In Butler, et al. v. The Travelers Home and Marine Insurance Co., separate fires damaged the homes of Miriam Butler and Joseph Stewart. Each home was insured by a Travelers-related insurance company (collectively, “Travelers”). Both policies afforded coverage for the replacement cost value (“RCV”) of the homes. The South Carolina Supreme Court defined RCV as “the amount of money it would take to pay a contractor to repair or replace the damaged structure, including cost for the materials and labor.” Neither Plaintiff though sought to repair or replace the homes. Rather, both sought the actual cash value (or “ACV) of the homes.
The Court explained that ACV is the value of the homes at the time they were damaged and that insurers typically calculate ACV using the following three methods: (1) market value; (2) replacement cost less depreciation; and (3) the “broad evidence” rule. In Butler, each Plaintiff chose the “replacement cost less depreciation” method. Under this method, the insurer first determines the damaged property’s RCV. Next, it determines the depreciation for that property. To do this, it totals “the amount an item has lessened in value since its purchase, taking into account its age, wear and tear, market conditions, and obsolescence.” Finally, that depreciated amount is subtracted from the RCV to then arrive at the ACV.
In Butler, both Plaintiffs agreed that Travelers properly included depreciated materials cost when calculating the homes’ ACV. But, they disagreed that it was permissible for Travelers to depreciate the “embedded” labor costs. The South Carolina Supreme Court agreed with Travelers.
According to the Court, the certified question was whether “embedded labor components”—meaning labor costs no longer separable from the cost of materials—may be depreciated when calculating ACV. The Court answered the question in the affirmative. The court concluded that “South Carolina law does not prohibit Travelers from including an estimate of the depreciation of embedded labor costs in its calculation of ACV;” in fact, “it makes no sense for an insurer to include depreciation for materials and not for labor.”
In conclusion, carriers with property policies governed by South Carolina law whose policies do not otherwise define ACV may use any of the above-three ACV calculation methods. Further, when utilizing the “replacement cost less depreciation method,” an insurer may depreciate both, materials and labor costs.
We hope this update has been informative. Should you have any questions regarding ACV, or any other aspect of residential or commercial property insurance, please do not hesitate to contact us.