Court Opinion

ID: 9788821
Source: CourtListenerOpinion
Date Created: 2023-08-31 01:19:18.762728+00
Date Added: 2024-06-11T07:35:05.327252
License: Public Domain

BOUDREAU, J.,
dissenting, WATT, V.C.J., and SUMMERS, J. joining.
1 1 I respectfully dissent.
4 2 The question certified to us is whether in Oklahoma an insurance company may depreciate the cost of labor to replace a residential roof when determining the actual cash value of the roof using the replacement cost less depreciation method. The parties advise us this is an issue of first impression not only for Oklahoma but for the entire country.1
*1022T 3 The material facts are not disputed and are found in the certification order. Charles Redcorn (Redeorn) purchased a homeowner's policy from State Farm Ins. Co. (State Farm). The policy provided for roof surface repair and replacement coverage on an actual cash value basis. The policy does not define actual cash value. A windstorm or hail damaged Redcorn's roof on November 9, 1998. State Farm concluded that the total amount of loss to the roof was $11,050. Because the roof was approximately sixteen years old, State Farm applied a depreciation factor of 80% (based on a twenty-year roof life). Subtracting 80% of the total amount of the loss, State Farm concluded the actual cash value of the roof was $2,210 ($11,050 less $8,840 equals $2,210). State Farm then reduced the actual cash value by the amount of Redeorn's deductible resulting in a payment to Redeorn of $1,960 ($2,210 less $250 equals $1,960). Redcorn sued State Farm. While he agrees State Farm properly depreciated the cost of shingles to be installed on his roof, he argues State Farm may not depreciate the cost of labor to install them.2
14 The majority holds that State Farm may depreciate the cost of labor. It reaches this result by defining Redcorn's roof as a "single product consisting of both materials and labor."
15 I would resolve the issue differently. Oklahoma adopted the broad evidence rule to calculate actual cash value in Rochester American Ins. Co. v. Short, 1953 OK 4, 252 P.2d 490.3 The broad evidence rule permits the trier of fact to consider "any evidence logically tending to establish the correct estimate of the value of the property at the time of the loss." Zochert v. National Farmers Union Property & Casualty Co., 516 N.W.2d 531, 534 n. 2 (S.D.1998) (emphasis added); Giulietti v. Connecticut Ins. Placement Facility, 205 Conn. 424, 534 A.2d 213, 216 (1987); Brooks Realty, Inc. v. Aetna Ins. Co., 276 Minn. 245, 149 N.W.2d 494, 495 (1967); see also 12 Couch on Insurance §§ 175:33, 177:25 (3d ed.1998). Applying the rule to the issue presented in this case, we must determine 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.
T6 In making this determination, I reject the majority's characterization of Redeorn's roof as a single product. A roof, unlike a preassembled consumer good, is not an integrated product. Redeorn cannot go the lumber yard or the retail store and buy a roof. A roof does not exist until the shingles are transported to the site and installed on top of the house. A roof is not a unified product but a combination of a product (shingles) and a service (labor to install the shingles).
17 The shingles are of course logically depreciable. As they age, they certainly lose value due to wear and tear. They typically have a useful life of twenty years. It makes sense, then, that sixteen-year-old shingles have lost sixteen/twentieths, or eighty percent, of their value over time.
11 8 Labor, on the other hand, is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value over time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of depre-clating the value of labor is illogical. The image that comes to me is that of a very old roofer with debilitating arthritis who can barely climb a ladder or hammer a nail. The value of his labor, I suppose, has depreciated over time.4
*1023T9 It is important to keep in mind that "{ilndemnity is the basis and foundation of all insurance law." Rochester American Ins. Co., 252 P.2d at 493. The objective of indemnity is to put the insured in as good a condition, as far as practicable, as he would have been in if the loss had not occurred, that is, to reimburse the insured for the loss sustained, no more, no less. Id. To properly indemnify Redcorn, State Farm should pay him the actual cash value of the shingles, depreciated for wear and tear, plus the cost of their installation. In my view, 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.5
{10 In sum, I would answer no to the certified question. I would hold that depreciating the cost of labor to install a roof does not logically tend to establish the correct estimate of the actual cash value of the roof at the time of the loss. I would respond to the certifying court that in determining actual cash value of a residential roof using the replacement cost less depreciation method, labor costs may not be depreciated.
SUMMERS, J.
1 I join in Justice Boudreau's dissenting opinion with this additional observation:
Before the damage the insured had on his house a roof with sixteen-year-old 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.

. Redcorn advises us that only California, through its Department of Insurance (not through its courts), has addressed the issue. He provided copies of excerpts from a report titled "The California Department of Insurance Market Conduct Examination Report of State Farm Fire and Casualty Company (NAIC #25143) and State Farm General Insurance Company (NAIC #25151) Bloomington, Illinois." The report appears to have been prepared in early 1998. The report contains the following with respect to depreciation of labor:
113. Depreciation of Labor Costs: While not cited as errors, the Companies depreciated labor cosis when determining ACV settlements. Labor costs should not be depreciated. This matter is referred to CDI Legal Division for review and opinion. (emphasis added).
The report also contains the following with respect to depreciation of labor:
Depreciation of labor: Nowhere in the claim files is it explained how any depreciation amounts are calculated, nor do the files reflect that the basis of depreciation is ever explained to the insured. Moreover, labor of subcontractors is depreciated; labor is not a depreciable item. (emphasis added)

. For the sake of simplicity I will refer to the materials needed to replace a roof as shingles. Certainly nails and other materials are also needed.

. New York was the first state to adopt the broad evidence rule to calculate actual cash value. See McAnarney v. Newark Fire Ins. Co., 159 N.E. 902 (N.Y.1928). For a list of other jurisdictions that have adopted the broad evidence rule, see 12 Couch on Insurance § 175:33 at n. 24.

. Among the materials provided by Redcorn are copies of excerpts from a State Farm training manual. In several different ways the training manual suggests that labor is not a depreciable item. For example, it defines depreciation as "decrease in the value of the property over a period of time due to wear, tear and obsolescence." This definition necessarily excludes depreciation of labor. It states that "[djepreciation should be taken on a line-by-line basis from dollar one on items subject to weathering and/or *1023wear and tear." This statement, too, necessarily excludes depreciation of labor.
Even more interesting, the training manual shows that State Farm does not always depreciate labor. For example, the manual states that State Farm does not depreciate the additional cost of labor to install shingles on an especially steep roof ("steep charges"), does not depreciate the cost of labor to hand carry shingles to the second level of a two-story building ("two-story charges") and does not depreciate the cost of labor to tear off multiple layers of shingles when the top layer is destroyed ("tear off guidelines").

. State Farm argues that Redcorn will realize a windfall if the cost of labor is not depreciated. According to State Farm, Redcorn will be able to postpone paying the cost of labor to replace his roof by an extra sixteen years. This argument is specious. In evaluating whether an adjusting practice accomplishes the aim of indemnity, the proper scope of inquiry focuses on a conceptual snapshot of the roof at the instant before the loss, and not on speculations about contingent betterment that may occur in the future.