Introduction

When an insured has a property loss, he expects his insurance company to restore him to his preloss condition. With replacement cost policies this is readily done. Some policies however are insured on an actual cash value (ACV) basis. In these policies, the property is depreciated based on age and wear, and the insured is compensated on that basis. One issue that comes up frequently is the labor necessary to make the repairs. The insured has damage to his roof; his roof is ten years old with a twenty-year life span, so the insured is going to be paid 50 percent of the value of a new roof. But what about the labor involved in repairing or replacing that roof? Should the labor be depreciated?

Labor is not a tangible item the way a roof is; you don't buy labor in a package, labor is the effort and skills used by a workman to repair or replace the property. The value of that labor doesn't depreciate over time, if anything it appreciates. Labor is a service and not a product that loses value as it ages.

In the case law of the past decade, courts have tended to rule in favor of insureds when neither "actual cash value" nor "depreciation" is clearly defined in the policy. Most states have established case law, if not actual law, that ambiguities in insurance contracts must be construed in favor of the insured. The key question in many cases centered on whether labor depreciation was permitted under policies that did not define "actual cash value."