Walker v. Auto-Owners Ins. Co.

80 Arizona Cases Digest 14

517 P.3d 617

Gerald WALKER, III, and Ada Walker, Plaintiffs,

v.AUTO-OWNERS INSURANCE COMPANY, a foreign company, Defendant.

No. CV-21-0236-CQ

Supreme Court of Arizona.

Filed: September 27, 2022

Thomas Joseph Snodgrass (argued), Snodgrass Law LLC, Minneapolis, MN; Robert D. Ryan, Law Offices of Robert D. Ryan, PLC, Phoenix, Attorneys for Gerald and Ada Walker

Todd A. Noteboom (argued), Stinson LLP, Minneapolis, MN; Sharon W. Ng, Stinson LLP, Phoenix, Attorneys for Auto-Owners Insurance Company

Thomas B. Dixon, Dixon Law Offices, P.L.C., Phoenix, Attorney for Amicus Curiae United Policyholders

Gena L. Sluga and Katharine A. Myers, Christian, Dichter & Sluga, P.C., Phoenix, Attorneys for Amici Curiae American Property Casualty Insurance Association and National Association of Mutual Insurance Companies

JUSTICE KING authored the Opinion of the Court, in which CHIEF JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER, and JUSTICES BOLICK, LOPEZ, BEENE, and MONTGOMERY joined.

JUSTICE KING, Opinion of the Court:

¶1 The United States District Court for the District of Arizona certified two questions to this Court: (1) When a homeowner's insurance policy does not define the terms "actual cash value" or "depreciation," may an insurer depreciate the costs of both materials and labor in determining the actual cash value of a covered loss?; and (2) Is the broad evidence rule applicable in Arizona such that an insurer and/or fact finder may consider labor depreciation as a pertinent factor in determining actual cash value?¹

¶2 The answer to each question is no, pursuant to the terms of the homeowner's insurance policy before us. However, we do not categorically preclude application of the broad evidence rule with respect to other homeowners’ insurance policies where appropriate.

I. BACKGROUND

¶3 Gerald and Ada Walker (the "Walkers") purchased the Homeowners Insurance Policy (the "Policy") from Auto-Owners Insurance Company ("Auto-Owners"), covering a house the Walkers owned in Tucson from December 15, 2018, through December 15, 2019. Section 1 of the Policy, entitled "PROPERTY PROTECTION," described "HOW LOSSES ARE SETTLED." Therein, the Policy provided, in relevant part:

Loss to covered property will be settled as follows:

...

(2) If the damaged covered property is insured under Coverage A – Dwelling or Coverage B – Other Structures ..., we will pay as follows:

(a) If at the time of loss, the limit of insurance applying to the damaged covered property is 80% or more of the full replacement cost of that covered property, we will pay the full cost to repair or replace the damaged part of such covered property. No deduction will be made for depreciation. In no event shall we pay more than the smallest of:

1) the limit of insurance applying to the damaged covered property;

2) the cost to replace the damaged covered property with equivalent construction for equivalent use at the residence premises ; or

3) the amount actually spent to repair or replace the damaged covered property.

(b) If at the time of loss, the limit of insurance applying to the damaged covered property is less than 80% of the full replacement cost of that covered property, we will pay the greater of either:

1) the actual cash value of the damaged covered property; or

2) the cost to repair or replace the covered property, less the deductible amount, multiplied by the ratio of the limit of insurance applying to the damaged covered property to 80% of its full replacement cost. No deduction will be made for depreciation.

...

If you 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.

(Emphasis in original). The Policy does not define the terms "actual cash value" or "depreciation."

¶4 Although Auto-Owners endorses some of its homeowners’ insurance policies with Form 57911, it did not do so with the Walkers’ Policy. Form 57911 defines "actual cash value" and "depreciation" as follows:

1. Actual cash value means the cost to repair or replace lost or damaged covered property with new property of similar quality and features reduced by the amount of depreciation applicable to the lost or damaged covered property immediately prior to the loss.

2. Depreciation means a decrease in value because of age, wear, obsolescence or market value and includes ... the cost of materials, labor and services ... necessary to repair or replace lost or damaged covered property.

(Emphasis added).

¶5 On May 28, 2019, an accidental water discharge from an appliance damaged walls and floors in several rooms in the Walkers’ house. The Walkers submitted a claim under the Policy. Auto-Owners accepted coverage for the loss.

¶6 The Walkers’ Policy contained replacement cost coverage (also known as "replacement cost value" or "RCV"), which Auto-Owners would pay if the insured chose to "repair or replace the damaged covered property." The Policy also provided an actual cash value option, which is the provision that applied to the Walkers’ covered loss here: "If you 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." (Emphasis in original). Auto-Owners depreciated both materials and labor when calculating the actual cash value of the Walkers’ covered loss.

¶7 The Walkers filed a complaint in the United States District Court for the District of Arizona, on behalf of themselves and similarly situated class members, alleging breach of contract and asking for declaratory and injunctive relief. The Walkers alleged Auto-Owners underpaid them and other similarly situated insureds by depreciating both materials and labor when calculating property damage claims under their homeowners’ insurance policies.

¶8 Auto-Owners filed a motion to dismiss, claiming the Policy allows it to deduct " ‘depreciation’ when estimating the value of ‘the property,’ and never distinguishes between materials and labor," and thus Auto-Owners may deduct both materials and labor when determining actual cash value. Auto-Owners also argued that "although Arizona case law regarding [actual cash value] is sparse," it believed "the Arizona Supreme Court would likely adopt the ‘broad evidence rule’ for determining" actual cash value. To resolve the motion, the district court certified the above-stated questions to us. Observing that no prior decision of this Court had addressed these questions and that clarification is warranted, we agreed to answer them. See A.R.S. § 12-1861 ; Ariz. R. Sup. Ct. 27.

II. DISCUSSION

A. Depreciation of both Materials and Labor when Determining Actual Cash Value under the Policy

¶9 We must determine whether Arizona law permits Auto-Owners, consistent with the terms of the Policy, to depreciate the costs of both materials and labor when determining the actual cash value of the Walkers’ covered loss.² We begin with an explanation of the difference between a policy that permits depreciation of both materials and labor and a policy that permits depreciation of materials only. A hypothetical recently discussed in Mitchell v. State Farm Fire & Casualty Co. , 954 F.3d 700, 706 (5th Cir. 2020), aptly summarizes the difference:

[The insured's] interpretation of "Actual Cash Value" includes depreciation of only the material components of the roof. Suppose the hypothetical roof can be replaced for a cost of $5,000 in materials and $5,000 in labor—a $10,000 roof. Suppose that the destroyed roof was 10 years old and expected to last 20 years. Under [the insured's] interpretation, the Actual Cash Value would be $7,500, because $2,500 would be deducted in depreciation (half of the cost of the materials ).

By contrast, [the insurer's] interpretation of "Actual Cash Value" includes depreciation of both the materials and the labor in constructing the roof. Using the same example, [the insurer's] interpretation would yield an Actual Cash Value of $5,000, because $5,000 would be deducted in depreciation (half of the total cost of replacing the roof).

¶10 Here, we are charged with stating the law governing the interpretation of the Walkers’ Policy. "We accord words used in [insurance] policies their plain and ordinary meaning, examining the policy ‘from the viewpoint of an individual untrained in law or business.’ " Teufel v. Am. Fam. Mut. Ins. Co. , 244 Ariz. 383, 385 ¶ 10, 419 P.3d 546, 548 (2018) (quoting Desert Mountain Props. Ltd. v. Liberty Mut. Fire Ins. Co. , 225 Ariz. 194, 200 ¶ 14, 236 P.3d 421, 427 (App. 2010) ). "If a policy is subject to ‘conflicting reasonable interpretations,’ it is ambiguous, and we interpret it by examining, as pertinent here, the ‘transaction as a whole.’ " Id. (internal citation omitted) (first quoting State Farm Mut. Auto. Ins. Co. v. Wilson , 162 Ariz. 251, 258, 782 P.2d 727, 734 (1989) ; and then quoting First Am. Title Ins. Co. v. Action Acquisitions, LLC , 218 Ariz. 394, 397 ¶ 8, 187 P.3d 1107, 1110 (2008) ). "If an ambiguity remains, we construe it against the insurer." Id. ; see also Sec. Ins. Co. of Hartford v. Andersen, 158 Ariz. 426, 428, 763 P.2d 246, 248 (1988) ("Where ambiguity in an insurance contract exists, the policy will be construed against the insurer."); Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529, 534, 647 P.2d 1127, 1132 (1982) ("Where the language employed is unclear and can be reasonably construed in more than one sense, an ambiguity is said to exist and such ambiguity will be construed against the insurer.").

1. Methodologies for Determining Actual Cash Value

¶11 "Insurance contracts often fail to define ‘actual cash value,’ leaving that task to the courts." Dickler v. CIGNA Prop. & Cas. Co. , 957 F.2d 1088, 1097 (3d Cir. 1992). To that end, the "discussion about the depreciation of labor costs [when determining actual cash value] is not occurring in a vacuum." Lammert v. Auto-Owners (Mut.) Ins. Co. , 572...