South Carolina Supreme Court Holds Embedded Labor Costs May Be Depreciated To Calculate Actual Cash Value

On a certified question, the Supreme Court of South Carolina held that South Carolina law permits an insurer to estimate depreciation of embedded labor costs when calculating “actual cash value” (ACV) of damaged property. Butler v. Travelers Home & Marine Ins. Co., No. 28026, 2021 S.C. LEXIS 51 (May 12, 2021).

Two insureds’ homes were damaged by fire. Their policies provided for Replacement Cost Value (RCV), but also provided for ACV if the insureds did not choose immediately to repair or replace damaged property. The insureds elected not to make immediate repairs but to take payment of ACV, with all parties agreeing that ACV was properly calculated as RCV minus depreciation. However, the parties disagreed on whether labor costs can be included in depreciation, and the insureds sued for breach of contract when the insurer factored depreciated labor costs into the ACV calculation. Observing the lack of guiding South Carolina precedent on the dispute, the court certified the following question to the South Carolina Supreme Court:  “When a homeowner’s insurance policy does not define the term ‘actual cash value,’ may an insurer depreciate the cost of labor in determining the ‘actual cash value’ of a covered loss when the estimated cost to repair or replace the damaged property includes both materials and embedded labor components?”

The Supreme Court answered in the affirmative. The Court first reasoned that ACV does not have a common application due to a number of factors, including but not limited to, the type of property damage, changes in technology since original construction of the property, zoning and market conditions. It next observed the importance of the phrase “embedded labor components” in the certified question, noting that the market may have a singular price for a given repair job that necessarily includes the cost of labor. The Court provided the example that the cost of replacing a roof would include the cost of labor to remove damaged portions and to install new components. The Court reasoned that such embedded labor costs make it impractical, if not impossible, to separately estimate depreciation of materials and related labor in determining ACV.