MISSOURI COURT OF APPEALS WESTERN DISTRICT
CYNTHIA FRANKLIN, ) ) WD84816 Respondent, ) v. ) OPINION FILED: ) LEXINGTON INSURANCE ) June 28, 2022 COMPANY, ) ) Appellant. )
Appeal from the Circuit Court of Jackson County, Missouri Honorable Susan Margene Burnett, Judge
Before Division Four: Cynthia L. Martin, C.J., Janet Sutton, J. and Laura Denvir Stith, Sp. J.
Lexington Insurance Company (Lexington) appeals the judgment of the Jackson
County Circuit Court concluding that it breached an insurance policy and awarding
damages to the insured. On appeal, Lexington contends the trial court erred in its
interpretation of the policy by applying the actual cash value settlement provisions, in
concluding that labor costs could not be depreciated when issuing an actual cash value
payment, and in concluding that the insured suffered damages. We affirm. On approximately May 14, 2016, a storm damaged the roof of Cynthia and Roger
Franklin’s 1 residence in St. Louis, Missouri, and water intruded into the home (the
property). Lexington insured the property by a homeowner’s insurance policy effective
October 1, 2015, to October 1, 2016.
Mrs. Franklin made a claim for the damage under the homeowner’s insurance
policy. Lexington accepted coverage and assigned an independent adjuster to prepare
an estimate for the necessary repairs to the property. Lexington provided the adjuster
a written claim assignment with instructions to estimate the actual cash value (ACV)
and replacement cost value (RCV) of the loss. Lexington instructed the adjuster to
“depreciate materials and sales tax only” when preparing his estimate for Mrs.
Franklin’s claim. (emphasis in original).
In mid-May 2016, a field adjuster from Lexington assessed the damage to the
property and prepared an estimate. The adjuster used the Xactimate software 2 to
calculate the claim’s RCV, depreciation, and ACV. However, contrary to Lexington’s
instructions, the adjuster depreciated labor costs when calculating the ACV of Mrs.
Franklin’s loss. 3
Through its software depreciation settings, Xactimate provided Lexington the
option to depreciate labor costs when calculating the ACV of a claim. 4 When the
1 Mr. Roger Franklin passed away in 2017 before Mrs. Franklin filed her lawsuit against Lexington. For the rest of this opinion, we will refer to the insured as Mrs. Franklin only. 2 A witness at trial testified that Xactimate is widely used by insurance companies in the United States. 3 In his estimate, the adjuster did not depreciate all categories of labor, including certain labor costs associated with roofing, gutters, and wallpaper. 4 To depreciate labor costs, an adjuster checks the boxes in Xactimate titled “Depreciate Non - Material,” “Depreciate Removal,” and/or “Depreciate Overhead and Profit.”
2 software applies depreciation to labor costs, the total amount of depreciation is
increased which then lowers the policyholder’s ACV payment.
The estimate provided that the RCV for the damages to Mrs. Franklin’s property
was $35,988.84. 5 From the RCV of $35,988.84, $8,915.52 of depreciation was
deducted, leaving an ACV total of $27,073.32. Mrs. Franklin’s $3,000 deductible was
subtracted from the ACV amount, leaving Mrs. Franklin a “net claim” of $24,073.32.
In July 2016, Lexington issued a payment of $24,073.32 to Mrs. Franklin and
her contractors. A July 7, 2016, letter to Mrs. Franklin further explained the payment.
The letter indicated that the payment included an “actual cash value payment” for
repairs that had been estimated but not yet completed, and the actual replacement costs
for other repairs that Mrs. Franklin had completed and for which she had invoices. The
letter advised Mrs. Franklin that she could “recover applicable depreciation for
dwelling/building items” if she “submit[ted] paid repair invoices or receipts, showing
that repairs/replacement have been completed.” 6
Mrs. Franklin completed some repairs to her property, and communicated this
information to Lexington. Periodically from October 2016, until the end of December
2016, a desk adjuster from Lexington attempted to follow-up with Mrs. Franklin and
requested additional information about the repairs. After no response, the desk adjuster
made the following claim note: “[N]o response to the repeated inquiries for the HB on
repairs. ALE paid and dmgs resolved for ACV. [C]losing claim[.]” Mrs. Franklin did
5 The RCV figure included items totaling $6,642.52, for invoices for “work already performed” that were unrelated to potential future repairs to Mrs. Franklin’s home. These items were not depreciated and are not the subject of dispute in this case. 6 The letter also indicated that if Mrs. Franklin intended to file a claim for withheld depreciation she needed to do so within 180 days of the loss, unless she requested an extension in writing.
3 not submit invoices, receipts, or other documentation for further pa yments from
Lexington, including any of the withheld depreciation. Lexington paid Mrs. Franklin
a total sum of $24,073.32.
In February 2018, Mrs. Franklin filed a petition in Jackson County Circuit Court
asserting that Lexington had breached the insurance contract. In her petition, Mrs.
Franklin agreed that ACV could be calculated by “estimat[ing] the cost of repairing or
replacing the damaged property, and then . . . subtract[ing] depreciation,” and that “it
was appropriate [for Lexington] to ‘depreciate materials’ when calculating the actual
cash value.” Mrs. Franklin contended that Lexington breached its contractual
obligations by paying her less than the ACV amount to which she was entitled by
withholding depreciation from the labor costs. Mrs. Franklin requested that the court
enter judgment in her favor in the amount of the depreciated labor costs.
Lexington filed a motion for summary judgment, arguing that it had not breached
the contract and Mrs. Franklin had not suffered damages. The trial court denied the
motion, and the case proceeded to a bench trial. The parties stipulated that Lexington
had withheld $5,424.79 in estimated labor costs from the July 2016 ACV payment to
Mrs. Franklin, an amount that Xactimate confirmed. At trial, Mrs. Franklin confirmed
that she only sought recovery of the labor costs withheld as depreciation from her ACV
payment. Lexington’s desk adjuster confirmed that if she knew the field adjuster had
depreciated labor costs on Mrs. Franklin’s claim before the lawsuit was filed, she would
have requested a correction from the adjuster, and would have ultimately issued a
higher ACV payment to Mrs. Franklin.
4 Following the bench trial, the trial court entered judgment in Mrs. Franklin’s
favor for $5,424.79, plus all taxable court costs and applicable post-judgment interest.
The trial court concluded that Lexington breached the contract by improperly
withholding $5,424.79 in labor costs from the ACV payment, and the court disagreed
with Lexington’s contention that the minimum payment owed to Mrs. Franklin under
the policy was not ACV but rather the actual costs of repair. Lexington appeals.
Legal Analysis
Lexington raises three points on appeal. In its first point, Lexington contends
that the trial court erred in applying the policy’s ACV loss settlement provisions instead
of the policy’s replacement cost loss settlement provisions. In its second point,
Lexington argues it satisfied its payment obligations under the policy and the trial court
erred in finding that Mrs. Franklin suffered damages. Finally, Lexington argues that
the trial court erred in concluding that Lexington could not withhold depreciation on
estimated labor costs from Mrs. Franklin’s ACV payment.
We will first address whether the trial court erred in applying the policy’s ACV
loss settlement provisions instead of the replacement cost loss settlement provisions,
Lexington’s first point. Then we will turn to Lexington’s third and second points;
whether Lexington breached its contractual obligation when it deducted labor
depreciation from Mrs. Franklin’s ACV payment, and whether Mrs. Franklin proved
that she suffered damages due to Lexington’s breach.
We review court-tried cases under the standard set forth in Murphy v. Carron
and will affirm the judgment unless it is against the weight of the evidence, it is not
supported by substantial evidence, or it erroneously declares or applies the law. 536
5 S.W.2d 30, 32 (Mo. banc 1976). “Where . . . resolution of the case involves the
interpretation of an insurance contract, we give no deference to the circuit court as
contract interpretation is a question of law that we review de novo.” Blumer v. Auto.
Club Inter–Ins. Exch., 340 S.W.3d 214, 218 (Mo. App. W.D. 2011) (citing Jones v.
Mid–Century Ins. Co., 287 S.W.3d 687, 690 (Mo. banc 2009)).
Application of the Policy’s ACV Provision
Lexington argues in its first point that the trial court erred by applying the
policy’s ACV loss settlement provisions, because, it contends, the policy’s replacement
cost loss settlement provisions applied to Mrs. Franklin’s claim. 7 Lexington argues
that the policy required Mrs. Franklin to affirmatively choose ACV coverage, and that
the evidence demonstrated Mrs. Franklin consistently sought replacement cost
coverage. We disagree.
Generally, most property insurance policies have two forms of coverage – ACV
and RCV. Under ACV coverage, the primary purpose is indemnity, and insureds who
suffer a covered loss are entitled to be put back in the position they were in before the
loss. Therefore, ACV permits an insurer to depreciate the claimed loss. With RCV
coverage, the insured is entitled to receive a payment representing the ACV of the loss,
and if repairs are done, the insured is entitled to an additional payment representing the
7 We note that this assertion conflicts with Lexington’s memorandum in support of its motion for summary judgment, in which Lexington stated that it “ paid the actual cash value before repairs were completed,” and its statement of uncontroverted material facts in support of its motion for summary judgment in which it stated, “[t]he [e]stimate also showed a total amount of depreciation of $8,915.52 at the time of loss, resulting in an Actual Cash Value of $27,073.32.”
6 cost of the repair/replacement, to the extent that the cost exceeds the ACV payment.
See Allan D. Windt, 3 I NS . C LAIMS A ND D ISPUTES § 11:35 (6th ed. 2020). 8
Here, the loss settlement portion of the policy obligated Lexington to do the
following:
C. Loss Settlement
....
2. Buildings covered under Coverage A or B at replacement cost without deduction for depreciation, subject to the following:
a. If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation, but not more than the least of the following amounts:
(1) The limit of liability under this policy that applies to the building;
(2) The replacement cost of that part of the building damaged with material of like kind and quality and for like use; or
(3) The necessary amount actually spent to repair or replace the damaged building . . . .
b. If, at the time of loss, the amount of insurance in this policy on the damaged building is less than 80% of the full replacement cost of the building immediately before the loss, we will pay the greater of the following amounts, but not more than the limit of liability under this policy that applies to the building:
(1) The actual cash value of that part of the building damaged; or
(2) That proportion of the cost to repair or replace, after application of any deductible and without deduction for
8 This serves as just general background on two common forms of coverage, but the sp ecific language in each insurance policy would control a claim and may vary.
7 depreciation, that part of the building damaged, which the total amount of insurance in this policy on the damaged building bears to 80% of the replacement cost of the building.
d. We will pay no more than the actual cash value of the damage until actual repair or replacement is complete. Once actual repair or replacement is complete, we will settle the loss as noted in 2.a and 2.b above.
In this case, the policy provides for a “two-step” claim adjustment process. 9 In
the first step, Lexington determines the ACV of a covered loss and issues an ACV
payment. The second step of the process is for the policyholder to request additional
payment for RCV coverage. Here, the policy provides for RCV coverage only after
repairs are completed.
On this issue, the trial court concluded that when Mrs. Franklin made her claim
for property damage, she did not specify if she sought ACV or RCV coverage, and
Lexington never sought clarification or provided Mrs. Franklin with information to
make a “knowing election.” The court noted that in her lawsuit, Mrs. Franklin only
sought recovery under the policy’s ACV coverage provision.
Lexington attempts to reverse the policy’s two-step settlement process by
arguing that the default coverage was for replacement cost benefits unless Mrs.
Franklin affirmatively chose otherwise. We disagree. Nothing in the policy required
9 At trial, a witness summarized the two-step process in “most” homeowner’s policies: [W]hen a loss occurs, the first step is actual cash value. The insured has no —there's nothing that the insured has to do to receive an actual cash value payment. But in order to receive a replacement cost payment, there are conditions of the policy that must be met and those policy conditions are determined by the insurance company or the adjuster on the file. See also Arnold v. State Farm Fire & Cas. Co., 268 F.Supp.3d 1297, 1300 (S.D. Ala. 2017) (summarizing two-steps).
8 Mrs. Franklin to affirmatively state that she was filing a claim under the ACV coverage
provisions.
Lexington’s interpretation of the policy would mean that Mrs. Franklin was
obligated to seek an RCV payment upon repairing the damage to the property.
However, we conclude that this obligation is disclaimed in the policy, which notes,
e. You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to buildings on an actual cash value basis. You may then make claim for any additional liability according to the provisions of this Condition C. Loss Settlement, provided you notify us of your intent to do so within 180 days after the date of loss.
The policy indicates that “additional liability” refers to replacement cost benefits,
which are “the cost to repair or replace, after application of any deductible and without
deduction for depreciation[.]” The policy language, “may then make claim for any
additional liability” is permissive – the policyholder receives an ACV payment first,
and then may put the ACV payment toward repairs or not. The policyholder can then
choose whether to make an additional claim for payment under the RCV provision if
they make repairs. A Lexington claim supervisor also agreed at trial that, under the
policy, ACV payments are “no[-]strings[-]attached” payments, and an insured does not
need to make repairs to receive an ACV payment. Under the plain language of the
policy, Mrs. Franklin could choose whether to pursue an ACV or RCV payment, and
she was not required to make a claim for RCV if she undertook repairs.
The record establishes that Lexington sent Mrs. Franklin a single ACV payment
and that Mrs. Franklin did not seek an additional payment through the replacement cost
provisions in the policy. Lexington’s July 7, 2016, letter to Mrs. Franklin stated that
“an actual cash value payment” was issued to Mrs. Franklin and identified the ACV
9 amount of the claim. The letter indicated that the ACV amount was calculated by
subtracting the deductible and depreciation. The letter then advised Mrs. Franklin that
to “recover applicable depreciation for dwelling/building items[,]” (which necessarily
refers to replacement cost benefits), Mrs. Franklin needed to submit paid repair
invoices or receipts, showing the repairs were completed.
A Missouri federal court, interpreting Missouri law, rejected a n argument that
“policyholders were obligated to seek an RCV payment upon actually repairing or
replacing damage to their home and that the limitations applicable to the RCV payment
are equally applicable to an ACV payment.” Lafollette v. Liberty Mut. Ins. Co., 2017
WL 1026424 at *8 (W.D. Mo. Mar. 16, 2017). In Lafollette, the court concluded that
the following policy language (which is nearly identical to the policy language in this
case) “explicitly disclaimed” such an obligation:
d. You may disregard the replacement cost loss settlement provisions and make a claim under this policy for loss or damage to buildings on an actual cash value basis. You may then make claim within 180 days after the loss for any additional liability . . . .
Id. at *9. The court held that this provision made it the policyholder’s choice “whether
to pursue an ACV or RCV payment” and that
the ACV payment is not transformed into an RCV payment simply because the policyholder chooses to use her ACV payment to repair damage to her home, much less because the ACV payment was sufficient to cover the cost of repairs. If the policyholder chose not to seek the RCV payment under these circumstances, as the policy permitted her to do, the ACV payment is not effectively transformed into an RCV payment and subject to limitations only applicable to RCV payments.
Id.
Lexington correctly notes that Mrs. Franklin never submitted invoices, receipts,
or other documentation for further payments from Lexington. Mrs. Franklin was
10 entitled to accept only an ACV payment for the damage to her property, and the policy
did not require Mrs. Franklin to submit invoices or other documentation of repairs
unless she chose to proceed further under the RCV provisions of the policy. 10 The trial
court did not err in applying the ACV loss provisions of the policy. Lexington’s first
point is denied.
Labor Depreciation
Having decided that Mrs. Franklin only pursued an ACV payment under the
policy, we now turn to whether Lexington breached its contractual obligation to pay
ACV by depreciating labor costs from the payment it issued to Mrs. Franklin.
Lexington argues that the trial court erred in concluding that Lexington could not
withhold estimated labor costs as depreciation from Mrs. Franklin’s ACV payment
because, they contend, the policy and Missouri law permit calculating ACV in such a
manner. 11 Mrs. Franklin argues that Lexington could not withhold labor costs as
depreciation from the ACV payment because the policy is ambiguous on whether labor
costs may be depreciated, and the ambiguity must be construed against Lexington and
in her favor. Mrs. Franklin does not dispute that Lexington is entitled to depreciate the
cost of materials, but she argues that the depreciation of labor costs is inconsistent with
the principle of indemnity.
“The general rules for interpretation of contracts apply to insurance policies. ”
Blumer, 340 S.W.3d at 218 (citation omitted). When we interpret insurance policies,
10 Compare this situation with Kastendieck v. Millers Mutual Insurance Co. of Alton Ill., where we held that the insurer was not obligated to pay an insured any additional replacement cost payments when the insured did not submit proof that he repaired or replaced the property , and the policy language unambiguously stated the insurer “w[ould] pay no more than the actual cash value for the loss or damage until the actual repair or replacement is complete.” 946 S.W.2d 35, 40 (Mo. App. W.D. 1997). 11 Lexington’s point three.
11 we start with the language contained within the policy to determine its meaning.
Ferguson v. St. Paul Fire & Marine Ins. Co., 597 S.W.3d 249, 255 (Mo. App. W.D.
2019). When a term is defined in a policy, we will normally look at that definition and
nowhere else to ascertain its meaning. Id. at 256. “However, when terms are undefined
we give terms their ordinary meaning, which is the meaning that the average layperson
would reasonably understand . . . . ” Id. See also Burns v. Smith, 303 S.W.3d 505, 509
(Mo. banc 2010). To determine the ordinary meaning of a term, we can consult
standard English language dictionaries. Ferguson, 597 S.W.3d at 256 (citation
omitted).
“If the language is ambiguous, we resolve the ambiguity against the insurer-
drafter.” Arch Ins. Co. v. Sunset Fin. Servs., Inc., 475 S.W.3d 730, 733 (Mo. App. W.D.
2015).
An ambiguity arises when there is duplicity, indistinctness, or uncertainty in the meaning of words used in the contract. Language is ambiguous if it is reasonably open to different constructions and the language used will be viewed in the meaning that would ordinarily be understood by the layman who bought and paid for the policy.
Krombach v. Mayflower Ins. Co., Ltd., 827 S.W.2d 208, 210 (Mo. banc 1992). “[I]n
construing the terms of an insurance policy, this Court applies the meaning which
would be attached by an ordinary person of average understanding if purchasing
insurance and resolves ambiguities in favor of the insured.” Burns, 303 S.W.3d at 509
(citations omitted). This rule is the doctrine of “contra proferentem,” which provides
that ambiguities in contracts are construed against the drafter, and it is applied “more
rigorously in insurance contracts than in other contracts” in Missouri. Id.; see also
Mansion Hills Condo. Ass’n v. Am. Fam. Mut. Ins. Co., 62 S.W.3d 633, 638 (Mo. App.
12 E.D. 2001) (“When interpreting language of an insurance policy that is not defined,
courts must give a term its ordinary meaning unless it plainly appears that a technical
meaning was intended.”).
The dispute here is whether, in the absence of an express provision in the
insurance policy, Lexington could lawfully withhold labor depreciation from Mrs.
Franklin’s ACV payment. The trial court concluded that the policy was ambiguous on
the issue of withholding labor cost depreciation from an ACV payment, and that the
policy was silent on any definition for depreciation. The trial court construed the policy
against Lexington, as the drafter of the policy, and concluded the following:
The dictionary definition of the term “depreciation” primarily describes the concept of “depreciation” as being related to the tangible loss of value of property due to the physical deterioration and wear and tear of that item and not something intangible, such as labor costs . . . . An ordinary policyholder would not know what labor depreciation is or expect labor costs to be depreciated from an ACV payment.
The trial court concluded that depreciation of labor costs was not permitted in the
interpretation of ACV under this specific policy and Lexington breached the policy by
withholding estimated labor costs from the ACV payment issued to Mrs. Franklin.
Here, in the loss settlement portion, the policy provides:
b. . . . we will pay the greater of the following amounts, but not more than the limit of liability under this policy that applies to the building:
(1) The actual cash value of that part of the building damaged; or
(2) That proportion of the cost to repair or replace, after application of any deductible and without deduction for depreciation, that part of the building damaged . . . .
(emphasis added). The policy does not define “actual cash value” or “depreciation.”
However, “[u]nder Missouri law, ‘[a]ctual cash value means a depreciated sum, i.e.,
13 the difference between the reasonable value of the property immediately before and
immediately after the loss.’” In re State Farm Fire & Cas. Co., 872 F.3d 567, 573 (8th
Cir. 2017) (citing Porter v. Shelter Mut. Ins. Co., 242 S.W.3d 385, 390 (Mo. App. W.D.
2007), Wells v. Mo. Prop. Ins. Placement Facility, 653 S.W.2d 207, 210 (Mo. banc
1983), and Dollard v. Depositors Ins. Co., 96 S.W.3d 885, 889 (Mo. App. W.D.
2002)). 12
“While the term ‘actual cash value’ has an unambiguous meaning under Missouri
law—the difference in the fair market value of the damaged property immediately
before and after the loss—it is a value that must be estimated.” Id. at 574. Under an
actual cash value policy, the insured bears the share of the loss resulting from
deterioration. Id. “[A] reduction in the immediately-before value of the property must
be estimated.” Id. A jury must determine the conflicting estimates “unless the parties
agree as to the amount of the damage or have it determined by an appraisal method
agreed to in the policy.” Id. (citing Dollard, 96 S.W.3d at 890). “A ‘depreciation’
deduction is the most common, but not the only acceptable method of estimating the
reduced fair market value of the damaged property.” Id.
12 Wells involved Missouri statutes dealing with fire damage, sections 379.140-.145, .160, and section 379.150 RSMo 1978, and policies issued under the Missouri FAIR ( Fair Access to Insurance Requirements) Plan. Wells v. Mo. Prop. Ins. Placement Facility, 653 S.W.2d 207, 208 (Mo. banc 1983). In Wells, the court stated that “[t]he value of the property at the point immediately before the loss is, of course, equivalent to the actual value of the property at the time of the loss. Cost of repair is admissible as evidence of damage, but of itself it is insufficient to establish the amount of damage .” Wells, 653 S.W.2d at 214. The court concluded that an insured who chooses a cash payment is “ entitled under § 379.150. . . [to] a sum ‘equal to the damage done on the property’ . . . [which] our courts have long held . . . to be determined by the difference in value of the property immediately before and immediately after the loss.” Id. at 214 (citations omitted). In Dollard, we recognized that the reasoning in Wells extended beyond the statutory scheme for “policies issued under the Missouri FAIR Plan” and was “applicable to regular insurance policies, as well.” Dollard v. Depositors Ins. Co., 96 S.W.3d 885, 888 (Mo. App. W.D. 2002).
14 The Missouri Department of Insurance defines “actual cash value” as “the
replacement cost of property minus depreciation. (Actual [c]ash [v]alue can also be
determined by market value, if any.).” See Missouri Department of Insurance, Glossary
of Terms (alphabetical), https://insurance.mo.gov/consumers/glossary.php (last visited
June 13, 2022).
One dictionary definition of “depreciation” is “a loss in the value of property
due to physical deterioration and wear or to obsolescence and lack of adaptability [.]”
Depreciation, Merriam-Webster, https://www.merriam-webster.com/legal/depreciation
(last visited June 13, 2022). Sources from the insurance realm also confirm that
depreciation “is the amount an item has lessened in value since it was purchased, taking
into account age, wear and tear, market conditions, and obsolescence.” Richard J.
Cohen, et al., 5 N EW A PPLEMAN O N I NS . L AW LIBRARY E D . §47.04[2][a] (2020). “[T]he
principal definition attributable to [depreciation] refers to ‘physical deterioration.’” Id.
The Missouri Department of Insurance defines “depreciation” as “[p]hysical wear and
tear or technological or economic obsolescence.” See Missouri Department of
Insurance, Glossary of Terms (alphabetical),
https://insurance.mo.gov/consumers/glossary.php (last visited June 13, 2022).
Mrs. Franklin argues that labor could not be withheld as depreciation in her ACV
payment because the policy was ambiguous on the issue, and it must be construed
against Lexington. Lexington argues that the term “actual cash value” has an
unambiguous meaning in Missouri, and withholding depreciation on all estimated
replacement costs, including labor costs, is a reasonable method for it to calculate
actual cash value. No Missouri state court has resolved this specific issue. Courts
15 around the country are split on their approaches to the labor depreciation issue, with
some courts concluding that labor costs cannot be depreciated, and some concluding
the contrary. Because there is no conclusive controlling Missouri authority on this
specific issue, we can look to persuasive authority from other jurisdictions. We
conclude that in this case, depreciation, without a specific definition or provision in
the insurance policy to say otherwise, applies to physical deterioration and does not
include labor costs. 13
Generally, courts have used one of three methodologies to measure ACV
coverage in the absence of a contractual provision prescribing the method by which an
insurer will determine ACV coverage: (1) market value; (2) replacement cost minus
depreciation; or (3) the broad evidence rule. The market value method considers what
a buyer would give and what a seller would take for the property in the open market.
Replacement cost less depreciation provides full replacement cost reduced by
depreciation. The broad evidence rule provides that any evidence that logically tends
to establish a correct estimate of the value of damaged or destroyed property should be
considered in determining ACV at the time of loss. See J.A. Tyler, Annotation, Test or
Criterion of “Actual Cash Value” under Insurance Policy Insuring to Extent of Actual
Cash Value at Time of Loss, 61 A.L.R.2d 711 §5 (1958 & 2022 Cum. Supp.).
13 Other courts have come to a similar conclusion. See Perry v. Allstate Indem. Co., 953 F.3d 417, 423 (6th Cir. 2020) (applying Ohio law and concluding that insured’s interpretation of the undefined term depreciation was reasonable because “depreciation traditionally refers to value lost from physical wear and tear”); Dickler v. Cigna Prop. & Cas. Co., 957 F.2d 1088, 1099 (3d Cir. 1992) (applying New York law and holding “that, in the present context, depreciation is properly defined as physical deterioration” and acknowledging that while physical deterioration is not the only possible definition of depreciation, ambiguities must be construed in favor of the insured ); Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 179 (Tenn. 2019) (concluding that depreciation, “in its ordinary sense . . . applies to physical deterioration”).
16 As Missouri has no statute or regulation requiring an insurer to use a specific
one of these or other methods to determine ACV, the method used is a matter the parties
can agree to by contract. In this case, Lexington’s adjuster confirmed that Lexington
calculated Mrs. Franklin’s ACV as replacement cost less depreciation (RCLD) using
the Xactimate software. As we will discuss below, while cases applying the other
methods are relevant, the jurisdictions following the RCLD method of determining
ACV provide the most guidance in interpreting this contract.
One of the first and most widely cited appellate court opinions to address the
labor depreciation question was the Oklahoma Supreme Court in Redcorn v. State Farm
Fire & Casualty Co., 55 P.3d 1017 (Okla. 2002). In Redcorn, the insured’s roof was
damaged in a storm. Id. at 1019. The insured had a policy that provided for payment
of actual cash value at the time of the loss for damage to roof surfaces. Id. at 1018-19.
The insured received a payment for the actual cash value of the damage to the roof and
the payment included a deduction for depreciation of both materials and labor. Id. at
1019. The policy did not define “actual cash value” and it did not prescribe a method
for determining actual cash value. Id. The insured brought an action in federal court
contending that only the materials component of a roof replacement should be
depreciated. Id. at 1018. The insured argued that depreciating labor was inconsistent
with principles of indemnity, which seeks to place the insured in the same position as
if no loss had occurred. Id. at 1020. The insured reasoned that the insurer should not
be allowed to depreciate labor because if it were possible to purchase depreciated
shingles, the cost of the labor to install them on the roof would be the same as the cost
to install new shingles. Id.
17 The district court certified the question to the Supreme Court of Oklahoma, and
the court ruled 5-3 in the insurer’s favor. Id. at 1021. The majority stated that a “roof
is the product of materials and labor” and rejected the insured’s argument that
indemnity principles precluded labor depreciation. Id. at 1020-21. The Redcorn
majority noted that in Oklahoma, the “broad evidence rule” determined “actual cash
value.” Id. at 1020. Under that rule, all relevant evidence should be “considered in
determining a loss. A roof is the product of both materials and labor just as a building
is the product of both materials and labor.” Id. at 1021. Finally, the court explained
that the insured chose an ACV policy and he “insured a roof surface, not two
components, materials and labor. He did not pay for a hybrid policy of actual cash value
for roofing materials and replacement costs for labor.” Id. The majority believed that
the insured would be unjustly enriched if his arguments regarding labor depreciation
were accepted. Id.
Two judges filed separate dissents in the case. Id. One dissenter, joined by two
other judges, rejected the majority's premise that a roof is “a single product[,]” and that
a customer cannot “go to the lumber yard or the retail store and buy a roof.” Id. at
1022 (Boudreau, J., dissenting). This dissent viewed the roof as “a combination of a
product (shingles) and a service (labor to install the shingles).” Id. The dissent
explained that although the shingles themselves were “logically depreciable” because
they lose value due to wear and tear, “[l]abor, on the other hand, is not logically
depreciable.” Id. The dissenting judge further elaborated his reasoning as follows:
Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value over time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of
18 depreciating the value of labor is illogical. The image that comes to me is that of a very old roofer with debilitating arthritis who can barely climb a ladder or hammer a nail. The value of his labor, I suppose, has depreciated over time.
Id. The dissenter believed that the insurer needed to pay the insured the value of the
shingles, depreciated for wear and tear, plus the installation cost to properly indemnify
him. Id. at 1023.
Another judge, in a separate dissent, observed that before the damage, the
insured had a roof with sixteen-year-old shingles. Id. at 1023 (Summers, J.,
dissenting). After the damage, the insured was “contractually entitled to have on his
house sixteen-year-old shingles, or their value in money. He should not bear any of the
cost of installing them, because that would deprive him of that for which he contracted-
being made whole as if the damage had not occurred.” Id.
Since Redcorn was decided, state and federal courts have split on the issue, with
courts, in general, following the reasoning in the Redcorn majority or its dissents. We
briefly discuss below some of these cases that have concluded labor is not depreciable
in the absence of an express insurance provision allowing for it.
The Supreme Court of Arkansas considered the issue in Adams v. Cameron
Mutual Insurance Co., 430 S.W.3d 675 (Ark. 2013). In Adams, a tornado damaged the
insureds’ home. Id. at 676. The insureds’ policy did not define “actual cash value.”
Id. The insurer issued a payment that included both material and labor depreciation.
Id. The insured sued, alleging that the insurer breached the insurance policy by
applying depreciation to the labor portion of the repairs. Id. at 677. The court held
that the term actual cash value was ambiguous because it was “fairly susceptible to
19 more than one reasonable interpretation” and that labor is not logically depreciable,
agreeing with the Redcorn dissenting opinions. Id. at 678-79. 14
The Supreme Court of Tennessee considered the labor depreciation issue in
Lammert v. Auto-Owners (Mutual) Insurance Co., 572 S.W.3d 170, 172 (Tenn. 2019),
where two sets of insureds had homes that suffered storm damage. One insured had a
policy that defined actual cash value as “the cost to replace damaged property with new
property of similar quality and features reduced by the amount of depreciation
applicable to the damaged property immediately prior to the loss [.]” Id. at 173. The
other insured’s policy did not define actual cash value but the policy stated that “actual
cash value includes a deduction for depreciation.” Id. The parties agreed that under
both policies, the method used to calculate actual cash value was replacement cost less
depreciation. Id. Neither policy specifically mentioned labor costs. Id.
The court in Lammert quoted a Black’s Law Dictionary definition of
depreciation, 15 and ultimately concluded that, under the policies at issue, labor may
not be depreciated when the insurance company calculates the actual cash value using
the replacement cost less depreciation method. Id. at 174, 179. The court stated that
when both parties have presented “plausible interpretations of the policies,” the court
must adopt the interpretation that favors the insured. Id. at 178-79. The court stated
that because depreciation refers to physical wear and tear, it would be reasonable for a
14 Adams was subsequently superseded by statute. See A RK . C ODE A NN . § 23-88-106(a)(2) (2017) (“‘Expense depreciation’ means depreciation, including but not limited to the cost of goods, materials, labor, and services necessary to replace, repair, or rebuild damaged pro perty.”). 15 Black’s Law Dictionary defines depreciation as “‘[a] reduction in the value or price of something; specif[ically] a decline in an asset's value because of use, wear, obsolescence, or age .’” Lammert, 572 S.W.3d at 174 (quoting Black's Law Dictionary (10th ed. 2014)).
20 homeowner to understand that depreciation only applied to material goods that can age
and experience wear and tear. Id. at 178.
In Mitchell v. State Farm Fire & Casualty Co., 954 F.3d 700, 703 (5th Cir. 2020),
the Fifth Circuit, applying Mississippi law, held that an insurance policy that refers to
“actual cash value” without further definition was ambiguous and construed the
ambiguity against the insurer. In Mitchell, a storm damaged the insured’s home. Id.
at 703. The insurance policy initially paid ACV and then RCV if the repairs to the
home were completed within a specific time period. Id. at 706-07 n.6. Actual cash
value was defined by a Mississippi statute as “‘the cost of replacing damaged or
destroyed property with comparable new property, minus depreciation and
obsolescence.’’’ Id. at 704 (quoting M ISS . C ODE A NN . § 83-54-5(a) (2019)). The Fifth
Circuit used the following example to explain the difference between the insurer and
the insured’s definitions of ACV:
To understand the difference between the two parties’ proffered definitions of ‘‘Actual Cash Value,’’ we will take a hypothetical destroyed roof as an example. [The insured’s] interpretation of ‘‘Actual Cash Value’’ includes depreciation of only the material components of the roof. Suppose the hypothetical roof can be replaced for a cost of $5,000 in materials and $5,000 in labor—a $10,000 roof. Suppose that the destroyed roof was 10 years old and expected to last 20 years. Under [the insured’s] interpretation, the Actual Cash Value would be $7,500, because $2,500 would be deducted in depreciation (half of the cost of the materials). By contrast, [the insurer’s] interpretation of ‘‘Actual Cash Value’’ includes depreciation of both the materials and the labor in constructing the roof. Using the same example, [the insurer’s] interpretation would yield an Actual Cash Value of $5,000, because $5,000 would be deducted in depreciation (half of the total cost of replacing the roof).
Id. at 706. The Fifth Circuit noted that its task was to determine if the insured's
interpretation of “actual cash value” was a reasonable one—not necessarily the most
reasonable—because if it was, the insured’s interpretation must prevail. Id. at 706.
21 The court determined that the insured's interpretation of the policy, that only the
material components of the roof could be depreciated, was reasonable because it
restored her to the status she had at the moment before the loss. Id. at 706. The court
also concluded that the insurer’s interpretation of the policy, that both materials and
labor could be depreciated, was reasonable. Id. at 706-07. Ultimately, the court
concluded that the policy was ambiguous and held in the insured’s favor. Id. at 707.
In Sproull v. State Farm Fire & Casualty Co., 184 N.E.3d 203, 204 (Ill. 2021),
the Supreme Court of Illinois considered whether an insurer could depreciate labor
costs in determining the ACV of a covered loss when the policy did not define the term.
In Sproull, the insured suffered wind damage to his home, and submitted a claim to the
insurer. Id. at 205. Under the policy’s terms, the insurer initially paid ACV for the
loss, but if the insured completed repairs within two years, the insured would receive
an additional amount up to the full replacement cost or policy limit, whichever was
less. Id. The insured received an ACV payment that included a depreciation for labor.
Id. The insured alleged a breach of contract, claiming that he was underpaid in his
ACV payment when labor depreciation was deducted. Id.
The court in Sproull noted that “Illinois’ insurance regulations provide that the
‘actual cash value’ or ‘ACV’ of an insured, damaged structure is determined as
‘replacement cost of property at time of loss less depreciation, if any.’” Id. at 204. The
court observed that both the insurer and the insured offered reasonable interpretation s
of actual cash value and depreciation. Id. at 221. However, because the policy (and
the regulation it incorporated) was susceptible to multiple reasonable interpretations,
22 it was ambiguous, and the court was required to construe the policy against the insurer.
Id. The court reasoned:
[I]f depreciation is understood to mean the physical deterioration of something tangible . . . then the phrase “depreciation, if any” logically would not include the depreciation of intangible things. From the [insured’s] perspective, it would be [the insurer] that is adding language to the [Illinois insurance] regulation. [The insurer] would be reading the regulation as stating “replacement cost of property at time of loss less depreciation, if any, applied even to intangibles such as labor that do not deteriorate.” We believe that the policy and the regulation it incorporates are susceptible to multiple reasonable interpretations and are therefore ambiguous.
Id. at 217 (citations omitted). The court held that, in the absence of a policy definition
of actual cash value and with an Illinois insurance regulation defining actual cash value,
when calculating the ACV of a covered loss, property materials and structure were
subject to a reasonable deduction for depreciation, but depreciation could not be
applied to the intangible labor component. Id. at 221.
We recognize that cases around the country, both at the state and federal level,
arrive at the opposite conclusion, i.e., that labor can be depreciated in an ACV
payment. 16 However, in the absence of specific policy language allowing for it, or a
Missouri statute or insurance regulation providing for this practice, we are not
persuaded by the reasoning in those cases.
We conclude that the policy was ambiguous on whether it allowed Lexington to
depreciate labor when making an ACV payment to Mrs. Franklin. The fact that various
16 See, e.g., Graves v. Am. Fam. Mut. Ins. Co., 686 F. App'x 536 (10th Cir. 2017) (depreciable under Kansas law); Butler v. Travelers Home & Marine Ins. Co., 858 S.E.2d 407 (S.C. 2021); Accardi v. Hartford Underwriters Ins. Co., 838 S.E.2d 454 (N.C. 2020); Henn v. Am. Fam. Mut. Ins. Co., 894 N.W.2d 179 (Neb. 2017); Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780 (Minn. 2016).
23 jurisdictions have reached differing conclusions on this issue supports a finding of
ambiguity. See Harrison v. Tomes, 956 S.W.2d 268, 270 (Mo. banc 1997) (“divergent
conclusions reached by [other] jurisdictions is further evidence of [an] ambiguity”).
Lexington argues that Mrs. Franklin’s and the trial court’s view, that only some
of the replacement costs such as materials are depreciable, but not others such as labor,
is illogical, unreasonable, and too narrow an interpretation of the term “actual cash
value.” We disagree. A policyholder would not reasonably expect that an ACV
payment would be reduced by depreciation on estimated labor costs. This belief, that
labor does not depreciate, “is a plausible conception for a wealth of thoughtful,
knowledgeable judges, and it is even more so for lay insureds with no special
competence in property or insurance matters.” Arnold v. State Farm Fire & Cas. Co.,
268 F. Supp. 3d 1297, 1312 (S.D. Ala. 2017). If Lexington wished to depreciate labor,
it had the ability to include such a provision in its policy, but it did not do so. The
insurer, as the drafter of the policy, is in the better position to remove ambiguity from
the insurance policy. Burns, 303 S.W.3d at 512. Lexington’s argument regarding labor
depreciation relies on a technical definition and understanding of depreciation that is
not evident in the insurance policy. “[A]n insured should not have to consult a long
line of case law or law review articles and treatises to determine the coverage he or she
is purchasing under an insurance policy . . . unless a technical meaning is clearly
provided in the insurance policy.” Lammert, 572 S.W.3d at 179 (citation omitted).
Mrs. Franklin’s interpretation of ACV and whether labor could be depreciated
from her ACV payment is reasonable, and her interpretation is more in keeping with
Lexington’s actual practice at the time of trial. Lexington instructed its adjusters to
24 only depreciate materials and sales tax when calculating the ACV of a claim, and a
representative testified that it was Lexington’s “national position” to not depreciate
labor when calculating ACV. Lexington’s desk adjuster did not know that labor costs
had been depreciated on Mrs. Franklin’s claim and, had she realized it, she would have
requested a correction from the adjuster. Additionally, when preparing Mrs. Franklin’s
estimate, Lexington did not depreciate all labor costs to replace or repair the damaged
property. 17
Lexington cites In re State Farm Fire and Casualty Co. (LaBrier), 872 F.3d 567
(8th Cir. 2017) to support its position. In LaBrier, the Eight Circuit analyzed the claims
of a group of Missouri homeowners who brought a putative class action and who argued
that an insurer had breached their policies by deducting labor depreciation from their
ACV payments. Id. at 571. On appeal, the Eighth Circuit, applying Missouri law, held
that the term “actual cash value” “means a depreciated sum, i.e., the difference between
the reasonable value of the property immediately before and immediately after the
loss.” Id. at 573 (citing Porter, 242 S.W.3d at 390, Wells, 653 S.W.2d at 209, and
Dollard, 96 S.W.3d at 889). The policies at issue in LaBrier did not specify which
method to use to determine the fair market value of a property before and after a
destructive event. Id. at 576. The court also stated:
While the term “actual cash value” has an unambiguous meaning under Missouri law—the difference in the fair market value of the damaged property immediately before and after the loss—it is a value that must be estimated. Conflicting estimates must be determined by a jury, unless the parties agree as to the amount of the damage or have it determined by an appraisal method agreed to in the policy. See Dollard, 96 S.W.3d at 890.
17 In the record before us, we have been unable to find an explanation on why some, but not all , labor costs were depreciated. Even if one exists, it would not have a bearing on our decision.
25 Id. at 574. The court concluded that whether the insurer’s chosen methodology
produced a reasonable estimate of the difference in a property’s value before and after
a loss was a question for the jury to determine on a case-by-case-basis, and therefore,
class certification was precluded. Id. at 576-77. Put a different way, because the
policies did not specify how ACV payments would be calculated, whether the insurer
was in breach of the policy would depend on whether its methodology produced a
reasonable estimate of ACV, as defined by Missouri law, in each individual case. 18
We do not find LaBrier persuasive. In Labrier, the insurer could have used
different methods to estimate the fair market value of a property before and after a
destructive event, and the policies in LaBrier did not specify which method to use. Id.
at 576. Here, the policy describes RCV, in comparison to ACV, as “replacement cost
without deduction for depreciation,” and at trial, Lexington’s adjuster confirmed that
Lexington calculated ACV as replacement cost less depreciation (RCLD). 19
In the absence of an express policy provision that allows for it, labor does not
fall within that which can be depreciated when an insured is entitled to an ACV
payment. Having found the policy ambiguous on whether labor can be depreciated, we
18 A year after LaBrier, the Eighth Circuit, applying Arkansas law, ruled in Stuart v. State Farm Fire & Casualty Co., 910 F.3d 371, 377 (8th Cir. 2018), that the district court did not abuse its discretion in concluding that the insurer’s violation of its contractual obligations by withholding labor depreciation when calculating ACV was a common question well -suited for class-wide resolution. In Stuart, the policies specified the method for calculating ACV payments as “the amount it would cost to repair or replace damaged property, less depreciation.” Id. at 376. The court stated that the insurer’s obligation . . . was not merely to arrive at a “reasonable” estimate of the property's value before and after the loss, but to calculate the ACV payment in accordance with the prescribed formula. There is no need for a jury to evaluate conflicting estimates based on different methodologies; the parties agreed on a methodology and the only dispute is over including labor depreciation in the calculation, which is a discrete portion of the formula that is easily segregated and quantified. Id. 19 This opinion should not be read to suggest that ACV should be determ ined by RCLD in all cases where “actual cash value” is undefined in a first -party property insurance policy.
26 must construe the policy liberally in favor of Mrs. Franklin and strictly against
Lexington. Accordingly, we hold that labor may not be depreciated under an insurance
policy that does not define ACV or depreciation to expressly include labor depreciation.
The trial court did not err in holding that Lexington breached the policy by withholding
labor costs as depreciation from the ACV payment issued to Mrs. Franklin.
Lexington’s third point is denied.
Damages
Finally, we turn to whether Mrs. Franklin proved that she suffered damages from
Lexington’s breach of the insurance policy. Lexington argues that the trial court erred
in finding Mrs. Franklin proved she suffered damages because it argues the policy
stated that Lexington would pay no more than the amount actually spent by Mrs.
Franklin to repair or replace the property, that Lexington’s payments exceeded the
amount Mrs. Franklin actually spent to repair the damage, and she did not submit
invoices for additional repairs to the property. 20
When an insured alleges a breach of an insurance contract, they must show (1)
a contract that included certain rights and obligations existed between the parties, (2)
the insurer breached its obligation under the contract, and (3) damages. See D.R.
Sherry Constr. Ltd., v. Am. Fam. Mut. Ins. Co., 316 S.W.3d 899, 904 (Mo. banc 2010).
Lexington argues that its payment obligation was capped at “the necessary
amount actually spent to repair or replace the damaged building[,]” which appears in
section 2.a(3) of the loss settlement portion of the policy. Mrs. Franklin argues that
the limitation in section 2.a(3) does not apply because she was entitled to a full ACV
20 Lexington’s point two.
27 payment (one in which depreciation for estimated labor costs was not withheld ),
regardless of the repair costs.
Lexington’s “actual cost” of repairs argument is not persuasive here because that
provision of the policy does not apply to ACV payments, and Mrs. Franklin’s breach
of contract lawsuit arises out of the actual cash value provisions in her policy. The
actual cash value coverage terms appear under “Section C Loss Settlement" in sections
1(a)-(d) and 2(d)-(e). The “actual cost” provision that Lexington relies on is in the
replacement cost provisions in “Section C Loss Settlement” 2(a)-(c). As we have
explained above, Mrs. Franklin’s claim was not for RCV coverage.
Lexington’s own witness acknowledged that the Xactimate software calculated
Mrs. Franklin’s ACV as of the date of the loss and thus, the actual cost s of repair were
“irrelevant” to the determination of ACV at the time of the loss. The ACV amount was
calculated the same way regardless of whether the policyholder repair ed the damaged
property after the loss.
Lexington, using the “actual cost” provision, argues that the ACV payment to
Mrs. Franklin sufficiently covered the cost of repairs. However, this misses the mark.
The question is not whether the ACV payment was sufficient to cover the costs of repair
or replacement, but whether Lexington was entitled to deduct labor depreciation in the
first place from that payment. Lexington’s obligation to pay Mrs. Franklin an ACV
payment was not tied to the “actual costs of repair” language which is only contained
in the policy’s RCV provision.
The ACV payment, as Lexington’s own representative testified, was “no strings
attached,” and Mrs. Franklin was under no obligation to make the repairs to the
28 property. What to do with the ACV payment was her choice- whether to put it towards
the cost of repairs and seek an additional RCV payment under the policy, or simply
receive a one-time ACV payment (as she did here).
The policy obligated Lexington to pay Mrs. Franklin the properly calculated
ACV of her claim, but Lexington paid her less by withholding labor depreciation from
her ACV payment. Mrs. Franklin’s ACV payment would have been larger had labor
costs not been included in the depreciation calculation, therefore, Mrs. Franklin proved
she suffered damages. Mrs. Franklin’s damages were $5,424.79, the amount of
withheld labor depreciation.
Lexington breached the insurance policy by improperly withholding
depreciation on labor costs in calculating the ACV of the loss, resulting in damages.
The trial court did not err in concluding that Mrs. Franklin proved she suffered
damages. Lexington’s second point is denied.
Conclusion
The judgment of the trial court is affirmed.
Janet Sutton, Judge
Martin, C.J. and Stith, Sp. J. concur.