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by Nicholas Smetzer

Picture if you will a quiet Texas home. It’s unremarkable, cozy, and most importantly for the purposes of this article, insured. All is well at this humble domicile until disaster strikes in one of the many forms that the Texas climate can unleash. The culprit could be wind, water, or hail; either way, the result is the same: there is damage to the roof, and it must be repaired.

The insured reports the damage to the insurer, who then sends an adjuster to measure the claim. The investigation goes smoothly at first. Initial payments, as they often are, are made on an actual cash value (ACV) basis, calculated by the insurer as replacement cost minus depreciation.

All is right in the world until the insured consults with a policyholder attorney, who peers into the insurer’s ACV calculation. It’s there that the policyholder attorney finds what he was looking for. He notices that, in addition to applying depreciation to shingles, nails, and flashing, the insurer also depreciated the labor portion of the installation. The policyholder attorney remembers hearing something at a conference about “depreciation of labor class actions”.

“This wasn’t mentioned in the policy,” argues the attorney. “Besides, can labor even depreciate? A roofer’s hard work doesn’t rust like a nail.” Seeing dollar signs, the policyholder attorney initiates litigation.

The above scenario is not an introduction to a Twilight Zone episode, nor is it a scary campfire story to tell at insurance conferences. Rather, these are the facts of Sims v. Allstate Fire & Casualty Ins. Co., decided in the Western District of Texas in 2024. In this case, the Court ultimately sided with the cadre of policyholder attorneys raising this argument across the country, ruling that when the policy is silent on how ACV is calculated or on how depreciation is applied, there exists an ambiguity that should be construed in the insured’s favor. Importantly, this decision did not turn on whether depreciating labor was inherently improper, or whether the method of calculating ACV was mathematically sound. Rather, it focused on the definitional clarity of the term “actual cash value” within the insurance policy. 

Surprisingly, Sims completely ignored prior Texas case law having considered the issue. The Northern District Court of Texas in Tolar v. Allstate Texas Lloyd’s Co., evaluated a class action lawsuit over determining how depreciation affected an ACV payment. Here, when a policyholder sued its insurer for depreciating general contractor overhead and profit (GCOP) and sales tax, the court identified that these were components more appropriately associated with replacing the property, not representing the property’s current value. In fact, the court noted plainly: “[b]ecause GCOP, sales tax, repair costs, and property value together represent the total replacement cost value, it follows naturally that GCOP, sales tax, repair costs, and property value ought to be depreciated together to reach the ACV payment.”

Greenspoint Investors, Ltd. v. Travelers Lloyds Insurance Co. similarly dealt with determining ACV where the policy provided no definition of the term. In Greenspoint, after an insured office building had suffered damage from Hurricane Ike, the policyholder created a new company to complete repairs on the building. The insurer, knowing about the close connection between the building and the newly formed repair company, questioned the reliability of the payment records it received and requested information about the actual costs of repairing the property. Rather than provide this information, the insured argued at trial that the proper measure of ACV, when undefined by the policy, should be the repair estimates. The insurer’s argument that ACV can be measured by extrinsic valuation evidence when undefined in the policy ultimately prevailed. 

But for some unknown reason, the Sims court chose to ignore Tolar and Greenspoint, relying instead on case law from other jurisdictions. And now it’s unclear whether labor can be depreciated in Texas first-party property damage claims.

So what should a Texas insurance company do now?

The answer is simple. Zelle recommends revising policies to include simple definitions of ACV and depreciation to eliminate the so-called ambiguities that have fueled the recent increase in policyholder attorney driven litigation. Here is Zelle’s recommended language:

DEFINITIONS OF ACTUAL CASH VALUE / DEPRECIATION

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.

Some Texas insurers might believe that this language will make their policy forms less viable on the market. But this language is not wholly unique or untested. Many carriers are already including this type of language in their policies, including carriers that offer personal lines coverage, which requires acceptance by the Texas Department of Insurance. For example, one personal lines carrier defines ACV in its policy as follows:

1. “actual cash value” means the value of the damaged part of the property at the time of loss, calculated as the estimated cost to repair or replace such property less a deduction to account for pre-loss depreciation. For this calculation, all components of this estimated cost including, but not limited to:
2. materials, including any tax;
3. labor, including any tax; and
4. overhead and profit;

are subject to depreciation.

The depreciation deduction may include such considerations as:

1. age;
2. condition;
3. reduction in useful life;
4. obsolescence; and
5. any pre-loss damage including wear, tear, or deterioration; 

of the damaged part of the property.

These provisions address the valuation disputes fueling recent litigation on how to measure ACV. By deliberately defining both actual cash value and depreciation (including the depreciation of labor), Zelle’s recommended provision and the personal lines provision both eliminate any argument as to ambiguity regarding labor, overhead and profit, and taxes, which are all issues that frequently become points of conflict when policies are silent.

More importantly, this clarity benefits both insurers and insureds. Insurers gain predictability and reduce exposure to class‑wide challenges premised on undefined terms, while insureds receive transparent, up‑front notice of how losses will be valued. Rather than inviting the uncertainty and risk that accompanies forcing courts or juries to reconstruct ACV methodologies after a loss, the policy itself supplies the governing standard.

While some object to the application of depreciation to labor as an attempt to devalue a payout or underpay workers, it is important to recognize that labor comes into play in the installation of a completed roofing system, not during the preliminary valuation of the pre-repair property. Crucially, “actual cash value” is a representation of the market value of the property immediately before the loss. As such, the depreciation of a labor item in a calculation merely reflects the fact that an older roof is worth less than a newer one, even though both at one point required work to be installed. By including these kinds of depreciation terms within an ACV definition within a policy, insurers may better discourage opportunistic behavior and prevent scenarios in which insureds receive near‑replacement level ACV payments on roofs without ever undertaking repairs.

Finally, and perhaps most importantly, it is noteworthy that under standard replacement cost coverage policies, this issue is actually a non-issue. The insured will recover the depreciation, whether labor was depreciated or not, when the work is performed and the replacement cost has been incurred. This raises an interesting question: do insureds actually even have any damages in these class action lawsuits? That academic discussion is for another day.

So what’s the lowdown? Clearly defined ACV language functions not only as a litigation‑avoidance tool, but as a practical mechanism for reinforcing the fundamental principle that insurance is intended to restore the insured to the same position as they were in before their loss, rather than generating a windfall. Setting and reinforcing this expectation for both sides of the policy, insurer and insured, can serve to improve the claims handling process by increasing transparency and consistency. Texas insurers would be well-served in ensuring that their policies define actual cash value and depreciation.

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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.