IN THE SUPREME COURT OF TENNESSEE

AT NASHVILLE

October 4, 2018 Session

GREGORY J. LAMMERT, ET AL. v. AUTO-OWNERS (MUTUAL) 

INSURANCE COMPANY

Rule 23 Certified Question of Law

from the United States District Court

for the Middle District of Tennessee

No. 3:17-cv-00819 Waverly D. Crenshaw, Jr., Chief Judge

___________________________________

No. M2017-02546-SC-R23-CV

___________________________________

The United States District Court for the Middle District of Tennessee has submitted a 

certified question of law pursuant to Tennessee Supreme Court Rule 23 regarding the 

interpretation of two insurance policies: “Under Tennessee law, may an insurer in making 

an actual cash value payment withhold a portion of repair labor as depreciation when the 

policy (1) defines 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 (2) states that ‘actual cash 

value includes a deduction for depreciation?”’ Based on Tennessee law regarding the 

interpretation of insurance contracts, we conclude that the language in the policies is 

ambiguous and must be construed in favor of the insured parties. Therefore, we answer 

the district court’s question in the negative: The insurer may not withhold a portion of 

repair labor as depreciation. 

Tenn. Sup. Ct. R. 23 Certified Question of Law

ROGER A. PAGE, J., delivered the opinion of the court, in which JEFFREY S. BIVINS, C.J.,

CORNELIA A. CLARK, SHARON G. LEE, and HOLLY KIRBY, JJ., joined.

J. Brandon McWherter, Franklin, Tennessee, T. Joseph Snodgrass, St. Paul, Minnesota, 

and David McMullan, Jr., Lexington, Mississippi, for the petitioners, Gregory J. 

Lammert, Jamie Lammert, Larry Reasons, and Susan Reasons.

04/15/2019
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John S. Hicks and Charles Covington McLaurin, Nashville, Tennessee, and Todd A. 

Noteboom and Jeffrey G. Mason, Minneapolis, Minnesota, for the respondent, AutoOwners (Mutual) Insurance Company.

John E. Quinn, Nashville, Tennessee, for the amici curiae, American Insurance 

Association, National Association of Mutual Insurance Companies, and Property 

Casualty Insurers Association of America. 

William F. Merlin, Jr., Tampa, Florida, for the amicus curiae, United Policyholders. 

OPINION

In 2017, Petitioners1 Gregory J. Lammert, Jamie Lammert, Larry Reasons, and 

Susan Reasons (“the homeowners”) filed a putative class-action suit against Respondent 

Auto-Owners (Mutual) Insurance Company (“Auto-Owners”), their property insurance 

company, for breach of contract.2 When Auto-Owners moved to dismiss the complaint, 

the homeowners opposed the motion to dismiss and contemporaneously requested that 

the district court consider certifying a question of law to this Court to resolve the issue of 

whether the cost of repair and replacement labor can be depreciated when calculating the 

actual cash value of a property using the replacement-cost-less-depreciation method of 

calculation. The district court certified the question to this Court on December 22, 2017. 

The facts set forth herein are derived from the district court’s certification order and its 

accompanying memorandum opinion. See Embraer Aircraft Maint. Servs., Inc. v. 

AeroCentury Corp., 538 S.W.3d 404, 407 (Tenn. 2017) (citing Allmand v. Pavletic, 292 

S.W.3d 618, 621 (Tenn. 2009)). 

The Lammerts owned a home and other structures in Nashville that were insured 

with Auto-Owners under a “Dwelling Insurance Policy.” Some of the Lammerts’ 

buildings were damaged in a hail storm on May 10, 2016. They filed a claim with AutoOwners, who informed them that the claim would be settled on an actual cash basis. 

Using a replacement-cost-less-depreciation method, Auto-Owners calculated that it 

would cost $12,146.55 to repair and replace the damage with new materials. After 

subtracting $2,160.19 in depreciation, Auto-Owners informed the Lammerts that the 

actual cash value of their property was $9,986.36. After the Lammerts inquired about the 

depreciation, Auto-Owners confirmed that both labor and materials had been depreciated. 

 

1

Under section 6 of Tennessee Supreme Court Rule 23, “The party designated by the certifying 

court as the moving party shall be referred to as the petitioner and the party adverse to the petitioner shall 

be referred to as the respondent.”

2

 Procedural history is derived from the briefs filed in this case because the district court order

did not include these details. 
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The Reasons’ home is located in Jackson, Tennessee, and the Reasons insured 

their house and related structures through Auto-Owners under a “Homeowners Insurance 

Policy.” The property was damaged twice, once by hail in November 2016 and again by 

wind in March 2017. They filed claims for each loss, which Auto-Owners accepted. 

When Auto-Owners calculated its obligation to the Reasons, it used the replacement-costless-depreciation method and deducted depreciation for both labor and materials when 

calculating the actual cash value. 

The parties disagree on the interpretation of the insurance policies, with the 

homeowners arguing that Auto-Owners should not have depreciated the cost of the labor 

to repair and replace the damaged property when calculating the actual cash value of the 

respective properties. The district court determined that this is a question of state law for 

which there is no controlling precedent and that the resolution of the question will

determine the outcome of the putative class action; therefore, it certified the following 

question to this Court pursuant to our Rule 233: 

Under Tennessee law, may an insurer in making an actual cash value 

payment withhold a portion of repair labor as depreciation when the policy 

(1) defines 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 (2) states that “actual cash value includes a deduction for 

depreciation”?

ANALYSIS

Standard of Review

This question concerns the interpretation of insurance policies. In general, we 

“construe insurance contracts in the same manner as any other contract.” Am. Justice Ins. 

Reciprocal v. Hutchison, 15 S.W.3d 811, 814 (Tenn. 2000). “The language of the policy 

 

3

Section 1 of Tennessee Supreme Court Rule 23 states: 

The Supreme Court may, at its discretion, answer questions of law certified to it 

by the Supreme Court of the United States, a Court of Appeals of the United States, a 

District Court of the United States in Tennessee, or a United States Bankruptcy Court in 

Tennessee. This rule may be invoked when the certifying court determines that, in a 

proceeding before it, there are questions of law of this state which will be determinative 

of the cause and as to which it appears to the certifying court there is no controlling 

precedent in the decisions of the Supreme Court of Tennessee.
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must be taken and understood in its plain, ordinary and popular sense.” Id. “In addition, 

contracts of insurance are strictly construed in favor of the insured, and if the disputed 

provision is susceptible to more than one plausible meaning, the meaning favorable to the 

insured controls.” Garrison v. Bickford, 377 S.W.3d 659, 664 (Tenn. 2012) (citing Tata 

v. Nichols, 848 S.W.2d 649, 650 (Tenn. 1993)). Nonetheless, “[a] strained construction 

may not be placed on the language used to find ambiguity where none exists.” FarmersPeoples Bank v. Clemmer, 519 S.W.2d 801, 805 (Tenn. 1975). 

Arguments of the Parties

The question presented in this case concerns whether a portion of the cost of labor 

to repair and replace damaged property can be deducted from the total replacement cost 

when calculating the actual cash value of a property. The two policies in this case 

contain different language. The Lammerts’ policy defines 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,” while the Reasons’ policy does not define actual cash value but states that actual 

cash value includes a deduction for depreciation. The parties agree that under both 

policies, the method used to calculate the actual cash value is replacement cost less 

depreciation. Importantly, neither policy specifically mentions labor costs. 

The homeowners contend that the language in the Lammerts’ policy 

unambiguously limits depreciation to the cost of the replacement materials by use of the 

terms “damaged property” and “prior to the loss.” According to them, “damaged 

property” eliminates labor costs because labor is intangible, and “prior to the loss” 

likewise eliminates labor costs because the labor costs at issue are post-loss costs. The 

homeowners also point to the definition of depreciation in the policy—“a decrease in 

value because of age, wear, obsolescence or market value”—to show that labor cannot be 

depreciated because it does not age, wear out, become obsolete, or (generally speaking) 

decrease in market value.4The homeowners further argue that the language in the 

Reasons’ policy is ambiguous and should be construed in their favor because labor is not 

depreciable. Auto-Owners maintains that neither policy is ambiguous and that 

depreciation of a property is taken from the total replacement cost, which includes both 

labor and materials. 

 

4

This definition is not included in the district court’s order or its memorandum opinion. 

However, the policy in question is attached to the homeowners’ brief in toto. While attachments to 

appellate briefs are generally not considered part of the record, see Tenn. R. App. P. 13(c), in this 

situation, the policy is clearly part of the record of the trial court and would have been in the record before 

this Court had we required the record, see Tenn. Sup. Ct. R. 23, § 5. Therefore, we will consider the 

policy as a whole for purposes of our analysis. 
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Background

Central to the discussion in this opinion are the concepts of indemnity, actual cash 

value, and depreciation. This Court in Braddock v. Memphis Fire Insurance Corp., 493 

S.W.2d 453, 459–60 (Tenn. 1973), explained that insurance contracts are contracts of 

indemnity, meaning that the purpose of the insurance contract “is to reimburse the 

insured; to restore him as nearly as possible to the position he was in before the loss.” 

Accordingly, if an insured were to make a profit on a loss by recovering the cost of a new 

roof for a damaged roof that was fifteen years old, then “[t]he ends of indemnity would 

not have been served.” Id. at 460. On the other hand, if an insured were able to replace a

loss “with a substitute identical in kind and quality” then “complete indemnity” would be

accomplished. McAnarney v. Newark Fire Ins. Co., 159 N.E. 902, 904 (N.Y. 1928). 

Because such a substitution is not generally possible when the damaged article is, for 

example, a fifteen-year-old roof, indemnity is instead accomplished through recovery of 

the actual cash value of a damaged property. 

The generally accepted definition of “actual cash value” is “actual value expressed 

in terms of money.” See Third Nat’l Bank v. Am. Equitable Ins. Co. of New York, 178 

S.W.2d 915, 924 (Tenn. Ct. App. 1943). However, there are multiple methods for 

determining actual cash value, including market value, replacement cost less 

depreciation, and the broad evidence rule. Elberon Bathing Co. v. Ambassador Ins. Co.,

389 A.2d 439, 443 (N.J. 1978). The New Jersey Supreme Court provided an excellent 

analysis of each method in Elberon: 

Market value is generally defined as the price a willing buyer would 

pay a willing seller, at a fair and [b]ona fide sale by private contract, neither 

being under any compulsion . . . . But there is a problem in that a building 

ordinarily has no recognized market value independent of the parcel of 

property in entirety, land and building together . . . . 

Replacement cost less depreciation has the advantage of relative 

definiteness. It is also easily ascertained. However, it is inflexible, and this 

characteristic often results in excessive recovery. Many structures today 

have a high replacement value because of the inflated cost of building 

materials even though their true commercial value represented by rentals, 

prospective profits, usefulness to the present owner, location and age is 

considerably less . . . .

The problem of excessive recovery under the replacement cost less 

depreciation rule together with the occasional uncertainty of market value 
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prompted development of what is now the most widely accepted rule, 

generally denominated as the “broad evidence rule[,]” [which the New 

York Court of Appeals defined as follows:]

. . . .

Where insured buildings have been destroyed, the trier 

of fact may, and should, call to its aid, in order to effectuate 

complete indemnity, every fact and circumstance which 

would logically tend to the formation of a correct estimate of 

the loss. It may consider original cost and cost of 

reproduction; the opinions upon value given by qualified 

witnesses; the declarations against interest which may have 

been made by the assured; the gainful uses to which the 

buildings might have been put; as well as any other fact 

reasonably tending to throw light upon the subject.

Elberon, 389 A.2d at 443-44 (internal citations omitted) (quoting McAnarny, 159 N.E. at 

905). 

Regarding depreciation, Black’s Law Dictionary defines depreciation as “[a] 

reduction in the value or price of something; specif[ically] a decline in an asset’s value 

because of use, wear, obsolescence, or age.” Depreciation, Black’s Law Dictionary (10th

ed. 2014), available at Westlaw. “Depreciation in insurance law is not the type that is 

charged off the books of a business establishment, but rather it is the actual deterioration 

of a structure by reason of age, and physical wear and tear, computed at the time of the 

loss.” Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017, 1020 (Okla. 2002). 

In this case, the parties agree on the method for calculating actual cash value—

replacement cost less depreciation. What they disagree on is whether depreciation 

applies only to the materials or to both materials and labor. The homeowners claim that 

applying depreciation to both materials and labor defeats the indemnity purpose of 

insurance by not making the homeowners whole, while Auto-Owners counters that 

applying depreciation only to materials results in a windfall to the homeowners, thus also 

defeating the purpose of indemnity. 

The following hypothetical illustrates the dilemma. Suppose that laminate 

flooring with half of its useful life remaining is damaged by a sewer backup and that the 

homeowner has an insurance policy providing that the insurance company will cover the 

actual cash value of damaged property, calculated by deducting depreciation from the 

replacement cost. Further suppose that it would cost $10,000 to replace the floor, with 
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$5,000 in labor costs and $5,000 in material costs. If depreciation is deducted from 

material costs alone, then the actual cash value for the floor is $7,500. If depreciation is 

deducted from the total replacement cost, then the actual cash value of the floor is $5,000. 

This discussion about the depreciation of labor costs is not occurring in a vacuum. 

Both sides have presented many cases supporting their divergent positions.5 We will 

highlight a few of the more noteworthy opinions, beginning with the Oklahoma Supreme 

Court case Redcorn v. State Farm Fire & Casualty Co., 55 P.3d 1017 (Okla. 2002). 

In that case, the homeowner’s roof was damaged by weather, and State Farm 

issued a payment for the actual cash value of the roof, calculated using the replacement 

cost less depreciation method. Redcorn, 55 P.3d at 1019. The policy did not define the 

term “actual cash value.” Id. The majority of the Oklahoma Supreme Court (five 

justices) ruled that it was appropriate for the insurance company to consider “the age and 

condition of a roof, both materials and labor, in setting an amount of loss.” Id. at 1021. 

Because Oklahoma follows the “broad evidence” rule, the Oklahoma Supreme Court 

stated that “a fact-finder is entitled to consider what the life of the destroyed roof, both 

materials and labor, would have been, as well as any other relevant evidence presented.” 

Id. The reasoning is essentially that everything can be considered under the broad 

evidence rule, so any depreciation of labor should also be considered. However, the 

Oklahoma Supreme Court went further and also ruled that labor must be depreciated to 

prevent overindemnification. Id. The majority opinion explained that the homeowner 

“insured a roof surface, not two components, material and labor. He did not pay for a 

hybrid policy of actual cash value for roofing materials and replacement costs for labor. 

To construe the policy in such a manner would unjustly enrich the policy holder.” Id. 

The Redcorn dissenters, three of the eight justices on the panel (one justice was 

recused), would have held that labor costs cannot be depreciated. Id. at 1022 (Boudreau, 

J., dissenting). Justice Boudreau redefined the issue presented to ask “whether 

depreciating the cost of labor to replace Redcorn’s roof logically tends to establish the 

correct estimate of the actual cash value of the roof at the time of the loss.” Id. Justice 

Boudreau reasoned that a roof is not an integrated product but rather “a combination of a 

product (shingles) and a service (labor to install the shingles).” Id. He readily agreed 

 

5

 The following is a non-exhaustive list of cases in favor of the insured: Titan Exteriors, Inc. v. 

Certain Underwriters at Lloyd’s, London, 297 F. Supp. 3d 628 (N.D. Miss. 2018); Arnold v. State Farm 

Fire and Cas. Co., 268 F. Supp. 3d 1297 (S.D. Ala. 2017); Brown v. Travelers Cas. Ins. Co. of America., 

No. 15-50-ART, 2016 WL 1644342 (E.D. Ky. Apr. 25, 2016); Lains v. Am. Family Mut. Ins. Co., No. 

C14-1982-JCC, 2016 WL 4533075 (W.D. Wash. Feb. 9, 2016). The following is a non-exhaustive list of 

cases in favor of the insurance companies: Graves v. Am. Family Mut. Ins. Co., 686 F. App’x 536 (10th 

Cir. 2017); In re: State Farm Fire and Cas. Co., 872 F.3d 567 (8th Cir. 2017); Henn v. Am. Family Mut. 

Ins. Co., 894 N.W.2d 179 (Neb. 2017).
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that shingles are depreciable because they “lose value due to wear and tear,” but he 

concluded that labor is not depreciable because labor does not “lose value due to wear 

and tear[, or] lose value over time.” Id. Justice Boudreau concluded that “allowing State 

Farm to depreciate the cost of labor would leave Redcorn with a significant out-of-pocket 

loss, a result that is inconsistent with the principle of indemnity.” Id. at 1023. Justice 

Summers, in a separate dissenting opinion, succinctly stated the following: 

Before the damage the insured had on his house a roof with sixteen-yearold shingles. After the damage the insured is contractually entitled to have 

on his house sixteen-year-old shingles, or their value in money. He should 

not bear any of the cost of installing them, because that would deprive him 

of that for which he contracted-being made whole as if the damage had not 

occurred.

Id. (Summers, J., dissenting). 

A decade later, the issue came before the Arkansas Supreme Court in Adams v. 

Cameron Mutual Insurance Co., 430 S.W.3d 675 (Ark. 2013), superseded by statute,

Ark. Code Ann. § 23-88-106(a)(2). In that case, the Arkansas Supreme Court determined 

that both parties presented tenable interpretations of the term “actual cash value,” thus 

making the term ambiguous. Id. at 678. The majority opinion then stated that it agreed 

more with the Redcorn dissenters than with the majority and concluded that labor was not 

depreciable. Id. at 678-79. Some years later, however, the Arkansas legislature enacted 

Arkansas Statute section 23-88-106, which specifically included the cost of labor in its 

definition of an expense depreciation, effectively abrogating Adams.

Two other state supreme courts have addressed this issue, Nebraska and 

Minnesota. The Nebraska Supreme Court in Henn v. American Family Mutual Insurance 

Co., 894 N.W.2d 179 (Neb. 2017), sided with the Oklahoma Supreme Court majority by 

reasoning that “property is a product of both materials and labor” and holding that proper 

indemnification occurs when both labor and materials are depreciated from the 

replacement costs. Id. at 189. The court agreed with the defendant insurance company 

that “a payment of actual cash value that included the full cost of labor would amount to 

a prepayment of unearned benefits.” Id. at 190. The opinion also discussed the fact that 

Nebraska utilized both the market value and the broad evidence rule for determining 

actual cash value and noted that both methods allow for the consideration of all facts and 

circumstances related to value. Id. at 189. 

The Minnesota Supreme Court took a third approach to answering the issue by 

determining that the depreciation of labor costs is an issue of fact rather than law. Wilcox 

v. State Farm Fire & Cas. Co., 874 N.W.2d 780, 785 (Minn. 2016). The court had 
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previously adopted the broad evidence rule in Brooks Realty, Inc. v. Aetna Insurance Co., 

149 N.W.2d 494 (Minn. 1967), “in order to effectuate indemnity in the fairest manner,” 

and in Wilcox, the court held that the “logical conclusion of Brooks Realty is that certain 

embedded labor costs may be depreciable, depending on the facts and circumstances of 

the particular case.” Wilcox, 874 N.W.2d at 785.

Three federal circuit courts of appeals have also addressed this issue based on the 

state law of the cases under consideration. The Eighth Circuit in In re State Farm Fire 

and Casualty Co. denied class certification in a lawsuit out of Missouri, reasoning that 

there were no predominate common facts because the issue of whether State Farm’s 

methodology for calculating actual cash value could “only be determined based on all the 

facts surrounding a particular insured’s partial loss.” In re State Farm Fire & Cas. Co., 

872 F.3d 567, 577 (8th Cir. 2017). The Eighth Circuit also reversed the district court 

because it did not address “whether depreciating what a contractor will charge to replace 

the partial loss is a reasonable method of estimating” the actual cash value of the 

property. Id. at 576. The same circuit reached a different result when deciding a case 

based on Arkansas law. In Stuart v. State Farm Fire and Casualty Co., the Eighth Circuit 

affirmed the class certification because under the Adams opinion, labor was never to be 

depreciated when calculating actual cash value based on the replacement-cost-lessdepreciation method. Stuart, 910 F.3d 371, 375-76 (8th Cir. 2018). The court explained: 

There is no need for a jury to evaluate conflicting estimates based on 

different methodologies; the parties agreed on a methodology and the only 

dispute is over including labor depreciation in the calculation, which is a 

discrete portion of the formula that is easily segregated and quantified. 

Arkansas law under Adams differs from Missouri law in that it explicitly 

prohibited insurers from depreciating the costs of labor when using this 

formula.

Id. at 376. 

The Tenth Circuit, in a case applying Kansas Law, considered whether the district 

court appropriately granted summary judgment in favor of the insurance company on the 

grounds that labor depreciation was allowed under Kansas law. Graves v. Am. Family 

Mut. Ins. Co., 686 F. App’x 536, 537-38 (10th Cir. 2017). The Tenth Circuit upheld the 

district court’s decision, holding that a reasonably prudent insured would expect 

depreciation to apply to the whole cost of replacing an asset rather than “an unorthodox 

depreciation method” that involves treating materials and labor differently. Id. at 540.

The most recent appellate case to address the issue before us was decided by the 

Sixth Circuit Court of Appeals during the pendency of this case, Hicks v. State Farm Fire 
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& Casualty Co., 751 F. App’x 703 (6th Cir. 2018). In that case, the Sixth Circuit 

concluded that under Kentucky law, the term “actual cash value” was ambiguous, not 

because it was undefined but because the word “depreciation” as used in the statutory 

definition of “actual cash value” was itself ambiguous. Id. at 708-10. Because the parties 

presented two reasonable interpretations of the term “depreciation” in the context of the 

policy—to allow for depreciation of labor and to allow for depreciation of materials 

only—the term was deemed ambiguous, and the insurance contract was construed strictly 

against the insurance company. Id. at 710. The Sixth Circuit noted that the cases cited 

by State Farm in favor of its position “come primarily from states where the broad 

evidence rule applies or where the policies at issue expressly define ACV.” Id. On the 

other hand, in states prescribing a replacement cost less depreciation method, the courts 

tended to rule in favor of the insured. Id. at 710-11.

We also note that some state insurance departments have addressed this issue. 

California’s insurance regulations, for instance, specifically state that “the expense of 

labor necessary to repair, rebuild or replace covered property is not a component of 

physical depreciation and shall not be subject to depreciation or betterment.” Cal. Code 

Regs. tit. 10, § 2695.9(f)(1) (2019). The Vermont Department of Financial Regulation 

Insurance Bulletin No. 184 prohibits the depreciation of repair and replacement labor. 

Susan L. Donegan, Comm’r, Property Loss Claims: No Labor Depreciation, Vt. Dep’t of 

Fin. Regulation (May 1, 2015), available at

https://dfr.vermont.gov/sites/finreg/files/regbul/dfr-bulletin-insurance-184.pdf. On the 

other hand, Mississippi Insurance Department Bulletin 2017-8 states that there is no 

statutory prohibition to labor depreciation in that state but that “the insurer should clearly 

provide for the depreciation of labor in the insurance policy.” Mike Chaney, Comm’r, 

Depreciation of Labor Expenses in Property Loss Claims, Miss. Ins. Dep’t (Aug. 4, 

2017), available at https://www.mid.ms.gov/legal/bulletins/20178bul.pdf. 

Application

Auto-Owners argues that Tennessee is a broad evidence state and that this court 

should follow other broad evidence states in concluding that labor is depreciable. First, 

we note that this Court has never adopted the broad evidence rule. In Braddock, this 

Court merely acknowledged that the broad evidence rule and the replacement-cost-lessdepreciation method both accomplished indemnity. Braddock, 493 S.W.2d at 460. 

Moreover, whether Tennessee is a broad evidence state is not at issue because in this 

case, as the homeowners point out, the parties agreed that the actual cash value was to be 

calculated based on the replacement cost method.6 

 

6

 We also note that after the claims were filed in this case, the Tennessee Department of 

Insurance promulgated a regulation specifying that the replacement cost less depreciation method was to 
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In the end, this case turns on our standard for interpreting insurance contracts 

because both parties have presented plausible interpretations of the policies, neither of 

which explicitly states whether labor expenses are depreciable when calculating the 

actual cash value. On the one hand, the homeowners’ position that labor is not 

depreciable is well-taken. “Depreciation in insurance law is not the type that is charged 

off the books of a business establishment, but rather it is the actual deterioration of a 

structure by reason of age, and physical wear and tear, computed at the time of the loss.” 

Redcorn, 55 P.3d at 1020. With this understanding, it is reasonable that a homeowner 

would understand that depreciation would only be applicable to material goods that can 

age and experience wear and tear. It is also reasonable that a homeowner, knowing that 

replacement costs include both labor and materials to rebuild a roof, would believe that 

the insurance company would only apply depreciation to the physical materials, those 

things that actually deteriorated. Auto-Owners argues that the homeowners’ 

interpretation is not reasonable because depreciation is a numerical factor to be applied to 

the replacement cost to calculate the actual cash value and is not reflective of literal 

deterioration. 

In reaching our conclusion, we must keep in mind that “the terms of a contract of 

insurance are to be construed according to their plain, ordinary, popular sense unless they 

have acquired a technical sense in commercial usage.” Swindler v. St. Paul Fire & 

Marine Ins. Co., 444 S.W.2d 147, 148 (Tenn. 1969) (citations omitted). However, the 

technical sense must be clearly conveyed in the policy itself: 

In our view, an insured should not have to consult a long line of case law or 

law review articles and treatises to determine the coverage he or she is 

purchasing under an insurance policy. Policy language should be given its 

plain meaning, unless a technical meaning is clearly provided in the 

insurance policy. 

Harrell v. Minn. Mut. Life Ins. Co., 937 S.W.2d 809, 814 (Tenn. 1996) (abandoning the 

distinction between “accidental means” and “accidental results” because “it is 

inconceivable that the average insured would understand the fine distinction”). 

Moreover, when language is ambiguous, it is to be “construed against the insurance 

company and in favor of the insured.” Id. 

Here, Auto-Owners argues for a technical definition of depreciation that is not 

evident on the face of either policy. Taking the term in its ordinary sense, it applies to 

 

be used when calculating actual cash value. Tenn. Comp. R. & Regs. 0780-01-05-.10 (effective Oct. 

2017). 
- 12 -

physical deterioration, which is the meaning attributed to it by the homeowners. As this 

Court has previously stated, “if the disputed provision is susceptible to more than one 

plausible meaning, the meaning favorable to the insured controls.” Garrison, 377 

S.W.3d at 664. Therefore, construing the policy language in favor of the insured, 

depreciation can only be applied to the cost of materials, not to labor costs. 

Auto-Owners also contends that if the homeowners’ interpretation is correct, then 

indemnity is not accomplished because instead of receiving the actual value of their 

property in terms of money, the insured would never receive less than the cost of the 

labor, even if the labor was worth more than the actual property prior to the loss. The 

homeowners, however, argue that depreciating labor costs would underindemnify the 

insureds because they would bear the out-of-pocket costs of reinstalling the damaged 

asset. They would agree with Oklahoma’s Justice Summers, who wrote in his dissenting 

opinion in Redcorn that Redcorn was “contractually entitled to have on his house sixteenyear-old shingles, or their value in money. He should not bear any of the cost of 

installing them because that would deprive him of that for which he contracted-being 

made whole as if the damage had not occurred.” Redcorn, 55 P.3d at 1023 (Summers, J., 

dissenting). 

Ultimately, it is not necessary for this Court to reach the decision of whether labor 

can logically depreciate or whether indemnity is accomplished. It is enough that we find 

the contracts ambiguous and that under our standard of review, the interpretation of the 

insured must prevail. We conclude that the answer to the district court’s certified 

question is no, the insurance company cannot withhold a portion of the labor costs as 

depreciation under either policy. 

CONCLUSION

We conclude that the language regarding depreciation in the policies in question is 

ambiguous. Under Tennessee law, ambiguities in insurance contracts are strictly 

construed against the insurance companies and in favor of the insured. Therefore, with 

the insured’s interpretation controlling, labor may not be depreciated when the insurance 

company calculates the actual cash value of a property using the replacement cost less 

depreciation method. 
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The Clerk is directed to transmit a copy of this opinion to the United States 

District Court for the Middle District of Tennessee in accordance with Tennessee 

Supreme Court Rule 23, section 8. Costs in this Court are taxed to Auto-Owners, for 

which execution may issue if necessary. 

_________________________________

 ROGER A. PAGE, JUSTICE