Opinion ID: 4517507
Heading Depth: 2
Heading Rank: 3

Heading: depreciation of labor costs

Text: Now we turn to the merits. The question on appeal is whether Perry’s insurance policy permits Allstate to depreciate labor costs in calculating ACV. Allstate argues that it was entitled to depreciate labor costs, in addition to the cost of materials, in calculating ACV. Perry says the policy is ambiguous. The district court sided with Allstate and granted Allstate’s motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). We review de novo the decision to dismiss Perry’s complaint. See Robbins v. New Cingular Wireless PCS, LLC, 854 F.3d 315, 318 (6th Cir. 2017). Neither the insurance policy nor the Ohio Administrative Code defines “depreciation.” And the Ohio Supreme Court has not weighed in on this question. Thus, “depreciation” is left undefined and, Perry argues, is ambiguous. We agree that the policy is ambiguous and hold that Allstate improperly depreciated labor costs in calculating ACV. In cases where our jurisdiction is based on diversity, we apply the substantive law of the state in which the district court sits according to the decisions of the state’s highest court. Kepley v. Lanz, 715 F.3d 969, 972 (6th Cir. 2013). Our case arises under Ohio law, so we must look to the decisions of the Ohio Supreme Court. Where, as here, the Ohio Supreme Court has not spoken on an issue, we look to the decisions of its lower courts, to the extent they are persuasive, to predict how the Ohio Supreme Court would decide the issue. Id.; Bailey v. V & O Press Co., 770 F.2d 601, 604 (6th Cir. 1985). The results of that search are inconclusive. Although two Ohio appellate courts have held in published decisions in different contexts that labor costs are not depreciable, two other appellate courts came out the opposite way in unpublished decisions, and no Ohio appellate court has addressed depreciation in this context. See Ohio Edison Co. v. Royer, 92 N.E.3d 912, 917 (Ohio Ct. App. 2018) (excluding labor costs from depreciation of damages in the context of a tort claim for destruction of a utility pole); Illuminating Co. v. Wiser, 114 N.E.3d 240, 246 (Ohio Ct. App. 2018) (same); Ohio Edison Co. v. Soule, No. S-17-052, 2018 WL 6016743, at  (Ohio Ct. App. Nov. 16, 2018) (unpublished) (finding that labor costs No. 18-4267 Perry v. Allstate Indemnity Co., et al. Page 5 were depreciable in the context of a tort claim for destruction of a utility pole); Helfrich v. Helfrich, No. 97APF08-975, 1998 WL 63528, at  (Ohio Ct. App. Feb. 10, 1998) (unpublished) (stating that separating labor costs from material costs for the replacement of concrete in a child support case was “fundamentally unsound”). The only Ohio courts to have addressed the precise question of depreciating labor costs in calculating ACV are two trial courts. They came to opposite conclusions. See Ingram v. Liberty Ins. Corp., No. 16CV005538, at p. 6 (Ohio Ct. Com. Pl. Mar. 13, 2018) (unpublished); Parker v. Am. Family Ins. Co., No. CV-16-865773, at pp. 6–8 (Ohio Ct. Com. Pl. June 13, 2019) (unpublished). We simply have no clear answer from Ohio law on whether labor costs are depreciable in calculating ACV. We therefore 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. Andersen v. Highland House Co., 757 N.E.2d 329, 332–33 (Ohio 2001). “[I]t will not suffice for [the insurer] to demonstrate that its interpretation is more reasonable than the policyholder’s.” Id. at 333 (quotation omitted). Instead, “in order to defeat coverage, the insurer must establish not merely that the policy is capable of the construction it favors, but rather that such an interpretation is the only one that can fairly be placed on the language in question.” Id. at 332 (quotation omitted) (emphasis added). If the policy is ambiguous, and the insured’s interpretation is reasonable, the insured prevails. We recently held in Hicks v. State Farm Fire & Casualty Co., a case arising under Kentucky law, that nearly identical policy language was ambiguous. 751 F. App’x 703 (6th Cir. 2018).3 Under Kentucky law, policies are ambiguous if they are susceptible to more than one reasonable interpretation. Id. at 709 (citing Bituminous Cas. Corp. v. Kenway Contracting Inc., 240 S.W.3d 633, 641 (Ky. 2007)). “A layperson confronted with State Farm’s policy,” we held, “could reasonably interpret the term depreciation to include only the cost of materials.” Id. Like 3 That Hicks was decided under Kentucky law rather than Ohio law makes no difference because Kentucky’s and Ohio’s methodologies for interpreting insurance policies are identical in all material respects. In addition to construing an ambiguous policy strictly against the insurer, a policy is ambiguous under both Kentucky and Ohio law if the meaning of a term is not clear on the policy’s face. See Bidwell v. Shelter Mut. Ins. Co., 367 S.W.3d 585, 588–89 (Ky. 2012); Ohio N. Univ. v. Charles Constr. Servs., Inc., 120 N.E.3d 762, 766 (Ohio 2018). Kentucky and Ohio courts decide whether a term is ambiguous based on its plain meaning. See Pryor v. Colony Ins., 414 S.W.3d 424, 430 (Ky. Ct. App. 2013); Charles Constr. Servs., 120 N.E.3d at 766. No. 18-4267 Perry v. Allstate Indemnity Co., et al. Page 6 Ohio law, Kentucky law dictates that an ambiguous insurance policy must be construed strictly against the insurer and in favor of the insured, so long as the insured’s proposed interpretation is reasonable. See Bidwell v. Shelter Mut. Ins. Co., 367 S.W.3d 585, 588–89 (Ky. 2012). Therefore, we interpreted “depreciation” to exclude labor costs. Hicks, 751 F. App’x at 710. As here, the insurance policy in Hicks did not define “depreciation.” Neither did the Kentucky Administrative Regulations. But, like here, the regulations did define ACV. See 806 KY. ADMIN. REGS. 12:095(9)(2) (2007). Kentucky’s regulations define ACV as “replacement cost of property at the time of the loss less depreciation, if any.” Id. Ohio’s regulations define ACV as “replacement cost of property at the time of loss, including sales tax, less any depreciation.” OHIO ADMIN. CODE § 3901-1-54(I)(2)(a) (2016). Allstate makes much of the fact that the Kentucky regulations say “depreciation, if any,” while the Ohio regulations say “any depreciation.” In its view, “any depreciation” means all types of depreciation. We read “any depreciation” as simply saying “whatever depreciation there happens to be.” Allstate’s interpretation just begs the question of what “depreciation” means in the first place.4 Moreover, Perry’s interpretation—that in calculating ACV depreciation does not include labor costs—has been recognized as reasonable by numerous state and federal courts, including our own, because depreciation traditionally refers to value lost from physical wear and tear. See 4 Analyzing the ACV definition as a whole, the parties debate whether a “sales tax” can apply to services or only material goods, and thus whether depreciation can include labor costs if a sales tax is limited to material goods. See OHIO ADMIN. CODE § 3901-1-54(I)(2)(a) (2016) (defining ACV as “replacement cost of property at the time of loss, including sales tax, less any depreciation”). Whatever the answer is, the meaning of “sales tax” does not solve our problem because “including sales tax” refers back to the “replacement cost of property,” not depreciation. See id. The parties also disagree over the effect of their respective interpretations of “depreciation” on a neighboring provision of the code. See § 3901-1-54(I)(2)(b). That provision states: If the insured’s interest is limited because his property has nominal or no economic value, or a value disproportionate to replacement cost less depreciation, the insurer is not required to comply with paragraph (I)(2)(a) of this rule regarding the determination of actual cash value. However, the insurer shall provide upon the insured’s request, a written explanation of the basis for limiting the amount of recovery along with the amount payable under the policy. Id. Perry says this provision accounts for a scenario where a windfall would issue to the insured if the insurer paid for repairs that include labor costs. Thus, depreciation must not include labor costs, or else this windfall-prevention provision would have no purpose. Allstate, however, says that this provision protects the insurer from costly repairs resulting from practical difficulties, like building on rocky landscapes, that exceed the value of the replacement itself. In those situations, an insured would be incentivized to destroy the structure to obtain an enormous windfall, if not for this provision. Both readings are reasonable to our eye and do not clear up the ambiguity. No. 18-4267 Perry v. Allstate Indemnity Co., et al. Page 7 Hicks, 751 F. App’x at 709–11 (collecting cases). Though a slim majority of courts may have gone the other way, see id. (collecting cases), that does not matter for our purposes because we do not ask whose reading is “more reasonable.” Andersen, 757 N.E.2d at 333. Like the insurer in Hicks, Allstate “could have removed any ambiguity by simply writing its policies to expressly include labor depreciation when calculating ACV.” See Hicks, 751 F. App’x at 709. But it didn’t, and under Ohio law, an ambiguous policy with competing reasonable interpretations must be construed in favor of the insured. Andersen, 757 N.E.2d at 332–33. The Tennessee Supreme Court, one of the high State courts in our circuit, has performed this same analysis and construed the policy against the insurer. See Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 178–79 (Tenn. 2019). The policies at issue in that case defined ACV 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.” Id. at 171. The policies did not define “depreciation.” See id. To decide whether “depreciation” could reasonably be read more than one way, the Tennessee Supreme Court summarized the split between courts across the country over whether “depreciation” can or should be read to include labor costs, including our decision in Hicks. See id. at 175–78. Against that backdrop, it determined that both interpretations were reasonable and accordingly that the term “depreciation” was ambiguous. Id. at 178–79. Because depreciation traditionally refers to lost value from the physical deterioration of the structure, “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.” Id. at 178. The insurer’s interpretation relied on a technical meaning of “depreciation,” not its “ordinary sense,” and its interpretation was “not evident on the face of either policy.” Id. at 179. “In the end,” the court held, “this case turns on our standard for interpreting insurance contracts because both parties have presented plausible interpretations of the policies.” Id. at 178. Like Kentucky and Ohio, Tennessee construes ambiguous terms in an insurance policy strictly against the insurer. See id. at 178–79. “Therefore, construing the policy language in favor of the insured, depreciation can only be applied to the cost of materials, not to labor costs.” Id. at 179. No. 18-4267 Perry v. Allstate Indemnity Co., et al. Page 8 Because Perry’s interpretation of “depreciation” is a fair reading of an ambiguous term, her interpretation prevails against the insurer.5 We accordingly hold as a matter of law that it was improper for Allstate to depreciate labor costs to arrive at its net payment to Perry for the damage to her home.