Depreciating Labor in Kentucky
In Kentucky, the question of whether labor is depreciable appears to have gotten significantly more complicated.
On April 25, 2016, Judge Thapar, in the Eastern District of Kentucky held that a property insurer may depreciate labor in the determination of actual cash value to the extent such labor has increased the market value of the property at issue. In so holding, the court appears to have implicitly overruled Bailey v. State Farm Fire & Cas. Co., which held that labor was not subject to depreciation, and was decided one year earlier by Judge Wilhoit, sitting in the same court.
In Brown v. Travelers Cas. Ins. Co. of Am., 2016 U.S.Dist. LEXIS 55037 (E.D.Ky. April 25, 2016), the parties agreed that “actual cash value” should be calculated as the replacement cost of the damaged property minus depreciation. The parties’ dispute centered on whether labor costs were subject to depreciation along with the cost of materials.
In his decision, Judge Thapar recognized the existence of two classes of labor: labor that merges with the materials and increases the value of a finished good, and pure labor, which adds nothing to the market value to the good. Using this dichotomy, Judge Thapar held that labor which increases the market value of the good, such as with a car, should depreciate along with the good. However, where labor does not enhance a product’s market value (the court used a haircut as an example), the labor is not depreciable.
It will be interesting to see how this decision impacts future claims handling in Kentucky since it seems to require carriers to determine the depreciation of labor on an item-by-item basis. We will continue to monitor the evolution of this issue and report on further developments.