Labor Costs Not Depreciable In 1st-Party Property Claims in Ohio

On March 18th, the United States Court of Appeals For The Sixth Circuit issued an opinion wherein it determined an Ohio insurer may not “deduct the cost of labor as part of calculating ‘depreciation’ to arrive at its net payment” for the cost to repair or replace damaged property. The case of Perry v. Allstate Indemnity Company arises from a claim for water damage to the insured’s home. Both the insured and Allstate agreed the policy covered the loss and they also agreed on the estimate for replacement cost. They disagreed in their calculations for actual cash value (“ACV”).

Specifically, they disagreed as to whether it was permissible to depreciate labor costs for purposes of calculating ACV. The Allstate policy did not define “depreciation.” Allstate interpreted the policy’s use of the word “depreciation” to include the cost of both materials and labor. The insured agreed “depreciation” included the cost of materials, but argued the policy was ambiguous as to whether “depreciation” included labor costs. At trial, Allstate filed a motion to dismiss for failure to state a claim, arguing it paid the claim in accordance with the policy terms and conditions. The trial court agreed and granted the motion.

The insured appealed and the Appellate Court reversed. The Appellate Court noted “the Ohio Supreme Court has not spoken on [the] issue” and relevant decisions of Ohio’s lower courts were inconclusive. The Appellate Court found only two (2) decisions from different Ohio trial courts which “addressed the precise question of depreciating labor costs in calculating ACV [and they] came to opposite conclusions.”

The Appellate Court determined the term “depreciation” in Allstate’s policy was ambiguous and the insured’s interpretation (“that in calculating ACV depreciation does not include labor costs”) was “a fair reading of an ambiguous term.” Construing the ambiguity against Allstate, the Appellate Court held “as a matter of law that it was improper for Allstate to depreciate labor costs to arrive at its net payment” for damage to the insured’s home.

We understand this decision may have a significant impact on the adjustment of property claims in Ohio. Moving forward, there will likely be questions as to how this decision applies to different policy language or in the context of a claim other than one for residential water loss. We encourage you to contact us to proactively discuss the potential impact of this decision on you and your company.

Authored by:  Jason P. Walker, Esq.
[email protected]com