The U.S. Court of Appeals for the Sixth Circuit recently reversed the dismissal of a homeowner’s claims against her hazard insurer related to its deduction for costs of labor as “depreciation” in determining its net payment for damage to the home.
In so ruling, the Sixth Circuit concluded that because “depreciation” was not defined under the policy, and the homeowner’s interpretation was a fair reading of an ambiguous term, the policy language must be interpreted strictly against the insurer under Ohio law.
A copy of the opinion in Perry v. Allstate Indemnity Co., et al. is available at: Link to Opinion.
A homeowner submitted a claim under her homeowner’s insurance policy after her property sustained significant water damage. The insurer accepted coverage and the parties agreed that the total estimated cost to repair or replace damage to the home totaled $32,965.09. After making deductions for “depreciation” under the terms of the policy, the insurer provided a net payment of $28,394.74 to the homeowner.
Although it was undisputed that the policy allowed for a deduction for depreciation, the homeowner disputed the insurer’s deduction of labor costs as part of its calculation of depreciation.
The homeowner filed a putative class action suit in Ohio state court against the insurer and on behalf of policyholders of the insurer and its other entities. The insurer removed the action to federal court and moved to dismiss the complaint for failure to state a claim, which was granted by the trial court. The homeowner timely appealed to the Sixth Circuit.
As an initial matter, the Sixth Circuit reviewed the insurer’s argument that the homeowner had standing only to pursue claims against the insurer as the entity that issued the subject policy.
Although the homeowner brought suit as a putative class action on behalf of policyholders of the insurer’s other entities, because she conceded that the remaining entities are not parties to the policy at issue in this case, and as the only named plaintiff in the action, the Sixth Circuit concluded that the homeowner lacked standing to file suit against the insurer’s entities who were not parties to the policy. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 559–61 (1992). As such, the Sixth Circuit directed the trial court to dismiss the homeowner’s claims against the insurer’s remaining entities without prejudice on remand.
Turning to the merits of the case, the issue on appeal was whether the policy permitted the insurer to depreciate labor costs in calculating actual cash value (ACV).
The language of the policy provided, in relevant part, that “[i]f you do not repair or replace the damaged, destroyed or stolen property, payment will be on an actual cash value basis. This means there may be a deduction for depreciation.” Neither the policy, nor Ohio Administrative Court, defines the term “depreciation.”
The insurer contended that “depreciation” must account for the cost of both materials and labor, and it was entitled to depreciate both in calculating ACV. The homeowner did not dispute that “depreciation” included the cost of materials, but argued that the term “depreciation” was ambiguous with respect to labor costs.
As the case was before the trial court based on diversity, it sought to apply the substantive law of Ohio’s highest court. The Ohio Supreme Court had not spoken on this issue, and rulings of its lower courts were inconclusive, leaving the Sixth Circuit to turn to Ohio’s general rules of contract interpretation and insurance law.
Under Ohio law, if an insurance policy is ambiguous, the policy is construed strictly against the insurer; if the policy is ambiguous, and the insured’s interpretation is reasonable, the insured prevails. Andersen v. Highland House Co., 757 N.E.2d 329, 332–33 (Ohio 2001).
The Sixth Circuit cited its recent decision in Hicks v. State Farm Fire & Casualty Co., 751 F. App’x 703 (6th Cir. 2018), a case arising under Kentucky law which also held that ambiguities in insurance policies are construed strictly against the insurer. In Hicks, the Sixth Circuit was asked to interpret nearly identical policy language as the case at bar, wherein neither the policy, nor Kentucky Administrative Regulations, defined “depreciation,” and concluded that “depreciation” excluded labor costs. Hicks, 751 F. App’x at 710.
Here, the insurer attempted to distinguish Hicks by arguing that the language of Ohio Administrative Code defines ACV as “replacement cost of property at the time of loss… less any depreciation,” as opposed to Kentucky regulations which define ACV as “replacement cost of property at the time of loss less depreciation, if any.” Compare, OHIO ADMIN. CODE § 3901-1-54(I)(2)(a) (2016), 806 KY. ADMIN. REGS. 12:095(9)(2) (2007).
The Sixth Circuit rejected the insurer’s argument, reading “any depreciation” as simply saying “whatever depreciation there happens to be.” Moreover, the Court noted that the homeowner’s interpretation that ACV depreciation does not include labor costs has been recognized by numerous state and federal courts because depreciation traditionally refers to value lost from physical wear and tear. Hicks, 751 F. App’x at 709–11 (collecting cases); Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 178–79 (Tenn. 2019).
Because the Sixth Circuit found that the homeowner’s interpretation of “depreciation” was a fair reading of an ambiguous term, the policy language must be construed in her favor and could only be applied to the cost of materials, not to labor costs. Accordingly, the trial court’s judgment of dismissal was reversed and remanded to the trial court for further proceedings.
