ins. Co., 2013 Ark. LEXIS 475 (Ark. Nov. 21, 2013).

   The insureds' policy with Cameron provided that a covered loss would be paid based on actual cash value, rather than replacement value. The policy did not define "actual cash value." 

    The insureds' home was damaged by a tornado. Cameron's adjuster valued the loss at $48,647.04. Included within the adjustment were certain labor-only services, such as the removal of roof decking, siding, and carpet and vinyl flooring. The depreciation of the materials and labor necessary to make the repairs was calculated as $8,364.66. The insureds signed a Proof of Loss stating that the total amount claimed under the policy was $39,204.88.

   The insureds then filed a class action suit in federal court asserting that Cameron's depreciation of labor-only costs resulted in the insureds' receiving payment for their loss in an amount less than what they were entitled under their policy. They alleged the depreciation factor to the labor portion of repairs was improper and not allowed under the policy. 

   Before the Arkansas Supreme Court, the insureds argued that the term "actual cash value" was ambiguous. Because depreciation applied to physical materials and not labor, it was unreasonable to assume that labor would be included in depreciation when calculating actual cash value. Cameron, on the other hand, argued that if it was required to pay the full labor costs associated with the loss, the insureds would be placed in a better position than that agreed to by Cameron and than the insureds were in before the loss.

   The court found the term "actual cash value" ambiguous. Labor was not logically depreciable. Therefore, the costs of labor could not be depreciated when determining the actual cash value of a covered loss when the policy did not define the term "actual cash value."