Insurer Can't Double-Dip on Depreciation

The Supreme Court of Arizona recently answered two questions certified by the U.S. District Court for the District of Arizona that both concerned how an insurer may or may not use depreciation in calculating the actual cash value (ACV) of damaged property. The case is Walker v. Auto-Owners Ins. Co., 2022 Ariz. LEXIS 306 (Ariz. 2022). 

The Walkers purchased a homeowner’s policy (the Policy) from Auto-Owners to cover their house, located in southeastern Arizona, for a period of one year. During the policy period, the home and several rooms in it suffered damage from an accidental water discharge; Auto-Owners agreed to provide coverage. The Loss Settlement provision of the Walkers’ policy stated that Auto-Owners would “pay the full cost to repair or replace the damaged part of [the] covered property” (quoting the Policy) if the policy was insured at or above 80 percent of the full replacement cost. The Walkers had insured their policy to 80 percent or higher, so the issue became the method Auto-Owner’s used when calculating the payment due. The “actual cash value” provision in the Policy stated that “If you [homeowners] do not repair or replace the damaged covered property, we shall pay the actual cash value of the property at the time of loss. Actual cash value includes a deduction for depreciation” (quoting the Policy, bolding omitted); Auto-Owners depreciated the costs of both labor and materials in determining the amount owed to the Walkers. The Walkers sued, claiming Auto-Owners improperly deducted labor depreciation, resulting in underpayment.