A recent South Carolina Supreme Court decision addressed a common, and hotly disputed, question that arises in the handling of first-party property claims. The Supreme Court held that even though a homeowner’s insurance policy does not define the term actual cash value (ACV), the insurer may nonetheless depreciate the cost of both materials and labor when determining the ACV of a covered loss when the estimated cost to repair or replace the damaged property includes both materials and “embedded” labor components.
In Butler v. Travelers Home & Marine Ins. Co., the homes of both Miriam Butler and Joseph Stewart were damaged in separate fires. Butler and Stewart each possessed homeowner’s insurance from subsidiaries of The Travelers Companies, Inc. (Travelers). Both Butler and Stewart chose to receive the ACV of the damages to their respective homes rather than repairing/replacing the damage. The question presented before the court was whether it was proper for Travelers to include labor costs in the depreciation calculation when the labor cost is “embedded” in the item of property.
Generally, when calculating ACV, insurers use one or a combination of three methods: (1) market value; (2) replacement cost less depreciation; and (3) the “broad evidence” rule. In Butler, Travelers chose to implement the “replacement cost less depreciation” method for calculating ACV. Under this method, Travelers established the actual cash value reimbursement by calculating the depreciation for both materials and labor, and subtracted both of those amounts from the replacement cost value to determine what they would offer to Butler and Stewart as ACV for their properties.
Another important concept implicated in Butler is the idea of “embeddedness.” The term “embedded,” as used in Butler, means that the labor costs are no longer separable from the cost of materials. The Butler Court stated that, “the fact the labor cost is embedded makes it impractical, if not impossible, to include depreciation for materials and not for labor to determine ACV of the damaged property … [r]ather, the value of the damaged property is reasonably calculated as a unit.” Thus, the court held that Travelers may include both material depreciation and labor depreciation when calculating ACV because “it makes no sense for an insurer to include depreciation for materials and not for embedded labor.” This case is helpful to guide insurers of property in South Carolina in properly handling first-party property damage claims.
If you have any questions about how this decision may impact you or your company, please contact: