Many property insurance policies state that the insurance company will pay the actual cash value of damaged or destroyed property. But, what does that mean exactly?
On March 30, 2020, in Mitchell v. State Farm, the United States Court of Appeals for the Fifth Circuit addressed that very question under Mississippi law.
The facts in Mitchell
In 2017, a storm damaged Mitchell’s home in Waterford, Mississippi. At the time, the home was insured by State Farm.
State Farm sent an adjuster to examine the damage. Later, Mitchell received a payment for $646.19.
Under Mitchell’s policy with State Farm, Mitchell was to receive “the actual cash value at the time of the loss of the damaged part of the property.” But, the term “actual cash value” was not defined in the policy.
The Fifth Circuit looked at the Mississippi Creditor-Placed Insurance Act and noted that “actual cash value” was defined as “the cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence.”
Using a similar approach, State Farm had explained in a document provided to Mitchell that Actual Cash Value was the “repair or replacement cost of the damaged part of the property less depreciation and deductible.”
State Farm estimated that the cost to replace the roof would be $3,246.42 and that depreciation amounted to $1,600.23. Her deductible was $1,000.
Thus, Mitchell’s ACV payment was calculated as $3,246.42 minus $1,600.23 minus $1,000, for a net final total Actual Cash Value of $646.19.
Mitchell objected to State Farm’s calculation because it applied depreciation to the total amount necessary to replace Mitchell’s roof, including both parts and labor.
Mitchell argued that, instead, State Farm should have applied depreciation to the cost of materials only, not to the cost of labor.
The Fifth Circuit’s ruling
As noted, Mississippi’s Creditor-Placed Insurance Act defines “actual cash value” to mean “the cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence.”
Although the policy at issue was not creditor-placed insurance, both Mitchell and State Farm agreed that Mississippi courts generally apply this definition to Mississippi insurance contracts.
What Mitchell and State Farm disagreed over was how much to deduct in depreciation.
To illustrate the difference between the parties’ positions, the Court used a hypothetical destroyed roof as an example.
The Court said suppose the hypothetical roof can be replaced for a cost of $5,000 in materials and $5,000 in labor—a $10,000 roof. Also, suppose that the destroyed roof was 10 years old and expected to last 20 years.
Under Mitchell’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, State Farm’s interpretation of “Actual Cash Value” includes depreciation of both the materials and the labor in constructing the roof.
Using the same example, State Farm’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).
Mitchell’s position prevails.
Under Mississippi law, “ambiguity and doubt in an insurance policy must be resolved in favor of the insured.”
Because the term “actual cash value” was not defined in the policy, and because the term could reasonably be interpreted in two different ways, Mississippi law required that the ambiguity be resolved in Mitchell’s favor.
And, that is what the Fifth Circuit did.
The Fifth Circuit also noted with approval a Sixth Circuit ruling that depreciating labor does not make the policyholder whole but rather frustrates the indemnity purpose of Actual Cash Value coverage, because the cost of labor to install a new garage would be the same as installing a garage with 10 year old materials.
In summary, “placing a homeowner in a position identical to the one she was in before the damage to her property accords with Mississippi’s definition of Actual Cash Value as ‘the cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence.’”
Panter Law Firm, PLLC, 7736 Old Canton Road, Suite B, Madison, MS 39110