The Minnesota Supreme Court considered a certified question from the the U.S. District Court regarding consideration of depreciating labor costs in determining the actual cash value of a loss. Wilcox v. State Farm Fire & Cas. Co., 2016 Min. LEXIS 50 (Minn. Feb. 10, 2016).
The insureds' home was damaged by hail. State Farm provided a written estimate that calculated the actual cash value of the loss. To estimate the actual cash value of the damaged property, State Farm first calculated the replacement costs of individual items, such as roof flashing, siding, fascia, gutters, and window screens. Next, State Farm subtracted the pre-loss depreciation of some, but not all, individual items. For example, State Farm depreciated the cost of removing and replacing certain materials, such as siding. State Farm did not depreciate the cost of the new siding separately from the cost of the labor required to install the new siding on the home. Instead, State Farm calculated the removal and replacement of the siding as a single cost, then depreciated the removal-and-replacement cost as a whole. The cost of labor to repair or replace the damaged property was referred to by the court as "embedded labor costs."
Suit was filed, alleging that State Farm's practice of depreciating embedded labor costs breached the duty to indemnify the insured for the actual cash value of the damaged property. The policy provided that State Farm would pay "only the actual cash value at the time of the loss of the damaged party of the property" until the property was repaired or replaced. Then State Farm would pay the full repair or replacement costs. "Actual Cash Value" was not defined by the policy, nor were the methods described for calculating actual cash value.
State Farm moved to dismiss the complaint. The magistrate judge concluded that labor depreciation was not permitted when the policy did not define "actual cash value" and recommended that the district court deny State Farm's motion to dismiss. The district court certified the question regarding depreciation of embedded labor costs to the Minnesota Supreme Court.
Minnesota adopts the broad evidence rule in calculating the actual cash value of a loss. The breadth of discretion provided to the trier of fact under the broad evidence rule was the best method to assure complete indemnity to the insured. The rule provided a flexible approach that considered several relevant facts such as the original cost of the property, the market value of the property at the time of loss, the cost of reconstruction, the cost of removing debris, the amount of salvage, and the potential remaining uses of the property. The jury could also consider opinions on value given by expert witnesses.
The broad evidence rule did not dictate whether labor was depreciable or not depreciable. Rather, embedded-labor-cost depreciation was one factor that the trier of fact could consider amoung other factors to determine the actual cash value of the damaged property.
Therefore, the court answered the certified question as follows:
When a homeowner's 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. Embedded-labor-cost depreciation, however, is only one of many factors to be considered by the trier of fact; and its relevance depends on the facts and circumstances of the particular case.
