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by Nabila Rahim

With its March 25 decision in Schoening Investment LP v. Cincinnati Casualty Co., the U.S. Court of Appeals for the Sixth Circuit recently joined a growing list of courts that have considered whether to depreciate labor costs to determine actual cash value.[1]

The court relied on essential contract interpretation principles to evaluate whether a commercial property insurer may justifiably depreciate labor costs to determine the actual cash value of damage.[2] Ultimately, the court found that the policy's definition of actual cash value, i.e., "replacement cost less a deduction that reflects depreciation," was unambiguous and applicable to labor costs.[3]

However, this recent decision highlights the fine lines of interpretation that have many courts split on the issue of depreciating labor costs.

This article explores how various U.S. jurisdictions have addressed the issue of whether "depreciation" should be applied to labor costs for purposes of determining actual cash value and how insurance companies should address this issue in their policies.

The Case for Depreciating Labor Costs

Courts in a number of states have consistently held that depreciation must be applied to labor costs in determining actual cash value.

For example, Florida courts have reasoned that because an insured will likely incur labor costs as part of replacing property, the cost of labor is included within the meaning of "replacement cost."[4]

In South Carolina, courts have held that labor costs may be depreciated to determine actual cash value, and this included "embedded labor components." Specifically, in its 2021 decision in Butler v. Travelers Home & Marine Insurance Co. the South Carolina Supreme Court held that "[e]mbedded labor components" are labor costs which are no longer separable from the cost of materials.[5] When the cost to repair or replace the property includes both materials and "embedded labor components," an insurer may depreciate labor costs, including materials, to determine the actual cash value of a covered loss.[6]

In reaching a similar conclusion, North Carolina courts have also accounted for this overlap between labor and materials.[7]

Some courts, including the U.S. Court of Appeals for the Tenth Circuit, have reasoned that by not depreciating labor costs, an insured would be allowed to recover for costs that are not actually incurred.

In 2017, the Tenth Circuit found this to be "contrary to the principle of indemnity," in Graves v. American Family Mutual Insurance Co., because failing to depreciate labor costs would place the insured in a better position relative to the pre-loss condition.[8] According to Graves, absent unambiguous policy language, there is no reason to "dissect depreciation into separate components of materials and labor costs."[9]

Limits on Depreciating Labor Costs

Some states that have allowed for depreciation of labor costs have implemented statutory regulations and limitations surrounding the depreciation of labor costs to facilitate transparency and mitigate risks.

For instance, in November 2024, the Michigan Department of Insurance and Financial Services issued a bulletin that personal lines homeowners and dwelling insurers may not depreciate labor or other nontangible costs when determining actual cash value without a standalone endorsement delineating the nontangible items subject to depreciation.[10]

The Mississippi Insurance Department also issued a similar bulletin in 2017 that makes clear that Mississippi has no statutory law prohibiting the depreciation of labor in property damage claims; however, if enforced, the insurer must provide clear notice for the depreciation of labor in the applicable insurance policy.[11]

The Nebraska Supreme Court requires insurers to include an explicit notice in insurance policies related to depreciation of labor costs. Specifically, if a policy does not expressly provide otherwise, an insurer may not deduct depreciation from the cost of repairing partial damage to insured property where the actual cash value of the property, as repaired, does not exceed its actual cash value at the time of the loss.[12]

Interestingly, Pennsylvania courts have carved out a narrow interpretation related to partial losses. In 2003, in Kane v. State Farm Fire & Casualty Co., the Superior Court of Pennsylvania reasoned that in partial loss situations, absent clear language to the contrary, an insurer may not depreciate "the replacement cost of a policy and that the phrase 'actual cash value' may not be interpreted as including a depreciation deduction, where such deduction would thwart the insured's expectation to be made whole."[13]

The Case Against Depreciating Labor Costs

Some states have promulgated regulations and insurance bulletins barring depreciation of labor costs.

In California, state regulations preclude the depreciation of labor costs in determining actual cash value.[14]

The District of Columbia Department of Insurance issued a bulletin in August 2025 finding "depreciation of labor and other nontangible items in the definition of [actual cash value] to be an unfair claims settlement practice."[15]

Related to fire insurance policies, the state of Washington provided in a 2022 notice that, "[e]xcept for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor necessary to repair, rebuild, or replace covered property is not a component of physical depreciation and may not be subject to depreciation or betterment."[16]

Notably, while courts in Arkansas previously allowed for depreciation of labor costs to determine actual cash value, the Arkansas Supreme Court found this to be a violation of public policy in its 2015 decision in Shelter Mutual Insurance Co. v. Goodner.[17] Specifically, the Supreme Court found depreciation of labor costs to be "illogical" and a violation of the "established principals of indemnity."[18]

Where "actual cash value" is undefined in an insurance policy, a number of states stand firm that depreciation must not be applied to labor costs.

For example, the Illinois Supreme Court explained that if a term is susceptible to more than one reasonable meaning, it is considered ambiguous and must be constructed against the insurer, as provided by ordinary contract interpretation principles.

Specifically, where an insurance policy does not define the terms "actual cash value" or "depreciation," then the terms are susceptible to at least two reasonable interpretations: (1) labor costs must be depreciated to determine actual cash value, and (2) labor costs must not be depreciated to determine actual cash value.[19]

In Sproull v. State Farm Fire & Casualty Co., the Supreme Court held that even in the presence of state insurance regulations that provide that "the 'actual cash value' [of a] damaged structure is determined as 'replacement cost of property at time of loss less depreciation, if any,' but where the insurance policy itself does not define actual cash value, then only the property structure and materials are subject to reasonable deduction for depreciation."[20]

The U.S. Court of Appeals for the Fifth Circuit has also made clear that if the term "actual cash value" is undefined, it must be construed in favor of the insured and labor costs may not be depreciated.[21]

Uncertain Territory

While some states have clearly taken a stance of this issue, there are handful of jurisdictions that remain unsettled. For example, states such as Kentucky and Minnesota have not decided on this issue and have deferred to a case-by-case determination in addressing depreciation of labor costs.

Interestingly, there is a lack of uniformity among courts applying Texas law on this issue. Previously, Texas courts held that when the term "actual cash value" is undefined, courts may rely on Texas law, which defines it as "repair or replacement cost less depreciation," according to the U.S. District of Northern Texas' 2011 decision in Tolar v. Allstate Texas Lloyd's Co.[22]

Because Texas courts have acknowledged that "replacement costs" are subject to depreciation, any costs that an insured may reasonably incur in repairing the property may also be depreciated.[23] Interestingly, the Tolar ruling notes that "undefined terms are not per se ambiguous," without first determining whether the undefined term is in fact susceptible to more than one reasonable interpretation.[24] Moreover, ambiguity must be evidenced from the policy itself, not a product of external evidence of the parties' intent.[25]

Last year, however, the U.S. District Court for the Western District of Texas held in Sims v. Allstate Fire & Casualty Insurance Co. that where the terms "actual cash value" and "depreciation" are undefined, the terms are ambiguous and must be interpreted in favor of not depreciating labor costs.[26]

In sum, whether labor costs are subject to depreciation when calculating actual cash value is an evolving issue that is driven by the applicable policy language and state law. As clearly illustrated by the foregoing, there is no uniform rule for depreciating labor costs, and regulations vary state to state. By incorporating a formal definition of depreciation into policy language, insurance companies can provide greater transparency regarding adjustments of labor cost.

One such definition being used by some insurance companies states as follows:
The following is added to any provision using the terms "actual cash value" and "depreciation": Actual cash value means the lesser of:

(1) The estimated cost to repair the damaged portion of property with like kind and quality materials as measured at the time and place of loss, less pre-loss depreciation; or

(2) The estimated cost to replace the damaged portion of property with like kind and quality materials as measured at the time and place of loss, less pre-loss depreciation.

Depreciation means a decrease in the fair market value of property over a period of time as a result of factors including, but not limited to, age, condition, wear and tear, deterioration, or economic obsolescence. The application of depreciation as used to calculate the actual cash value of property shall include all components of the estimated cost to repair or replace the damaged portion of property, including but not limited to labor, materials, overhead, profit, and any applicable tax.

This wording is one example of how insurers can navigate this issue in the face of an uncertain legal landscape.

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Schoening Inv. LP v. Cincinnati Cas. Co., 170 F.4th 1006, 1008 (6th Cir. 2026).

[2] Id. at 1011.

[3] Id. at 1014.

[4] Goff v. State Farm Fla. Ins. Co., 999 So. 2d 684, 690 (Fla. Dist. Ct. App. 2008); see also Trinidad v. Florida Peninsula Ins. Co., 121 So. 3d 433, 443 (Fla. 2008).

[5] Butler v. Travelers Home & Marine Ins. Co., 433 S.C. 360, 368 (2021).

[6] Id. at 369.

[7] See Accardi v. Hartford Underwriters Ins. Co., 373 N.C. 292, 296, 838 S.E.2d 454, 457 (2020) (stating "differentiating between labor and materials when calculating depreciation [...] makes little sense.")

[8] Graves v. Am. Fam. Mut. Ins. Co., 686 F. App'x 536, 539 (10th Cir. 2017).

[9] Id.

[10] Bulletin 2024-26-INS; Depreciation of Nontangible Items (November 8, 2024).

[11] Bulletin 2019-8; Depreciation of Labor Expenses in Property Loss Claims (August 4, 2017).

[12] Olson v. Le Mars Mut. Ins. Co. of Iowa, 269 Neb. 800, 810, 696 N.W.2d 453, 461 (2005).

[13] Kane v. State Farm Fire & Cas. Co., 2003 PA Super 502, ¶ 19, 841 A.2d 1038, 1047 (2003).

[14] See 10 C.C.R.§ 2695.9(f)(1).

[15] Bulletin 25-IB-001-08/12, (August 11, 2025).

[16] WAC 284-20-010 (Standard Fire Policies) (amendment effective January 1, 2022).

[17] Shelter Mut. Ins. Co. v. Goodner, 2015 Ark. 460, 6, 477 S.W.3d 512, 516 (2015).

[18] Id.

[19] Sproull v. State Farm Fire & Cas. Co., 2021 IL 126446, ¶ 54, 184 N.E.3d 203, 221.

[20] Id. at 209.

[21] Mitchell v. State Farm Fire & Cas. Co., 954 F.3d 700, 712 (5th Cir. 2020).

[22] Tolar v. Allstate Texas Lloyd's Co., 772 F. Supp. 2d 825, 831 (N.D. Tex. 2011).

[23] Id.

[24] Nat'l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. McMurray, 342 Fed. App'x. 956, 959 (5th Cir. 2009); Tolar v. Allstate Tex. Lloyd's Co., 772 F.Supp.2d 825, 830 (N.D. Tex. 2011).

[25] Nat'l Union Fire Ins., 342 Fed. App'x. at 959.

[26] Sims v. Allstate Fire & Cas. Ins. Co., 746 F. Supp. 3d 417, 428 (W.D. Tex. 2024).

This article was originally published by Law360