To Find Actual Cash Value Labor as well as Components Must be Depreciated

No Component of a Property Exists Without the Labor to Make It

The definition of the term “Actual Cash Value” (ACV) has been difficult for insurers over the last few decades. States and insurers define it differently. Some insurers, attempting to avoid the diverse state decisions define ACV in the policy wording.


In Rosemary Henn, Individually And On Behalf Of Others Similarly Situated v. American Family Mutual Insurance Company, Supreme Court of Nebraska, 295 Neb. 859, No. S-16-597 (2/17/17) the Nebraska Supreme Court was asked to determine whether, when calculating ACV, the insurer can depreciate the labor part of its determination because the plaintiff argued labor can’t depreciate.


The U.S. District Court for the District of Nebraska has certified the following question to this court: “May an insurer, in determining the ‘actual cash value’ of a covered loss, depreciate the cost of labor when the terms ‘actual cash value’ and ‘depreciation’ are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated?”

The question arises from a putative class action filed in the U.S. District Court involving a dispute over the interpretation of a homeowner’s insurance policy. Rosemary Henn asserts claims for breach of contract, unjust enrichment, violations of Nebraska’s Consumer Protection Act, fraudulent concealment, and equitable estoppel. Henn argues American Family Mutual Insurance Company (American Family) wrongfully failed to compensate her and others similarly situated by depreciating labor costs in calculation of ACV for loss or damage to a structure or dwelling under its homeowner’s insurance policies.

The parties, contrary to the jurisprudence in Nebraska, agreed that actual cash value is replacement cost minus depreciation, but disagree as to whether the labor component can be depreciated.


In September 2011, Henn submitted a homeowner’s claim under her insurance policy issued by American Family. The claim was submitted due to damage that occurred to her home’s roof vent caps, gutters, siding, fascia, screens, deck, and air-conditioning unit during a hailstorm.

The policy provides that “[i]f at the time of loss, … the building is not repaired or replaced, [American Family] will pay the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building.” The insured has two options for recovery following a covered loss: (1) receive “the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building” or (2) receive the full replacement cost value upon completion of the repair or replacement of the damaged property.

Under both options, the insured will first receive an ACV payment. The policy does not define ACV or depreciation, or describe the methods employed to calculate ACV.

American Family provided Henn with a written estimate that ACV was “based on the cost to repair or replace the damaged item with an item of like kind and quality, less depreciation.” The estimate further stated that “replacement cost” was the “cost to repair the damaged item with an item of like kind and quality, without deduction for depreciation.” From the replacement cost of $3,252.60 American Family subtracted $276.67 in depreciation, to arrive at an actual cash value amount of $2,975.93. American Family then subtracted Henn’s $1,000 deductible, leaving her with an actual cash value payment of $1,975.93. The depreciated amount includes both material costs and labor costs.

After Henn filed suit American Family filed a motion for summary judgment, arguing that the policy was unambiguous and that the issues could be resolved as a matter of law. The U.S. District Court certified the question to the Nebraska Supreme Court.


Both parties agree that depreciation is an element of actual cash value. But Henn argues that the language in the policy does not unambiguously allow for labor depreciation and that American Family’s depreciation of labor resulted in underindemnification of her loss.

A court interpreting an insurance policy must first determine, as a matter of law, whether the contract is ambiguous. In an appellate review of an insurance policy, the court construes the policy as any other contract to give effect to the parties’ intentions at the time the writing was made. Where the terms of a contract are clear, they are to be accorded their plain and ordinary meaning. But when an insurance contract is ambiguous, we will construe the policy in favor of the insured. A contract is ambiguous when a word, phrase, or provision in the contract has, or is susceptible of, at least two reasonable but conflicting meanings.  While an ambiguous insurance policy will be construed in favor of the insured, ambiguity will not be read into policy language which is plain and unambiguous in order to construe against the drafter of the contract.  There is no legal requirement that each word used in an insurance policy must be specifically defined in order to be unambiguous.

The Nebraska Supreme Court has set forth three approaches to determining actual cash value:

  1. where market value is easily determined, actual cash value is market value,
  2. if there is no market value, replacement or reproduction cost may be used,
  3. failing the other two tests, any evidence tending to formulate a correct estimate of value may be used.”

The Nebraska Supreme Court will usually apply the third approach usually referred to as the “broad evidence rule.” Determining the actual cash value of the property involved the insured and insurer may consider every fact and circumstance which would logically tend to the formation of a correct estimate of the building’s value, including the original cost, the economic value of the building, the income derived from the building’s use, the age and condition of the building, its obsolescence, both structural and functional, its market value, and the depreciation and deterioration to which it has been subjected.

Both the market value test and the broad evidence rule consider all the other “facts and circumstances” shown by the evidence that affected or had a tendency to establish the property’s value.

Henn argued that the depreciation of labor is illogical because labor does not depreciate. Actual cash value, as defined by this court, is not a substantive measure of damages, but, rather, a representation of the depreciated value of the property immediately prior to damages. For purposes of indemnification, actual cash value must not equal the amount required to complete the repairs or replacement of the property. Instead, actual cash value is intended only to provide a depreciated amount of the replacement cost to start the repairs.

The Nebraska Supreme Court has employed the market value approach as part of application of the broad evidence rule. Both materials and labor constitute relevant facts to consider when establishing the value of the property immediately prior to the loss. The property is a product of both materials and labor.

The term actual cash value is not ambiguous in the policy. The unambiguous definition of actual cash value is a depreciation of the whole. As such, the insured is not underindemnified by receiving the depreciated amount of both materials and labor. The Supreme Court concluded that: “A payment of actual cash value that included the full cost of labor would amount to a prepayment of unearned benefits.”

Payment of the full amount of labor would amount to a prepayment of benefits to which the insured is not yet entitled. Depreciating the whole is merely one way to arrive at a value that represents the depreciated value of the property to which the insured is entitled. Payment of actual cash value, which depreciates both materials and labor, does not underindemnify the insured.

Under both the market value test and the broad evidence rule, all relevant evidence is considered in determining the value. Both materials and labor are elements that help establish the value of the property immediately prior to the time of loss. Actual cash value applies to the insured property as a whole.


The term “actual cash value” is unambiguous and depreciation of labor does not lead to underindemnification but, as the Nebraska Supreme Court concluded, failure to depreciate labor would provide the insured more than the policy promised to pay.  No component of a property exists without the labor to make it. If depreciation is used to determine actual cash value the materials and labor used to make the home and its component parts must be depreciated.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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