Lammert v. Auto-Owners (Mutual) Ins. Co.
| Decision Date | 15 April 2019 |
| Docket Number | No. M2017-02546-SC-R23-CV,M2017-02546-SC-R23-CV |
| Citation | 572 S.W.3d 170 |
| Parties | Gregory J. LAMMERT, et al. v. AUTO-OWNERS (MUTUAL) INSURANCE COMPANY |
| Court | Tennessee Supreme Court |
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.
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.
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.
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.
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"?
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 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).
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.
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. , 247 N.Y. 176, 159 N.E. 902, 904 (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 , 27 Tenn.App. 249, 178 S.W.2d 915, 924 (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. , 77 N.J. 1, 389 A.2d 439, 443 (1978). The New Jersey Supreme Court provided an excellent analysis of each method in Elberon :
To continue reading
Request your trial
-
Sproull v. State Farm Fire & Cas. Co.
...depreciation makes sense only in states that apply the "broad evidence rule" for determining ACV.¶ 34 In Lammert v. Auto-Owners (Mutual) Insurance Co. , 572 S.W.3d 170 (Tenn. 2019), the insureds suffered storm damage to their homes. The policy for one set of plaintiffs defined "actual cash ......
-
Perry v. Allstate Indem. Co.
...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 o......
-
Richards v. State Farm Fire & Cas. Co.
...other state high courts and federal circuit courts" to find out a word's ordinary meaning. Id. (citing Lammert v. Auto-Owners (Mut.) Ins. Co. , 572 S.W.3d 170, 175–78 (Tenn. 2019). But when the ordinary meaning of a term is ambiguous, or when a material provision of the policy "is susceptib......
-
Johnson v. State Farm Fire & Cas. Co.
...other state high courts and federal circuit courts that address the meaning of a disputed policy term. See Lammert v. Auto-Owners (Mut.) Ins. Co., 572 S.W.3d 170, 175-78 (Tenn. 2019)."[C]ontracts of insurance are strictly construed in favor of the insured, and if the disputed provision is s......