Court Opinion

ID: 4387388
Source: CourtListenerOpinion
Date Created: 2019-04-15 17:41:28.07588+00
Date Added: 2024-06-11T07:49:49.746096
License: Public Domain

04/15/2019
                 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.
John S. Hicks and Charles Covington McLaurin, Nashville, Tennessee, and Todd A.
Noteboom and Jeffrey G. Mason, Minneapolis, Minnesota, for the respondent, Auto-
Owners (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 Auto-
Owners, 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.
                                                    -2-
       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-cost-
less-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.
                                                 -3-
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.” Farmers-
Peoples 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.4 The 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.
                                                    -4-
                                       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
                                            -5-
       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
                                           -6-
$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).
                                                   -7-
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-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.

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
                                           -8-
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-less-
depreciation 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
                                           -9-
& 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-less-
depreciation 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
                                                - 10 -
       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).
                                             - 11 -
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 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, 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

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