Should Depreciation Be Applied to Labor When Adjusting Property Insurance Claims?

Co-authored by: Cileena Y. Terra

In almost every property insurance policy the insurance company is entitled to deduct depreciation. There has been a lot of discussion recently concerning whether depreciation should be applied to labor. This article will focus on whether labor costs should be depreciated when adjusting property insurance claims.

Every property damage loss involves labor and the materials needed to repair the property to its pre-loss condition by using materials that are of “like, kind, and quality”.[1] While it is clear depreciation applies to materials because they age and wear, whether it should apply to labor is not as forthcoming. Courts around the country are split in their approaches to this labor depreciation issue. As you will see below some courts have taken the position that labor costs cannot be depreciated when considering actual cash value while others have found that labor costs may be depreciated.

In Illinois, the state court of appeals recently held that labor cannot be depreciated when considering actual cash value of a loss.[2] The court articulated in Sproull v. State Farm that the cost of labor could not be depreciated because only the property structure and materials were subject to a reasonable deduction for depreciation. It found that depreciation could not be applied to the intangible labor component for two reasons. First, the Illinois’s insurance regulations provided that the “actual cash value” of an insured damaged structure was determined as replacement cost of property at time of loss less depreciation, if any. Second, the policy did not define the term actual cash value. In addition, the Fifth Circuit Court of Appeals, interpreting Mississippi law, also denied an insurer’s motion to dismiss where the term “actual cash value” was not defined in the policy. The court held that where both parties argued reasonable but differing interpretations of the term, the court ruled in favor of the insured’s interpretation  that actual cash value only included depreciation of materials not labor.[3] Furthermore, in some states courts have declined to apply depreciation to labor without deciding the threshold issue of whether labor can logically depreciate. For example, the Tennessee Supreme Court recently ruled that labor cannot be depreciated when the insurance policy language regarding depreciation is ambiguous.[4] In Lammert v. Auto-Owners Mut. Ins. Co, the court was asked to decide whether an insurer, in making an actual cash value payment, could withhold a portion of repair labor as depreciation when insurance policies 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,” or stated that “actual cash value included a deduction for depreciation”. The court found the language regarding depreciation in the policies ambiguous and therefore held that the insureds’ interpretation of the policies should apply. Accordingly, it took the position that labor could not be depreciated when an insurance company calculates the actual cash value of the properties using the replacement cost less depreciation method.

Similarly, courts in the states of Alabama[1], Kentucky[2], and the Sixth Circuit Court of Appeals interpreting Ohio law[3], have held that when the term “actual cash value” is ambiguously defined in the policy then the insureds’ interpretation of the policy, the view that depreciation does not apply to labor, is controlling. Additionally, other states such as California[4], Montana[5], and Vermont[6] have established by regulation, statute, or via the insurance department that labor cannot be depreciated when calculating actual cash value. However, there are still a number of courts across the country that have taken the position that labor cost can in fact be depreciated. The U.S. District Court of Colorado held as recently as 2017 that labor costs may be depreciated based on the policy defining actual cash value as “the amount it would cost to repair or replace covered property…subject to a deduction for…depreciation.” In addition, the court noted that the policy did not explicitly limit depreciation to “physical deterioration and obsolescence” and therefore labor costs could be depreciated.[7] In North Carolina the Supreme Court also determined that when calculating ACV under the particular policy construed, depreciation included the cost of labor.[8] Similarly, courts in Kansas[9], Florida[10], Indiana[11], Oklahoma[12], Nebraska[13], and the Eighth Circuit Court of Appeals[1] have all held that labor costs may be depreciated in the determination of actual cash value. Additionally, in 2017 Arkansas enacted a statute, Ark. Code Ann. § 23-88-106, which states labor costs may be depreciated in the determination of actual cash value for new and renewed policies. It allows for labor to be depreciated when a particular form, pre-approved by the Insurance Commissioner, is included in the insurance policy explaining that labor cost depreciation may be deducted.

In the author’s opinion, those jurisdictions that suggest that labor should not be depreciated do so because of the distinction between materials and labor. Many of those jurisdictions that find that labor should not be depreciated do so by finding the definition of “actual cash value” in the policy is ambiguous and thus should be construed in favor of the insured. While the amount of depreciation on labor will be dependent upon the size of the loss, the number could be substantial. In those states where courts have not decided whether labor should be depreciated or not, one may want to use some of the arguments used in the states where courts have found that labor is not depreciable when trying to adjust or resolve a property insurance claim. This is an issue to watch for the future, as courts will likely continue to produce more case law on the application of depreciation to labor in the coming years.


[1] “…the term “‘like kind and quality’” means “a restoration of appearance, function, and value.” Moeller v. Farmers Ins. Co. of Washington, 173 Wn. 2d 264, 274, 267 P.3d 998 (2011)

[2] Sproull v. State Farm Fire & Casualty Company, 2020 IL App (5th) 180577

[3] See Mitchell v. State Farm Fire & Cas. Co., 2020 U.S. App. LEXIS 9874 (5th Cir., Mar. 30, 2020). [1] See Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 171 (Tenn. 2019)

[4] See Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 171 (Tenn. 2019)

[5] See Arnold v. State Farm Fire & Cas. Co., 2017 U.S. Dist. LEXIS 122051 (S.D.Ala. Aug. 3, 2017) holding that defendant had not shown that the term “ACV,” which was undefined, could only be interpreted to include depreciation of labor costs.

[6] See Hicks v. State Farm Fire & Cas. Co., No. 18-5104, 2018 U.S. App. LEXIS 28894, at *1 (6th Cir. Oct. 15, 2018) holding that even though Kentucky law defines ACV as replacement cost minus depreciation, the policy is ambiguous because it does not specifically address what can be depreciated.

[7] The Sixth Circuit Court of Appeals, interpreting Ohio law, held that an insurer cannot depreciate labor if the policy does not define depreciation and does not expressly provide for such deductions. See Perry v. Allstate Indem. Co., 2020 U.S. App. LEXIS 8555 (6th Cir. Mar. 18, 2020) holding that an Ohio insurer may not “deduct the cost of labor as part of calculating ‘depreciation’ to arrive at its net payment” for the cost to repair or replace damaged property. See also, Cranfield v. State Farm Fire & Casualty Co., 2020 U.S. App. LEXIS 9254 (6th Cir. Mar. 23, 2020)

[8] See 10 C.C.R.§ 2695.9(f)(1).

[9] See Mont. Code Ann. § 33-24-101

[10] See Insurance Bulletin No. 184.

[11] See Basham v. United Servs. Auto. Ass’n, No. 16-cv-03057, 2017 U.S. Dist. LEXIS 118729 (D. Colo. July 28, 2017)

[12] See Accardi v. Hartford Underwriting Insurance Co., No. 42A19, 2020 N.C. LEXIS 83 (N.C. Feb. 28, 2020),

[13] See Graves v. Am. Family Mut. Ins. Co., 2015 U.S. Dist. LEXIS 95127, at *12-*13 (D. Kan. Jul. 22, 2015), aff’d, 2017 U.S.App. LEXIS 6980 (10th Cir. April 21, 2017).

[14] Goff v. State Farm Fla. Ins. Co.,999 So. 2d 684, 689 (Fla. 2d Dist. Ct. App. 2008

[15] Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349, 365 (Ind. 1982).

[16] See Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017, 1021 (Okla. 2002); Branch v. Farmers Ins. Co., 55 P.3d 1023, 1027 (Okla. 2002) [1] See Henn v. Am. Family Mut. Ins. Co., 894 N.W.2d 179 (Neb. 2017). 

[17] See Henn v. Am. Family Mut. Ins. Co., 894 N.W.2d 179 (Neb. 2017). 

Scroll to Top