Originally published by Chip Merlin.
The Arkansas Supreme Court ruled last week that depreciating labor is against public policy when calculating the actual cash value of a loss.1 This was despite insurance policy language permitting the practice. This will undoubtedly generate class action lawsuits against insurers engaged in this practice and cause some claims managers to question if they should continue with this practice.
The policy defined “actual cash value” to mean “total restoration cost less depreciation.” The policy defined “depreciation” as follows:
Depreciation means the amount by which any part of the covered property which must be replaced has decreased in value since it was new. The condition, age, extent of use, and obsolescence of the property will be considered in determining depreciation. When calculating depreciation, we will include the depreciation of the materials, the labor, and the tax attributable to each part which must be replaced to allow for replacement…
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