Butler v. Travelers Home & Marine Ins. Co.

• Decision Date: 12 May 2021
• Docket Number: Opinion No. 28026,Appellate Case No. 2020-001285
• Parties: Miriam BUTLER, individually, and Evelyn Stewart, in her capacity as personal representative of Joseph Stewart, and both on behalf of others similarly situated, Plaintiffs, v. The TRAVELERS HOME AND MARINE INSURANCE COMPANY, and The Standard Fire Insurance Company, Defendants.
• Court: South Carolina Supreme Court

858 S.E.2d 407

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

v.The TRAVELERS HOME AND MARINE INSURANCE COMPANY, and The Standard Fire Insurance Company, Defendants.

Appellate Case No. 2020-001285

Opinion No. 28026

Supreme Court of South Carolina.

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 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 APPLEMAN ON INSURANCE LAW LIBRARY EDITION § 47.04[1] (2020) ("Case law 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. , 77 N.J. 1, 9, 389 A.2d 439, 444 (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 ACV.

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 structure.

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 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...