Butler v. The Travelers Home

                  In The Supreme Court

    Miriam Butler, individually, and Evelyn Stewart, in her
    capacity as personal representative of Joseph Stewart, and
    both on behalf of others similarly situated,



    The Travelers Home and Marine Insurance Company, and
    The Standard Fire Insurance Company,


    Appellate Case No. 2020-001285

                   CERTIFIED QUESTION

        J. Michelle Childs, United States District Judge

                      Opinion No. 28026
           Heard March 24, 2021 – Filed May 12, 2021


    T. Joseph Snodgrass, Larson King, LLP, of St. Paul, MN;
    David Eugene Massey and Summer C. Tompkins, Law
    Offices of David E. Massey Trial Lawyers, of Columbia;
    Erik D. Peterson, Mehr, Fairbanks & Peterson Trial
             Lawyers, PLLC, of Lexington, KY; J. Brandon
             McWherter, McWherter Scott Bobbitt PLC, of Franklin,
             TN, all for Plaintiffs.

             Stephen E. Goldman and Wystan M. Ackerman, Robinson
             & Cole LLP, of Hartford, CT; William P. Davis, Baker,
             Ravenel & Bender, LLP, of Columbia, all for Defendants.

             Reynolds H. Blakenship Jr., Yarborough Applegate LLC,
             of Charleston; Christopher E. Roberts, Butsch Roberts &
             Associates LLC, of Clayton, MO, both for Amicus Curiae
             United Policyholders.

             Thomas C. Salane and R. Hawthorne Barrett, Turner
             Padget Graham & Laney, P.A., of Columbia, for Amici
             Curiae American Property Casualty Insurance Association
             and National Association of Mutual Insurance Companies.

JUSTICE FEW: The United States District Court for the District of South
Carolina certified the following question to this Court pursuant to Rule 244 of the
South Carolina Appellate Court Rules:

             When a homeowner's insurance policy does not define the
             term "actual cash value," may an insurer depreciate the
             cost of labor in determining the "actual cash value" of a
             covered loss when the estimated cost to repair or replace
             the damaged property includes both materials and
             embedded labor components?

We answer the certified question "yes."

These are two cases filed in one action in federal district court. The cases arose after
the homes of Miriam Butler and Joseph Stewart1 were damaged in separate fires.
Butler and Stewart each purchased a homeowner's insurance policy from one of the

 Joseph Stewart passed away. His daughter Evelyn Stewart filed this lawsuit as
personal representative of his estate.
defendants, both of whom are subsidiaries of The Travelers Companies, Inc. The
parties refer to the defendants as "Travelers."

The insurance policies are not in the record before us. From the portions of the
policies quoted by the district court and the parties, we know the respective policies
provide replacement cost value coverage to repair or replace damaged portions of
their homes. However, both policies provide that in the event the insured chooses
not to immediately repair or replace the damaged property, the insured will receive
payment for actual cash value instead of replacement cost value. The parties and the
district court, as is apparently common in the insurance industry, refer to
replacement cost value and actual cash value as "RCV" and "ACV."

Butler and Stewart elected not to immediately repair or replace their damaged
property. Each thus elected not to receive replacement cost but instead to receive a
cash payment for the ACV of the damaged property. As the district court stated,
"Plaintiffs do not allege they actually repaired the covered damage, and instead seek
relief solely based on the calculation of the ACV payment."

The certified question addresses whether Travelers properly calculated the ACV
payments Travelers offered to Butler and Stewart to settle their property damage
claims. As far as we can tell, neither policy requires Travelers to use a specific
method for calculating such an offer. Generally, insurers use one or a combination
of three methods for calculating ACV. See 5 Jeffrey E. Thomas et al., NEW
recognizes three general categories for measuring 'actual cash value': (1) market
value, (2) replacement cost less depreciation and (3) the 'broad evidence' rule."
(citing Elberon Bathing Co., Inc. v. Ambassador Ins. Co., Inc., 

389 A.2d 439

, 444
(N.J. 1978))). As Travelers states in its brief, "One of the well-established methods
used for estimating ACV involves estimating the replacement cost value (RCV) of
the damage and then subtracting depreciation." To calculate ACV in these two
cases, Travelers chose to use the "replacement cost less depreciation" method.
According to Butler and Stewart, "Travelers did not and has not calculated any
portion of Plaintiffs' losses by appraisal or fair market value."

Specifically, therefore, the question before us is whether—when using the
"replacement cost less depreciation" method to calculate the offer it will make to its
insured—Travelers may "depreciate" the labor component of the cost of repair or
replacement. Our first task in answering the question is to understand what Travelers
means by "depreciate." We begin that task by defining the terms RCV and ACV.
RCV is clear; it is simply the amount of money it would take to pay a contractor to
repair or replace the damaged structure, including cost for materials and labor. ACV
also has clear meaning when considered in the abstract. It is the amount of money
a willing buyer would pay, and a willing seller would accept, in a transaction with
no unnatural constraints. ACV must account for changes in the value of a structure
over time. Thus, ACV is what the structure was worth at the time it was damaged.
Both RCV and ACV are terms we readily understand in their abstract sense.

Next, we consider how the terms are applied in a specific situation. For RCV, it is
simple and straightforward. To calculate RCV, one determines the extent of the
damage and solicits bids to have the damage repaired or replaced. The amount of
RCV is thus determined by the market and is readily ascertainable, whether it is
determined by the value of the low bid, the average of bids, or the otherwise most
favorable bid.

ACV, on the other hand, is difficult to determine in a specific situation. While we
understand ACV in the abstract, we are left scratching our heads when we consider
how Travelers—or anyone—would calculate what it "actually" is.2 The reason is
there is normally no market for aged and partially deteriorated portions of homes. A
fifteen-year-old roof, for example, is not available for purchase in the market, nor is
there any market on which to sell one. Thus, the ACV of damage to a portion of a
home—in most instances3—is a fiction, and it is not possible to precisely ascertain

  Butler and Stewart attach significance to statements this Court previously made
supposedly defining ACV in a different context. See S.C. Elec. & Gas Co. v. Aetna
Ins. Co., 

238 S.C. 248

, 262, 

120 S.E.2d 111

, 118 (1961) (referencing "the cost of
materials," which we said "would be depreciable," and "[$]41,881.00, representing
cost of winding and installation," which we said "would not be depreciable"). While
it is true we used the phrase "actual cash value" in the discussion in which those
statements were made, the statements actually refer to a value more similar to RCV.

See 238 S.C. at 263

, 120 S.E.2d at 118 (stating the depreciated material cost should
have added to it "the undepreciable $41,881.00 of replacement cost," which we said
"would indicate that the actual cost of the new coils, in place, after depreciation, was
$96,061.00"). In any event, we find the statements we made in that case have little
impact on the certified question we address in this case.
 In some instances, ACV may be determined with precision by using the "market
value" method. For example, if a lightning strike damages a kitchen appliance
beyond repair, the homeowner may be able to replace it with a unit of similar age
and condition purchased at a used appliance store or on some online market.
This brings us to "depreciation." According to its general definition, depreciation is
"a decline in an asset's value because of use, wear, obsolescence, or age."
Depreciation, BLACK'S LAW DICTIONARY (11th ed. 2019). In the specific context of
property insurance, depreciation is "the amount an item has lessened in value since
it was purchased, taking into account age, wear and tear, market conditions, and
obsolescence." Thomas et al., supra, § 47.04[2][a]. Both sides include this
definition in their briefs. To calculate ACV using either definition, one would
ascertain the original value of the damaged property, probably using the actual cost
incurred to build or purchase it, and then estimate the extent to which the original
value has declined over the years. It may be necessary to account for inflation,
demand, or any other variable that has affected value. With these definitions of
depreciation, the starting point for the calculation of ACV is the original value of the

That, however, is not what Travelers did to calculate ACV in these cases. Rather,
Travelers began by estimating the RCV of the damaged property, and from that
number it subtracted a separate estimate of lost value, which Travelers calls
"depreciation." There is no indication in the limited materials before us exactly how
Travelers goes about determining the appropriate amount for depreciation. It is clear
only that Travelers calculated depreciation for both materials and labor, and
subtracted both those amounts from RCV to determine what it would offer for ACV.
Butler and Stewart agree that starting with RCV and subtracting depreciation is a
proper method and do not challenge the specific amount of depreciation Travelers
attributed to labor. Their only disagreement is whether it was proper for Travelers
to include labor costs in the depreciation calculation.

This disagreement is the central issue in the federal lawsuit and in this certified
question. Butler filed the federal lawsuit claiming Travelers breached her insurance
policy by depreciating the cost of labor in calculating ACV. Stewart's daughter
Evelyn later intervened to assert the similar claim of her father. As the district court
stated, "whether an ACV payout in South Carolina . . . allows for the depreciation
of labor . . . is determinative of the outcome of the instant suit."4 The district court

  Ordinarily, the propriety of an insurer's method for calculating what offer to make
to settle the claim of its insured would not be the issue in a lawsuit of this sort.
Rather, the issue would be simply the amount of ACV, or how to instruct the jury
that will determine the amount of ACV. In this case, however, Butler and Stewart
chose to frame the issue in terms of how Travelers calculates its offers, not in terms
of the proper ACV of the damaged property. See Jessica Peterman, Note, Actual
found the question whether an insurer in this situation may depreciate labor costs in
calculating an offer of ACV "has not been adequately addressed by controlling
precedent of South Carolina's appellate courts," and certified the question to this
Court. We accepted the question.

Rule 244(a), SCACR, permits this Court to "answer questions of law." The
principles of law applicable to this certified question are well-established. "An
insurance policy is a contract between the insured and the insurance company, and
the policy's terms are to be construed according to the law of contracts." Williams v.
Gov't Emps. Ins. Co. (GEICO), 

409 S.C. 586

, 594, 

762 S.E.2d 705

, 709 (2014)
(citing Auto Owners Ins. Co. v. Rollison, 

378 S.C. 600

, 606, 

663 S.E.2d 484

, 487
(2008); Coakley v. Horace Mann Ins. Co., 

376 S.C. 2

, 5-6, 

656 S.E.2d 17

, 18-19
(2007); Estate of Revis v. Revis, 

326 S.C. 470

, 477, 

484 S.E.2d 112

, 116 (Ct. App.
1997)). "The cardinal rule of contract interpretation is to ascertain and give legal
effect to the parties' intentions as determined by the contract language." Schulmeyer
v. State Farm Fire & Cas. Co., 

353 S.C. 491

, 495, 

579 S.E.2d 132

, 134 (2003) (citing
United Dominion Realty Tr., Inc. v. Wal-Mart Stores, Inc., 

307 S.C. 102

, 105, 

S.E.2d 866

, 868 (Ct. App. 1992)). "Where [a] contract's language is clear and
unambiguous, the language alone determines the contract's force and effect."
Harleysville Grp. Ins. v. Heritage Cmtys., Inc., 

420 S.C. 321

, 350, 

803 S.E.2d 288

304 (2017) (alteration in original) (quoting McGill v. Moore, 

381 S.C. 179

, 185, 

S.E.2d 571

, 574 (2009)). "Ambiguous or conflicting terms in an insurance policy
must be construed liberally in favor of the insured and strictly against the insurer."
Whitlock v. Stewart Title Guar. Co., 

399 S.C. 610

, 615, 

732 S.E.2d 626

, 628 (2012)
(quoting USAA Prop. & Cas. Ins. Co. v. Clegg, 

377 S.C. 643

, 655, 

661 S.E.2d 791

797 (2008)). "The law provides . . . that construing a contract is a question of law
for the court." Crenshaw v. Erskine Coll., 

432 S.C. 1

, 26, 

850 S.E.2d 1

, 14 (2020).

Before applying these principles of law to the certified question, we make two
observations. First, while ACV is a term that has common meaning across all
contexts, it does not have common application in all situations. Variations in the
types of property damaged, changes in technology since the original construction,

Cash Value and Depreciation of Labor on Homeowner's Policies, 

82 Mo. L

. Rev.
551, 551 (2017) ("Property and casualty insurance companies are now facing the
'next big wave' of class actions regarding depreciation on homeowner's policies.
Specifically, policy language referring to labor depreciation and the actual cash
value . . . of that labor is currently . . . being litigated all across the country.")
(footnotes omitted).
zoning or historic district restrictions on reconstruction, consumer preferences,
market conditions, and the specific terms of the applicable homeowner's insurance
policy, could affect how the abstract meaning of ACV is applied to the specific
situation. For example, consider a case in which a seventy-five-year-old slate roof
is damaged by a falling tree. The ACV of the damaged portion of the roof could be
affected by (1) whether the insurance policy provides for replacement with original
materials; (2) zoning or historic district restrictions that affect the choice of
materials; (3) homeowner preference to eventually replace with slate, or with
shingles or metal; (4) current market conditions such as unusually low or high
demand for materials or labor; and other considerations. The abstract meaning of
the term ACV is the same across all these variables, but the application of the term
to determine a specific amount of ACV changes as each variable changes.

Second, the district court drafted the certified question with reference only to
"embedded labor components." The term "embedded" in this sense means that the
labor costs are no longer separable from the cost of materials. To illustrate, the cost
of a new roof includes the cost of shingles and nails. Initially, the shingles and nails
had labor costs because workers had to make them. By the time the shingles and
nails were sold to the roofer, however, those labor costs were "embedded" in the
market price the roofer paid to purchase them. Thus, the roofer paid one price for
shingles and one price for nails, and there was no differentiation between the cost of
materials in those products and the cost of labor used to make them. Similarly, the
cost of a new roof includes paying workers to remove the old roof and install the
new one. Up to a certain point in time, these labor costs are separable—not
embedded—from the cost of the materials. Eventually, however, even those labor
costs become embedded. While some inquiry will reveal how labor and material
costs were differentiated in calculating the price, the market has one price for the
roof because the materials and labor costs are "embedded" in it. Thus, when a typical
homeowner replaces a roof, she pays for the roof as one unit.

With these two observations, our task becomes simple. When the labor cost
associated with an item of property is embedded, the value of the item is necessarily
calculated as to the unit, not as to the individual parts. We return to the example of
shingles and nails. It undoubtedly took considerable labor to manufacture both, but
once the item is placed on the market, the price of the item is dictated by how the
market interacts with the completed item. Nobody bargains for the purchase of nails
by separating out how much the nail manufacturer spent on labor, as opposed to
Similarly, the fact the labor cost is embedded makes it impractical, if not impossible,
to include depreciation for materials and not for labor to determine ACV of the
damaged property. Rather, the value of the damaged property is reasonably
calculated as a unit. Therefore, we answer the certified question "yes," because it
makes no sense for an insurer to include depreciation for materials and not for
embedded labor. But see Accardi v. Hartford Underwriters Ins. Co., 

838 S.E.2d

, 457 (N.C. 2020) (stating "differentiating between labor and materials when
calculating depreciation . . . makes little sense") (emphasis added).

It is important to repeat, however, that we have no idea how Travelers actually
estimates depreciation. Butler and Stewart argue Travelers acted "surreptitiously"
in not disclosing to its insureds what it was doing. We find nothing surreptitious in
Travelers' actions. Travelers made a calculation of what it was willing to pay for the
damage and made an offer to resolve Butler's and Stewart's claims on the basis of
that calculation. Butler and Stewart do not agree Travelers offered the appropriate
amount, and they each rejected Travelers' offer.

Whether Travelers made a sufficient offer is not a question of law for a court to
resolve. Rather, whether the insurer correctly, or even reasonably, made the
calculation on which it based an offer to its insured is evidence the fact-finder should
consider in determining ACV. See Wilcox v. State Farm Fire & Cas. Co., 

N.W.2d 780

, 785 (Minn. 2016) ("But whether embedded-labor-cost depreciation is
logical or helpful to the trier of fact is ultimately a question of fact, not law."). ACV,
in fact, is a question of fact. ACV will vary according to numerous variables,
including how the insurer goes about choosing the amount to estimate for
depreciation of labor. To the extent an insured believes its insurer made the
calculation incorrectly or unreasonably, and made an insufficient offer on that basis,
the disagreement relates to a question of fact as to which both parties enjoy the right
to a trial by jury.

Thus, we make no effort to address whether Travelers' offer was sufficient. We
simply hold that South Carolina law does not prohibit Travelers from including an
estimate of the depreciation of embedded labor costs in its calculation of ACV for
purposes of making an offer to its insured.


KITTREDGE, HEARN and JAMES, JJ., concur. BEATTY, C.J., concurring
in result only.

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