Arnold v. State Farm Fire and Casualty Company
ORDER denying 10 Motion to Dismiss; denying 19 Motion to Remand. Signed by District Judge William H. Steele on 8/3/2017. (tgw)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
ANNIE ARNOLD, etc.,
STATE FARM FIRE AND
) CIVIL ACTION 17-0148-WS-C
This matter is before the Court on the defendant’s motion to dismiss. (Doc.
10). The parties have filed briefs and evidentiary materials in support of their
respective positions, (Docs. 10, 11, 14, 15, 27, 30),1 and the motion is ripe for
This action was filed in state court and timely removed by the defendant.3
According to the class action complaint, (Doc. 1-2 at 1-14), the plaintiff’s house
was insured by the defendant under a policy (“the Policy”) providing replacement
cost value (“RCV”) coverage. Payment on covered losses under such policies
Because the defendant filed a corrected brief an hour after filing its motion,
(Doc. 11), the Court does not consider its original brief. (Doc. 10-1).
The plaintiff has filed a motion to remand, (Doc. 19), which is fully briefed and
ripe for resolution. (Docs. 19, 28, 29). Ordinarily, the Court would consider a motion to
remand prior to considering a motion to dismiss. However, because the only ground of
the motion to remand presupposes the success of the defendant’s motion to dismiss, the
Court addresses that motion first.
The action was removed pursuant to 28 U.S.C. § 1453. The Court has
confirmed that it has subject matter jurisdiction pursuant to 28 U.S.C. § 1332(d).
proceeds in two stages. Initially, the defendant pays actual cash value (“ACV”),
which it calculates as the estimated cost of materials and labor required to
complete the removal of damaged materials and subsequent repairs, less
depreciation. The defendant pays the difference between ACV and RCV only if
the insured accomplishes the repairs, rebuilding or replacement of the damaged
property within a specific time frame and submits proof of same to the defendant.
The insured therefore must front repair/replacement costs exceeding the ACV
payment. In the plaintiff’s case, and as a rule, in calculating ACV the defendant
depreciates both materials and labor. The single claim presented is that the
defendant breached its contractual duty to pay ACV by unlawfully depreciating
The defendant argues that the plaintiff lacks standing to pursue her claim
and that the Court thus lacks subject matter jurisdiction. The defendant further
argues that the complaint fails to state a claim upon which relief can be granted.
“In every federal case, the party bringing the suit must establish standing to
prosecute the action.” Elk Grove Unified School District v. Newdow, 542 U.S. 1,
11 (2004), abrogated in part on other grounds, Lexmark International, Inc. v.
Static Control Components, Inc., 134 S. Ct. 1377 (2014). Standing has both
constitutional and prudential components, id., but the defendant challenges only
constitutional standing. (Doc. 11 at 12). Constitutional standing is jurisdictional,
and in its absence “the federal court must dismiss the case for lack of subject
matter jurisdiction.” Florida Wildlife Federation, Inc. v. South Florida Water
Management District, 647 F.3d 1296, 1302 (11th Cir. 2011); accord Stalley ex rel.
United States v. Orlando Regional Healthcare System, Inc., 524 F.3d 1229, 1232
(11th Cir. 2008).
A challenge to standing under Rule 12(b)(1) can be either facial or factual.
The defendant mounts a factual challenge. In such a case, “matters outside the
pleadings, such as testimony and affidavits are considered.” McElmurray v.
Consolidated Government, 501 F.3d 1244, 1251 (11th Cir. 2007) (internal quotes
omitted). “Since such a motion implicates the fundamental question of a trial
court’s jurisdiction, a trial court is free to weigh the evidence and satisfy itself as
to the existence of its power to hear the case without presuming the truthfulness of
the plaintiff’s allegations.” Makro Capital of America, Inc. v. UBS AG, 543 F.3d
1254, 1258 (11th Cir. 2008) (internal quotes omitted).
The “irreducible constitutional minimum of standing contains three
elements.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). “First, the
plaintiff must have suffered an injury in fact – an invasion of a legally protected
interest which is (a) concrete and particularized … and (b) actual or imminent, not
conjectural or hypothetical ….” Id. (internal quotes omitted). “Second, there must
be a causal connection between the injury and the conduct complained of – the
injury has to be fairly traceable to the challenged action of the defendant, and not
the result of the independent action of some third party not before the court.” Id.
(internal quotes omitted). “Third, it must be likely, as opposed to merely
speculative, that the injury will be redressed by a favorable decision.” Id. at 561
(internal quotes omitted).
The defendant has presented uncontroverted evidence that, before this
lawsuit was filed, it had paid the plaintiff RCV based on her undepreciated labor
costs. (Doc. 11-1). The defendant concludes that, because no disputed labor
depreciation remained unpaid at the commencement of the action, the plaintiff is
unable to satisfy the second requirement of constitutional standing. (Doc. 11 at
14, 15 n.8). This seems doubtful, since the defendant does not dispute that it,
rather than some third party acting independently, performed the challenged action
of reducing ACV by depreciating labor costs. The cases cited by the defendant,
however, do suggest (with minimal analysis) that a defendant’s payment in full of
a plaintiff’s claim may negate an injury in fact, make it impossible to redress the
(already redressed) injury by a favorable decision, or moot the controversy.4
The plaintiff responds that she has not in fact been made whole. She notes
that the defendant did not pay RCV until several years after paying ACV, and her
complaint demands an award of prejudgment interest to compensate her for the
withholding of labor depreciation during this interval. (Doc. 1-2 at 13; Doc. 15 at
Anticipating this response, the defendant argues that entitlement to
prejudgment interest for breach of contract is governed by Alabama Code § 8-8-8
and that the plaintiff, for various fact-intensive reasons, cannot satisfy that
provision’s elements, viz., that the amount due was certain, that the time it was due
was certain, and that the defendant knew both. (Doc. 11 at 15-16). The defendant
assumes rather than demonstrates that its argument goes to standing, but the Court
cannot indulge the defendant’s assumption.
The defendant does not identify which element or elements of standing it
believes to be imperiled by its argument, but it makes no difference. As for the
first element, the only possible question is whether the plaintiff suffered the
“invasion of a legally protected interest.” Lujan, 504 U.S. at 560. “A legally
cognizable injury requires infringement of an interest protected by statute or
otherwise.” Primera Iglesia Bautista Hispana, Inc. v. Broward County, 450 F.3d
1295, 1304 (11th Cir. 2006) (internal quotes omitted). The complaint alleges the
breach of a contract to pay undepreciated labor costs, and contractual rights are
certainly protected by law. E.g., Avenue CLO Fund Ltd. v. Bank of America, 709
F.3d 1072, 1077 (11th Cir. 2013). Although the defendant has recently paid those
undepreciated labor costs, it has not paid interest on the withheld amounts. Even
if general contract law does not provide a legally protected interest in receiving
Mootness is not part of standing analysis. Instead, “[j]usticiability doctrine is
composed of three strands: standing, ripeness, and mootness.” Strickland v. Alexander,
772 F.3d 876, 883 (11th Cir. 2014) (internal quotes omitted).
interest on wrongly withheld sums, Section 8-8-8 establishes such an interest by
providing that “[a]ll contracts … for the payment of money … bear interest from
the day such money … should have been paid ….”
As for the second element of standing, there is no question but that it was
the defendant, and not some missing third party, that has failed to pay the plaintiff
interest on the amounts withheld as depreciation on labor.
As for the third element, redressability means a “substantial likelihood that
the requested relief will remedy the injury in fact.” Vermont Agency of Natural
Resources v. United States ex rel. Stevens, 529 U.S. 765, 771 (2000) (internal
quotes omitted); accord Already, LLC v. Nike, Inc., 568 U.S. 85, 90 (2013) (the
plaintiff’s injury must be “likely to be redressed by the requested relief”) (internal
quotes omitted); Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 103
(1998) (redressability is “a likelihood that the requested relief will redress the
alleged injury”). “Relief that does not remedy the injury suffered cannot bootstrap
a plaintiff into federal court; that is the very essence of the redressability
requirement.” Steel Co., 523 U.S. at 107. The plaintiff’s injury must be “likely to
be redressed if the requested relief is granted.” Gladstone Realtors v. Village of
Bellwood, 441 U.S. 91, 100 (1979). Plainly, an award of prejudgment interest will
remedy the injury suffered by the defendant’s failure to pay such interest,
precisely redressing the injury.
The defendant challenges standing by arguing that, under the evidence it
presents, the plaintiff cannot satisfy the three-part test identified by the Alabama
Supreme Court for recovery under Section 8-8-8. Primarily, the defendant argues
that, under the Policy, payment was not due until 60 days after the plaintiff
presented proof of loss; that the plaintiff never did so; and that the defendant’s
payment of ACV did not waive the proof-of-loss trigger (as would usually occur)
because the Policy contains a no-waiver provision and because it did not realize its
payment would work a waiver. Because the date the payment was due never
arrived, the defendant concludes the plaintiff cannot be entitled to receive an
award of prejudgment interest. The defendant also presents factual arguments
denying that the amount due was certain or that it knew either the amount due or
the date it was due. (Doc. 11 at 15-16; Doc. 27 at 9-12).
The Court need not pass on the factual or legal validity of these arguments,
because they do not address standing but rather the merits of the plaintiff’s case.
“Standing is a threshold jurisdictional question which must be addressed prior to
and independent of the merits of a party’s claims.” Interface Kanner, LLC v.
JPMorgan Chase Bank, 704 F.3d 927, 932 (11th Cir. 2013) (internal quotes
omitted). It thus does not matter for standing purposes whether the plaintiff can
actually prove the defendant is legally obligated to pay prejudgment interest. See,
e.g., Warth v. Seldin, 422 U.S. 490, 500 (1975) (“[S]tanding in no way depends on
the merits of the plaintiff’s contention that particular conduct is illegal ….”);
Mulhall v. UNITE HERE, Local 355, 618 F.3d 1279, 1286 (11th Cir. 2010) (same).
The defendant, which relies exclusively on Lujan for its understanding of
standing’s elements, appears to have misconstrued the Supreme Court’s statement
that redressability requires that the injury “will be redressed by a favorable
decision.” 504 U.S. at 561. The defendant appears to take this language to mean
that, assuming a favorable decision on liability, it must be likely the plaintiff can
establish entitlement to the requested relief. A “favorable decision,” however, is a
favorable decision “on the merits,” which includes an award of the requested
relief. E.g., Parker v. Scrap Metal Processors, Inc., 386 F.3d 993, 1004 (11th Cir.
2004). As the cases cited above and in the accompanying note reflect, the test for
standing is whether, assuming the plaintiff receives the relief she requests, that
relief will redress the injury she suffered.5 Undoubtedly an award of prejudgment
interest will redress a failure to pay prejudgment interest.
See, e.g., Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26,
44 (1976) (standing absent where alleged harm was hospitals’ denial of service to
indigents, and it was merely speculative whether the requested relief – a requirement that
the hospitals serve indigents as a condition of receiving favorable tax treatment – would
result in the hospitals serving indigents rather than foregoing the favorable tax treatment);
In its reply brief, the defendant raises a new standing argument: that, under
Alabama law, the pre-suit payment and acceptance of principal “extinguish[es]”
any interest claim. (Doc. 27 at 9). District courts, including this one, ordinarily do
not consider arguments raised for the first time on reply.6 However, because – and
only because – the defendant raises the argument as a challenge to subject matter
jurisdiction, the Court addresses it. E.g., Bank of Brewton v. Travelers
Companies, Inc., 2014 WL 2113092 at *4 (S.D. Ala. 2014) (“[W]hen the issue
goes to subject matter jurisdiction, the Court will consider an argument first raised
As with the defendant’s previous arguments, this one goes not to standing
but to the merits of the plaintiff’s claim, viz., her ability to establish the elements
for recovery of prejudgment interest. But even were the defendant’s argument
truly one implicating standing, it would fail. The defendant relies for its argument
on a 1914 decision of an intermediate Alabama court which ruled that, when
interest is a function of statute and not of express contractual provision, interest is
not the basis of a separate right of action but only an incident to recovery of the
principal, such that payment and acceptance of the principal extinguishes any right
to interest. Louisville & Nashville Railroad Co. v. Elmore & Brame, 65 So. 695,
695-96 (Ala. App. 1914). The Alabama Supreme Court, however, has repudiated
the proposition on which the defendant relies:
Florida Family Policy Council v. Freeman, 561 F.3d 1246, 1258 (11th Cir. 2009)
(standing absent where the requested relief – barring enforcement of certain canons of
judicial conduct – would not redress the injury of judicial disqualification because an
unchallenged statute would still result in disqualification); KH Outdoor, L.L.C. v. Clay
County, 482 F.3d 1299, 1303, 1305 (11th Cir. 2007) (standing absent where the requested
relief – striking down a sign ordinance – would not redress the injury of inability to erect
proposed signs, because the plaintiff’s permit applications failed to meet other,
unchallenged statutes and regulations).
See Park City Water Authority v. North Fork Apartments, L.P., 2009 WL
4898354 at *1 n.2 (S.D. Ala. 2009) (citing cases from over 40 districts applying the rule
in 2009 alone). The Eleventh Circuit follows a similar rule. E.g., Herring v. Secretary,
Department of Corrections, 397 F.3d 1338, 1342 (11th Cir. 2005).
We have carefully considered these cases [including Elmore & Brame]
and disagree with the reasoning that allows the collection of interest
after the acceptance of principal when the right to interest is expressed
in the contract, but not when the right to interest is mandated by statute.
We have searched in vain and find no basis for the distinction, especially
in the light of our cases which would read the statute [Section 8-8-8] into
the contract, making it part of the agreement.
Thomas v. Liberty National Life Insurance Co., 368 So. 2d 254, 258 (Ala. 1979).
Alabama, in short, permits a stand-alone action for contractual interest under
The plaintiff’s motion to remand argues that, if she lacks constitutional
standing and the Court thus lacks subject matter jurisdiction, the proper remedy is
remand rather than dismissal. (Doc. 19 at 2). Because the plaintiff does have
standing, her motion to remand is due to be denied.
II. Failure to State a Claim.
As noted, the dispute in this case centers on whether the defendant properly
depreciated labor in its calculation of ACV. The defendant asserts that this
question must as a matter of law be answered in the affirmative.
The Policy provides that, “until actual repair or replacement is completed,
we will pay only the actual cash value at the time of the loss of the damaged part
of the property,” capped by the lower of policy limits or cost to repair or replace.
(Doc. 1-2 at 28).8 The Policy does not define “actual cash value.”
“The court must enforce the insurance policy as written if the terms are
unambiguous ….” Safeway Insurance Co. v. Herrera, 912 So. 2d 1140, 1143
The defendant also cites a sister federal court’s conclusion – reached without
analysis or citation to any authority – that Georgia does not allow a stand-alone interest
claim. (Doc. 27 at 9). Even if that proposition is correct, this case is governed by
Alabama law, not Georgia law.
The policy is an exhibit to the complaint and thus can be considered on a Rule
12(b)(6) motion. E.g., Thaeter v. Palm Beach County Sheriff’s Office, 449 F.3d 1342,
1352 (11th Cir. 2006).
(Ala. 2005). “Whether a provision of an insurance policy is ambiguous is a
question of law.” Id. “If a word or phrase is not defined in the policy, then the
court should construe the word or phrase according to the meaning a person of
ordinary intelligence would reasonably give it.” Id. That is, “[w]hen analyzing an
insurance policy, a court gives words used in the policy their common, everyday
meaning and interprets them as a reasonable person in the insured’s position
would have understood them.” Baldwin Mutual Insurance Co. v. Adair, 181 So.
3d 1033, 1042 (Ala. 2014) (internal quotes omitted). Specifically, “[t]he court
should not define words it is construing based on technical or legal terms.”
Herrera, 912 So. 2d at 1143.
“A term is ambiguous only if, applying the ordinary meaning, one would
conclude that the provision containing the term is reasonably susceptible to two or
more constructions.” Herrera, 912 So. 2d at 1144 (internal quotes omitted). “To
the extent the language of an insurance policy provision is ambiguous, all
ambiguities must be resolved against the insurance company.” Id. at 1143; accord
Travelers Casualty and Surety Co. v. Alabama Gas Corp., 117 So. 3d 695, 700
(Ala. 2012). This principle extends to ambiguities regarding the amount the
insurer is to pay. Safeway Insurance Co. v. Amerisure Insurance Co., 707 So. 2d
218, 221, 223 (Ala. 1997).
As applied to this case, to prevail on the instant motion the defendant must
show that the undefined term “actual cash value” could not reasonably be
construed by a reasonable insured, lacking special knowledge or expertise and
applying the ordinary meaning of the Policy language, as not including
depreciation of labor costs. The Court concludes that the defendant has not met
In Ballard v. Lee, 671 So. 2d 1368 (Ala. 1995), overruled in part on other
grounds, State Farm Fire and Casualty Co. v. Owen, 729 So. 2d 834 (1998), the
policy, like the instant Policy, provided for replacement cost coverage, with the
initial payment limited to an undefined “actual cash value” at the time of loss. Id.
at 1370. When the plaintiff suffered a loss and the insurer applied depreciation in
calculating ACV, the plaintiff sued the defendants for fraudulently suppressing
that they would apply depreciation. Id. at 1371. The plaintiff understood the
undefined term to mean “the amount of money that the property could reasonably
be sold for in the marketplace,” and witnesses within the industry concurred that
the everyday meaning of the term was roughly fair market value. Id. at 1374. The
Supreme Court ruled that this evidence “shows that the term ‘actual cash value’
has an accepted everyday meaning, which would be known by a layperson,” id. at
1375, that does not envision any reduction for depreciation.
Ballard stands for the proposition that a person of ordinary intelligence,
lacking special knowledge or expertise and applying the ordinary meaning of the
words used, could reasonably understand the undefined term “actual cash value”
as not involving depreciation and thus as not involving depreciation of labor costs.
The defendant, however, insists Ballard is undone by a subsequent state insurance
regulation. (Doc. 27 at 12).
When the insurance policy provides for the adjustment and settlement
of losses on an actual cash value basis on residential fire and extended
coverage, the insurer shall determine actual cash value according to one
of the following:
Replacement cost of property at time of loss less depreciation. ….
As otherwise provided in the policy.
Ala. Admin. Code r. 482-1-125-09(2) (2003).9 According to the defendant, this
regulation “controls” and “dictates” that the defendant apply depreciation, with the
plaintiff “charged as a matter of public policy” with knowledge of the regulation’s
requirements because the regulation is “read into” the policy. (Doc. 11 at 17; Doc.
27 at 11-12).
The current version of this provision eliminates the second and third
alternatives. The defendant correctly relies on the previous version, as it was in effect
during the life of the Policy. (Doc. 1-2 at 15).
On its face, however, the regulation does not dictate that the defendant
apply depreciation, because it does not dictate that the defendant use only the first
of the three listed methods for calculating ACV. On the contrary, the very point of
the regulation is to give the insurer multiple options, one of them being the same
method (which does not involve depreciation) that the Ballard Court deemed the
everyday meaning of “actual cash value.” The plaintiff makes exactly this point in
her responsive brief. (Doc. 15 at 29-30). Rather than assisting the defendant, the
regulation simply underscores that “actual cash value” has multiple reasonable
meanings, at least one of which excludes depreciation, which means the Policy’s
undefined use of the term cannot unambiguously provide for labor depreciation.
Even had the regulation required the defendant to use the first method of
calculating ACV, the defendant has not demonstrated that the plaintiff was
charged with knowledge of the regulation so as to render unreasonable any other
understanding of the term. The defendant relies on Barber Pure Milk Co. v.
Alabama State Milk Control Board, 156 So. 2d 351 (Ala. 1963); Higgins v.
Nationwide Mutual Insurance Co., 282 So. 2d 301 (Ala. 1983); and Graffeo v.
State Farm Fire & Casualty, Inc., 628 So. 2d 790 (Ala. Civ. App.1993). Barber
states that “all men are charged as a matter of public policy with a knowledge of
the law pertaining to their transactions,” 156 So. 2d at 355, but the defendant has
not endeavored to show that this glittering generality applies in an insurance
context to alter the rules of policy construction described above and in countless
Alabama cases.10 Higgins is an insurance case, but it has nothing to do with the
construction of undefined policy language; it holds only that, where an Alabama
statute broadly requires automobile policies to include uninsured motorist
coverage, “it is mandatory that Act No. 866, the governing law be read into the
policy contract as it exists” so as to render void an exclusion of certain vehicles
from such coverage. Id. at 303, 305. The “read[ing] into” language appears to be
The Court has been unable to locate any insurance case citing Barber.
figurative, but in any event Higgins merely charges insurers with doing what the
law requires them to do; it does not charge insureds with knowledge of those
requirements. Graffeo states that, “[i]n the absence of a definition within the
policy or by statute or case law, the term replacement cost must be given its
common meaning,” id. at 791, but it does so without citing any authority for the
proposition that an undefined policy term can be construed against the insured
based on a statutory definition not found in the policy.11 Nor does Graffeo
identify regulations as a source of such definitional power. Moreover, the
defendant fails to effectively address Herrera, which held that a statutory
definition of “forcible entry” was “inapposite” to the construction of the undefined
term in an insurance policy. 912 So. 2d at 1144.12 The Court does not rule that
regulations cannot provide controlling definitions missing from a policy to the
detriment of the insured, but it does rule that the defendant has failed to show they
Moving on from the regulation, the defendant argues that “[t]he Alabama
Supreme Court has recognized for decades that a determination of actual cash
value must include a deduction for depreciation.” (Doc. 11 at 18 n.11). This
proposition has some support in the case law. Glen Falls Insurance Co. v. Garner,
155 So. 533, 536 (1934) (“‘Actual cash value’ means, and can only mean, what
the thing is worth in money, allowing for depreciation.”); Reliance Insurance Co.
v. Substation Products Corp., 404 So. 2d 598, 609 (Ala. 1981) (“Actual cash value
The single case Graffeo cites supports only the “common meaning” portion of
According to the defendant, Herrera precludes insureds from relying on
statutory definitions to construe undefined policy language but permits insurers to do so.
(Doc. 27 at 12). The defendant identifies no authority or justification for such a blatant
Because the defendant has not shown the regulation’s relevance, the Court need
not consider the defendant’s argument that the regulation’s first alternative not only
permits but mandates depreciation of labor as well as materials. (Doc. 11 at 19).
means what the property is worth in money, allowing for depreciation.”) (citing
Glen Falls). The Alabama Supreme Court’s most recent pronouncement,
however, is contained in Ballard, which rejects the proposition that the undefined
term unambiguously includes depreciation, and the defendant’s even more recent
regulation confirms that the term can reasonably be read as excluding
depreciation. The defendant has offered no basis for concluding that its cases, to
the extent they may support its position, survive Ballard.
The defendant’s task would appear to be two-fold. First, it must establish
that “actual cash value” unambiguously includes depreciation. Second, it must
establish that depreciation unambiguously includes labor depreciation. As
discussed above, the defendant has not accomplished its first task. It is not clear
that this failure is fatal to its motion, however, because the plaintiff frames the
issue, not as whether the Policy unambiguously permits depreciation in calculating
ACV, but as whether it unambiguously contemplates depreciation of labor as well
as materials. (Doc. 15 at 32). The Court thus turns to that question.
No Alabama state court has resolved this issue.14 The defendant relies upon
several state and federal cases to demonstrate that “actual cash value”
unambiguously includes labor depreciation. The plaintiff relies on several state
and federal cases to the contrary. The Court finds the plaintiff’s cases more
The earliest cited case is Redcorn v. State Farm Fire & Casualty Co., 55
P.3d 1017 (Okla. 2002).15 The policy at issue provided ACV (not RCV) as the full
measure of recovery. Id. at 1018-19. As here, “actual cash value” was not defined
by the policy. Id. at 1019. The Court concluded that the term “has a specific
The only Alabama decision cited by either party is a trial court’s unexplained,
one-sentence denial of an insurer’s motion for summary judgment, (Doc. 15-3), which
the Court finds to be unhelpful.
The Redcorn Court understood that it was addressing a question of first
impression nationally. 55 P.3d at 1021 (Boudreau, J., dissenting).
meaning that has been construed by this Court, and is not ambiguous.” Id. Past
decisions had already determined that the ACV of a destroyed building is
determined by a “broad evidence rule,” whereby “all relevant factors” are
considered, “includ[ing] depreciation.” Id. at 1020. Depreciation extends to labor
costs because “[a] building is the product of both materials and labor.” Id. Since
the plaintiff paid for an ACV policy, he would be over-indemnified and unjustly
enriched were he to receive undepreciated labor costs for his damaged roof. Id. at
Redcorn was a 5-3 decision. The dissenters rejected the characterization of
a roof as a single, integrated product, since it is not purchased pre-assembled but
must be created post-purchase by combining a product (shingles) with a service
(labor to install the shingles). 55 P.3d at 1022 (Boudreau, J., dissenting). While
the shingles physically deteriorate and are thus properly subject to depreciation,
labor “is not logically depreciable.” Id. Thus, depreciating labor “does not
logically tend to establish the correct estimate of the actual cash value of the roof
at the time of the loss,” as required by the broad evidence rule. Id. at 1023. The
dissenters also disagreed that the plaintiff would be over-indemnified under such a
In Papurello v. State Farm Fire & Casualty Co., 144 F. Supp. 3d 746
(W.D. Pa. 2015), the policy, like the instant Policy, was an RCV policy with ACV
payable as a first step. Id. at 758-59. Like the Policy, the Papurello policy did not
define ACV but stated that the insurer would pay “the actual cash value at the time
of the loss on the damaged part of the property,” subject to certain limits. Id. at
759. The Court ruled that “property” as used in this provision unambiguously
means “the finished product in issue – the result or physical manifestation of
combining” labor and materials. Id. at 770 (emphasis in original). Thus, the
plaintiff was entitled only to ACV as to both labor and materials, yet failing to
depreciate labor would “equat[e] impermissibly to full ‘replacement cost’” for
labor before repairs were undertaken, even though the policy provided for RCV
only after repairs were completed. Id.
Henn v. American Family Mutual Insurance Co., 894 N.W.2d 179 (Neb.
2017), like Papurello, involved an RCV policy with a first-step ACV payment and
no definition of ACV. Id. at 182. Unlike in Papurello, the parties agreed that
ACV is replacement cost minus depreciation. Id. Based largely on a body of
“well-developed [Nebraska] case law on the definition of actual cash value,” the
Henn Court concluded that “[t]he unambiguous definition of actual cash value is a
depreciation of the whole.” Id. at 190. The Court also emphasized its “broad
evidence rule,” under which depreciation of both labor and materials is relevant.
Id. at 189. The Court additionally agreed that payment of undepreciated labor
would be tantamount to RCV as to labor rather than ACV and would result in a
“prepayment of unearned benefits.” Id. at 189-90.
Graves v. American Family Mutual Insurance Co., 2015 WL 4478468 (D.
Kan. 2015), involved a two-step RCV policy that defined ACV as “the amount
which it would cost to repair or replace damaged property with property of like
kind and quality, less allowance for physical deterioration and depreciation,
including obsolescence.” Id. at *1. The Court concluded that a reasonable person
in the plaintiff’s position “would expect [the insurer] to depreciate all costs
necessary to (re)creating the insured ‘property’ – including the costs associated
with labor – when calculating actual cash value.” Id. at 3. The insured
“property,” the Court explained, is “ordinarily understood as an indivisible output”
such as a roof; it is the combined product that is valuable to the insured and that
she seeks to protect from loss, and it is concern for the value of that “ultimate
tangible form” that the policy contemplates. Id. at *3-*5. The Court reasoned
that, since “[t]he value of the finished product diminishes,” both the materials and
the labor invested in the product diminish in value, and each is thus subject to
depreciation. Id. The plaintiff’s view, the Court warned, confuses ACV with
RCV and would unjustly enrich her. Id. at *4-*5.
The Tenth Circuit recently affirmed the District Court in Graves on the
grounds that the plaintiff’s argument “would in effect reduce, if not eliminate, the
distinction between an ‘actual cash value’ policy and the more expensive
‘replacement cost’ policy,” allowing the insured to “receive a windfall … contrary
to the principle of indemnity.” Graves v. American Family Mutual Insurance Co.,
2017 WL 1416278 at *1, *3 (10th Cir. 2017). The panel distinguished a contrary
Arkansas decision on the grounds the policy at issue did not define ACV. Id. at
*3. The Court declined to “dissect depreciation into separate components of
materials and labor costs” because Black’s Law Dictionary (“Black’s”) identifies
ten depreciation methods, none of which distinguish between materials and labor.
Id. at *4.
The policy in Ware v. Metropolitan Property and Casualty Insurance Co.,
220 F. Supp. 3d 1288 (M.D. Ala. 2016), was a two-step RCV policy, with ACV
defined identically, for present purposes, with the Graves policy. Id. at 1289.16
The Ware Court concluded that, because this definition envisions depreciation
from “the entire estimated cost of repairing the covered property,” it “logically
follows that the depreciation allowance includes depreciation of the full estimated
cost of repair, which obviously includes materials and labor.” Id. at 1291. The
policy’s failure to make an express distinction between labor and material repair
costs further supported the Court’s view. Id.
The policy in Brown v. Travelers Casualty Insurance Co. of America, 2016
WL 1644342 (E.D. Ky. 2016), did not define ACV, but the parties agreed that it
meant replacement cost “less depreciation.” Id. at *2. The Court did not focus on
whether the undefined term, “actual cash value,” unambiguously encompasses
labor depreciation. Instead, the Court addressed whether and when labor
depreciates. Beginning with Black’s definition of “depreciation,” the Court
The Ware policy exchanged “repair or replace damaged property with property
of like kind and quality,” 2015 WL 4478468 at *1 (emphasis added), for “repair and
replace covered property with material of like kind and quality.” 220 F. Supp. 3d at 1289
concluded that labor does depreciate when it increases the market value of a good,
but not otherwise. Id. at *2-4. Because the defendant failed to demonstrate that
all of the plaintiff’s claimed damages fell in the former category, the Court denied
its motion for judgment on the pleadings. Id. at *4.
Finally, just last week a sister court in Colorado addressed a policy that
defined ACV as including depreciation and that further warned that ACV “may be
significantly less than … replacement cost.” Basham v. United Services
Automobile Association, 2017 WL 3217768 at *1 (D. Colo. 2017). The Court held
that “the specific policy language here” was unambiguous and that, given that
language “and background insurance principles” regarding indemnity, a
reasonably prudent insured would understand that depreciation would be applied
to labor costs. Id. at *2-*4. While agreeing that “labor does not depreciate”
because it is a service rather than an asset, the Court noted that labor can increase
the value of an asset or create a new one (like a roof), which asset can depreciate.
Before assessing the defendant’s cases, the Court offers a reminder of the
issue before it. The only question presented by the defendant’s motion is whether,
under Alabama law, the undefined term “actual cash value” unambiguously
includes depreciation of labor costs. If a reasonable insured in the plaintiff’s
position, not possessing specialized knowledge or expertise about such matters
and knowing only the Policy language and the common, everyday meaning of the
language employed, could reasonably understand that ACV does not include
depreciation of labor costs, the term is ambiguous and the defendant’s motion
must fail. It does not matter if the defendant’s construction is also reasonable; it
does not even matter if the defendant’s construction is (before or after initiation
into various property and insurance concepts) more reasonable.
The single most unifying theme of the defendant’s cases is the concern that
accepting the insured’s view would lead to at least a temporary overpayment of
the insured beyond her actual loss, resulting in a windfall or unjust enrichment
contrary to the indemnity theory of insurance. There may be reason to question
this concern17 but, in any event, the defendant has failed to show that it has any
bearing on how a reasonable insured would construe the undefined term “actual
cash value.” The defendant certainly has not attempted to show that Alabama law
requires insureds, before forming an understanding of what undefined policy terms
mean, to discover and ponder the myriad and largely hidden commercial and
societal considerations that underlie the insurance industry and its oversight by the
three branches of state government. The Court therefore deems any risk of overindemnity irrelevant to its analysis.18
A related complaint expressed in several of the defendant’s cases is that
making undepreciated labor payable as part of ACV would erase the line between
ACV and RCV. As with over-indemnity, this objection appears to be grounded in
an understanding of these two concepts that is perhaps common among insurers
and others with specialized knowledge but independent of the actual language
used in the policies at issue. To that extent, the Court considers the objection
irrelevant to how a reasonable insured would construe the undefined term “actual
Several of the plaintiff’s authorities consider depreciation of labor from ACV
to under-indemnify the insured. Moreover, the defendant has not demonstrated that overindemnity is a proper concern in the context of an RCV policy. According to the
defendant, indemnity means being placed in the same position after the loss as before the
loss – no better and no worse. (Doc. 11 at 25). But the very point of an RCV policy is to
place the insured in a better position than she previously occupied (because she trades a
used roof for a new one paid for by the insurer). It is thus less than obvious that an initial
payment under an RCV policy that (per the defendant’s cases) likewise places her in a
better position than she previously occupied (receiving more than her used roof was
worth) constitutes a meaningful over-indemnity.
Even if there is a risk of over-indemnity, the defendant has not explained why it
should be judicially protected from this foreseeable consequence of its own imprecise
drafting regarding an issue of which it has been actually aware (as the defendant in
Redcorn) since at least 2002. That the defendant scraped by with a 5-3 decision might
well have prompted a reasonable insurer to consider defining ACV so as to eliminate any
To the extent this argument is based on policy language, it is potentially
relevant to the issue at hand. Again, however, that language must be given its
ordinary sense and construed as a reasonable lay insured would construe it, not
how an insurer, a court, or another with specialized knowledge of what ACV and
RCV are “supposed” to accomplish would view it. The defendant has offered no
textual analysis of the Policy to demonstrate that a reasonable insured would
unambiguously understand that she could not receive undepreciated labor until
after completing the repairs/replacement. The defendant says only that the Policy
“expressly stat[es] that full replacement cost is not owed until repairs are
performed.” (Doc. 11 at 23). What the Policy actually says is that the defendant
will pay “the cost to repair or replace” the damaged property, with an initial
payment of “actual cash value” (whatever that means) before repair/replacement is
completed, and a second payment of “the covered additional amount” (whatever
that is) once repair/replacement is timely completed and proof of same presented.
(Doc. 1-2 at 28). This language clearly means that the two payments add up to the
total cost of repair or replacement, but it does not say or even suggest that
depreciation is paid only at the second step. The defendant’s textual argument
thus does nothing to advance its position that the Policy unambiguously calls for
depreciation of labor from the initial payment of ACV.
Other matters that influenced the resolution of the defendant’s cases, even
if arguably relevant to the meaning of “actual cash value,” do not apply here. The
defendant has identified no well-developed Alabama case law demonstrating that
ACV encompasses depreciation for labor and, as discussed above, Ballard reflects
that the common understanding of ACV does not encompass depreciation at all.
Nor has the defendant shown that Alabama embraces a “broad evidence rule” that
requires depreciation to be considered. The Court cannot look to Black’s
definitions of “depreciation” because its definitions are “inapposite” to undefined
policy terms.19 Finally, the Court cannot examine the wording and syntax of the
Policy’s definition of ACV because, again, no such definition exists.
Thus, the only substantial argument appearing in the defendant’s cases that
could be applied here focuses on the conception of the insured “property” as a
“product” of both materials and labor. The precise explanations vary, but the
basic idea is that, because the property/product diminishes in value over time,
depreciation must be applied to all components of the property/product, including
labor. The Policy likewise provides for payment of ACV as to the damaged
portion of the insured “property,” so there is at least an opening for applying the
argument in this case.
The Court assumes for present purposes that this rationale supports a
reasonable construction of ACV as providing for depreciation of labor costs,
especially when the policy (as in Graves, Ware and Basham) defines ACV as
involving depreciation. Again, however, the question is whether the plaintiff’s
construction is also reasonable. The jurists in the plaintiff’s cases have all thought
As noted, the three Redcorn dissenters concluded that labor “is not logically
depreciable.” 55 P.3d at 1022 (Boudreau, J., dissenting). The Supreme Court of
Arkansas found this dissent “convincing” and “simply [could] not say that labor
falls within that which can be depreciable.” Adams v. Cameron Mutual Insurance
Co., 430 S.W.3d 675, 678, 679 (Ark. 2013). The Court in Bailey v. State Farm
Fire and Casualty Co., 2015 WL 1401640 (E.D. Ky. 2015), likewise found the
Redcorn dissent “more persuasive” and “compelling,” to the point that “[t]he very
idea of depreciating the value of labor defies good common society.” Id. at *7-*8.
And in Wilcox v. State Farm Fire and Casualty Co., 2015 WL 927093 (D. Minn.
Herrera, 912 So. 2d at 1144.
The Court does not consider the various state trial court decisions proffered by
2015), a Magistrate Judge agreed with the Redcorn dissent that “depreciating labor
in an actual cash value policy does not make logical sense.” Id. at *4.21 Even
Brown, which the defendant advances as supporting its position, ruled both that
labor cannot be depreciated when (as with the installation of a home alarm system)
it does not increase the market value of the material, and that for many items (such
as installing walls) it is far from clear whether the labor depreciates or not. 2016
WL 1644342 at *3-*4. Similarly, the Minnesota Supreme Court concluded that
“certain [not “all”] embedded labor costs may be [not “are”] depreciable,
depending on the facts and circumstances of the particular case.” Wilcox v. State
Farm Fire and Casualty Co., 874 N.W.2d 780, 785 (Minn. 2016) (emphasis in
Construing a policy substantively identical to the Policy, the Court in
Labrier v. State Farm Fire and Casualty Co., 147 F. Supp. 3d 839 (W.D. Mo.
2015), ruled that both ACV and the missing term “depreciation” are ambiguous,
with some common meanings of the latter term “focus[ed] on material condition,”
id. at 849; thus, while an ordinary lay person reading the policy would understand
that ACV is less than RCV, she would not be able to tell “what is being deducted
at the first step.” Id. at 850.22 Even with a policy defining ACV to include
depreciation “for physical deterioration and obsolescence,” Judge Bough
concluded that the quoted language limited the permissible depreciation to
materials, not labor. Riggins v. American Family Mutual Insurance Co., 106 F.
Supp. 3d 1039, 1040-41 (W.D. Mo. 2015). The Court in Lains v. American
The District Court did not adopt the Magistrate Judge’s recommendation to
deny the defendant’s motion to dismiss the breach of contract claim but instead adopted
the alternative recommendation to certify the question to the Minnesota Supreme Court.
Wilcox v. State Farm Fire and Casualty Co., 2015 WL 927342 (D. Minn. 2015).
Judge Laughrey issued a second, substantively similar opinion in Boss v.
Travelers Home & Marine Insurance Co., 2016 WL 3983833 (W.D. Mo. 2016).
Family Mutual Insurance Co., 2016 WL 4533075 (W.D. Wash. 2016), found the
same language capable of either construction and thus ambiguous. Id. at *1, *2.
The Court does not adopt all the reasoning of the plaintiff’s cases. Some of
them, for example, invoke indemnity principles, some rely on Black’s definitions,
and some do not view the issue through the prism of a reasonable insured. But
they point the way to the correct resolution of the defendant’s motion, because
they make clear that a reasonable insured, armed only with the Policy language
and everyday meaning of the words used, could reasonably understand that ACV
does not encompass depreciation of labor costs.23
First, a reasonable insured could reasonably understand that labor does not
depreciate. As reflected and explained in the cited cases, this is a plausible
conception for a wealth of thoughtful, knowledgeable judges, and it is even more
so for lay insureds with no special competence in property or insurance matters.
Second, and related to the first, a reasonable insured could reasonably understand
that depreciation in its everyday sense applies only to physical deterioration, and
she could reasonably understand that labor does not sustain such deterioration
because it is not physical. Third, a reasonable insured in the plaintiff’s position
could reasonably understand that the Policy does not call for depreciation of things
that do not depreciate, due to the inherent logical contradiction of depreciating
While not essential to this conclusion, the Court notes that the defendant has
injected evidence that “[s]ome adjusters believe only the material and not the labor
should be depreciated.” (Doc. 11 at 28). While the defendant focuses on the conclusion
of the source material’s author that such a position “makes little sense,” (id.; Doc. 27 at
14), the fact remains that the defendant has confirmed that some percentage of insurance
adjusters, like some percentage of jurists, share the plaintiff’s understanding.
The defendant insists that depreciation of labor costs occurs in other contexts –
including tax law, maritime law and appraisals – and under various state statutes and
regulations. (Doc. 11 at 21, 26 n.16, 28-29 & 29 n.17). A reasonable insured, however,
is not charged with knowledge of these usages, and the defendant has failed to explain
how they could negate the reasonableness of construing the Policy as not providing for
depreciation of labor costs.
It is clear that the plaintiff has standing to pursue her claim. Moreover, the
defendant has not demonstrated that the Policy unambiguously provides for
depreciation of labor costs. Accordingly, and for the reasons set forth above, the
defendant’s motion to dismiss is denied, and the plaintiff’s motion to remand is
DONE and ORDERED this 3rd day of August, 2017.
s/ WILLIAM H. STEELE
UNITED STATES DISTRICT JUDGE
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