Why Labor Must Be Depreciated to Find ACV

 Materials and Labor Depreciate to Reach Actual Cash Value

The intent of a first party property insurance policy is to place the insured, after a loss, back in the same financial situation the insured was in before the loss. Insurance does not rebuild a damaged structure. It pays the insured sufficient money to rebuild using material and labor of like kind and quality.

No insurer or builder can replace a 20-year-old damaged roof with a 20-year-old roof. When a policy insures only up to the actual cash value (ACV) of a loss after a peril insured against damages property its value is paid to indemnify the insured.

That amount is determined, when there is no definition of ACV in the policy, by either reducing the cost of replacement by physical depreciation, by determining the difference between the fair market value of the property before and after the loss, or by applying the broad evidence rule to establish ACV.

In Rosemary Henn, Individually And On Behalf Of Others Similarly Situated v. American Family Mutual Insurance Company, No. S-16-597, 295 Neb. 859, Supreme Court Of Nebraska (February 17, 2017) a class action attempt was made to profit from a small loss by claiming bad faith when an insurer included the value of labor as well as materials in reaching an ACV indemnity payment.


The U.S. District Court for the District of Nebraska certified the following question to the Nebraska Supreme 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 dispute centers on whether labor costs can be depreciated in determining the actual cash value of covered damaged property under a homeowner’s insurance policy. The parties agree that actual cash value is replacement cost minus depreciation, but disagree as to whether the labor component can be depreciated.


The policy allowed for payment of full replacement cost. However, it allowed the insured to take only ACV and, after replacing the property, to receive the difference between replacement cost value (RCV) and ACV.

The policy does not define “actual cash value” or depreciation, or describe the methods employed to calculate ACV. The policy also does not explain how American Family determines the difference between replacement cost value and actual cost value.

After inspecting the storm damage, American Family provided Henn with a written estimate that explained the calculations for replacement cost value, actual cash value, and depreciation for the claim. The written estimate defined actual cash value as being “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.” In the estimate, American Family’s adjuster determined that the cost to repair and replace the damaged portions of Henn’s home with new materials would be $3,252.60. From this amount, 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. The estimate did not show how much it depreciated from building materials as opposed to labor.

Henn failed to make a claim for payment of replacement costs.

Henn sued and American Family moved for summary judgment in the U.S. District Court.


American Family argued that ACV, as used in the policy, is not ambiguous because the term incorporates the concept of depreciation from the cost of repairs, which includes both materials and labor. American Family further contended that ACV is merely an interim payment and that depreciation of both materials and labor properly indemnifies the insured.

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. There is no legal requirement that each word used in an insurance policy must be specifically defined in order to be unambiguous or insurance policies would be hundreds of pages and impossible to read and understand.

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 “broad evidence rule”). [Olson v. Le Mars Mut. Ins. Co., supra note 2, 269 Neb. at 806, 696 N.W.2d at 458, citing Sullivan v. Liberty Mutual Fire Ins. Co., 174 Conn. 229, 384 A.2d 384 (1978)].

In its determination of the actual cash value of the property involved an 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.

Nebraska applies, for partial losses, the broad evidence rule. The rule allows a fact-finder to consider what the life of the destroyed property, both materials and labor, would have been, as well as any other relevant evidence presented.


ACV is not a substantive measure of damages, but, rather, a representation of the depreciated value of the property immediately prior to damages. Instead, ACV is intended only to provide a depreciated amount of the replacement cost to start the repairs or, if the insured decided not to repair, the value of the property damaged or destroyed.

The Supreme Court found that the term ACV is not ambiguous in the policy. The unambiguous definition of ACV is a depreciation of the whole. As such, the insured is not underindemnified by receiving the depreciated amount of both materials and labor.  A payment of ACV that included the full cost of labor would amount to a prepayment of unearned benefits. An insured is properly indemnified when the amount calculated for ACV equals the depreciated value of the property just prior to the loss, which includes both materials and labor.

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. ACV applies to the insured property as a whole. Therefore, the Supreme Court refused to accept the distinction that Henn attempted to read into the policy. The Supreme Court concluded that the term “ACV” is unambiguous and that depreciation of labor does not lead to underindemnification and failure to depreciate labor would result in overindemnification.

The Supreme Court, therefore, answered the certified question in the affirmative.


The Supreme Court of Nebraska applied common sense to find that to determine ACV. The insurer must first determine the RCV loss, deduct from that amount the physical depreciation the damaged item had incurred before the loss, and thereby provide indemnity to the insured. A product, whether a widget, an air conditioner, a roof or a dwelling, requires the labor of a person to put together the item and make it a whole. The materials used are only a small part of the value while the labor of the people making it is a major part of its value. If only the value of the materials are depreciated the insured will recover more than the policy promised.

© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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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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