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Henn v. American Family Mutual Insurance Co.

Supreme Court of Nebraska

February 17, 2017

Rosemary Henn, individually and on behalf of others similarly situated, plaintiff,
v.
American Family Mutual Insurance Company, defendant.

         1. Insurance: Contracts. A court interpreting an insurance policy must first determine, as a matter of law, whether the contract is ambiguous.

         2. Insurance: Contracts: Appeal and Error. In an appellate review of an insurance policy, the court construes the policy as any other contract to give effect to the parties' intentions at the time the writing was made. Where the terms of a contract are clear, they are to be accorded their plain and ordinary meaning.

         3. _: _:. When an insurance contract is ambiguous, an appellate court will construe the policy in favor of the insured.

         4. Contracts: Words and Phrases. A contract is ambiguous when a word, phrase, or provision in the contract has, or is susceptible of, at least two reasonable but conflicting meanings.

         5. Insurance: Contracts: Words and Phrases. Regarding words in an insurance policy, the language should be considered not in accordance with what the insurer intended the words to mean but according to what a reasonable person in the position of the insured would have understood them to mean.

         6. Insurance: Contracts. While an ambiguous insurance policy will be construed in favor of the insured, ambiguity will not be read into policy language which is plain and unambiguous in order to construe against the preparer of the contract.

         7. Insurance: Contracts: Words and Phrases. There is no legal requirement that each word used in an insurance policy must be specifically defined in order to be unambiguous.

         8. _: _: _ . Actual cash value is not a substantive measure of damages, but, rather, a representation of the depreciated value of the property immediately prior to damages.

         [295 Neb. 860] 9. Insurance: Contracts. For purposes of indemnification, actual cash value must not equal the amount required to complete the repairs or replacement of the property. Instead, actual cash value is intended only to provide a depreciated amount of the replacement cost to start the repairs.

         10. _: _ . Under a replacement cost policy, the insured, not the insurer, is responsible for the cash difference necessary to replace the old property with the new property. And upon submitting the required materials for replacement cost value, the insured will receive the difference necessary to replace the old property with the new property.

         11. _:. Both materials and labor constitute relevant facts to consider when establishing the value of the property immediately prior to the loss.

         12. _: _ . Absent specific language in an insurance policy, a court may consider any relevant evidence in its calculation of actual cash value, including materials and labor.

         13. _: _. An insured is properly indemnified when the amount calculated for actual cash value equals the depreciated value of the property just prior to the loss, which includes both materials and labor.

         Certified Question from the U.S. District Court for the District of Nebraska. Judgment entered.

          Eric R. Chandler, of Law Offices of Eric R. Chandler, PC, L.L.O., and Erik D. Peterson and M. Austin Mehr, of Mehr, Fairbanks & Peterson Trial Lawyers, P.L.L.C, for plaintiff.

          Bartholomew L. McLeay and Brooke H. McCarthy, of Kutak Rock, L.L.P, and Michael S. McCarthy and Marie E. Williams, of Faegre, Baker & Daniels, L.L.P, for defendant.

          Daniel P. Chesire, of Lamson, Dugan & Murray, L.L.P, for amici curiae American Insurance Association et al.

          Mark C. Laughlin and Robert W. Futhey, of Fraser Stryker, PC, L.L.O., for amicus curiae State Farm Fire and Casualty Company.

          Heavican, C.J., Wright, Cassel, Kelch, and Funke, JJ., and Inbody and Bishop, Judges.

         [295 Neb. 861] Heavican, C.J.

         INTRODUCTION

         The U.S. District Court for the District of Nebraska has certified the following question to this court: "May an insurer, in determining the 'actual cash value' of a covered loss, depreciate the cost of labor when the terms 'actual cash value' and 'depreciation' are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated?" We answer this question in the affirmative.

         The question arises from a putative class action filed in the U.S. District Court, in case No. 8:15CV257, involving a dispute over the interpretation of a homeowner's insurance policy. Rosemary Henn asserts claims for breach of contract, unjust enrichment, violations of Nebraska's Consumer Protection Act, fraudulent concealment, and equitable estoppel. Henn argues American Family Mutual Insurance Company (American Family) wrongfully failed to compensate her and others similarly situated by depreciating labor costs in calculation of actual cash value for loss or damage to a structure or dwelling under its homeowner's insurance policies.

         The dispute centers on whether labor costs can be depreciated in determining the actual cash value of covered damaged property under a homeowner's insurance policy. The parties agree that actual cash value is replacement cost minus depreciation, but disagree as to whether the labor component can be depreciated.

         No class has yet been certified, and progression of the case has been stayed pending the outcome of this certified question.

         BACKGROUND

         The following facts were obtained from the briefs submitted by the parties and from the district court's certificate and memorandum order.

         In September 2011, Henn submitted a homeowner's claim under her insurance policy issued by American Family. The claim was submitted due to damage that occurred to her home's roof vent caps, gutters, siding, fascia, screens, deck, [295 Neb. 862] and air-conditioning unit during a hailstorm on August 18. 2011. The insurance policy, American Family's "Nebraska Homeowners Policy-Gold Star Special Deluxe Form" No. 26-BE4992-01, is a replacement cost policy. American Family determined that the hail loss was covered by Henn's policy.

         The policy provides, in relevant part, that an insured may recover, following a covered loss, "the cost to repair the damaged portion or replace the damaged building, provided repairs to the damaged portion or replacement of the damaged building are completed, " or "[i]f at the time of loss, ... the building is not repaired or replaced, [American Family] will pay the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building." Therefore, under the policy, the insured has two options for recovery following a covered loss: (1) receive "the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building" or (2) receive the full replacement cost value upon completion of the repair or replacement of the damaged property.

         Under both options, the insured will first receive an actual cash value payment. If the insured repairs or replaces the damaged property, the insured can recover the difference between the replacement cost value and actual cost value payments. If the insured does not repair or replace the damaged property, the insured is entitled to receive only the actual cash value. Payment under the replacement cost option is limited to the smallest of the cost to replace the property with like construction for similar use, the actual amount spent to repair or replace the property, or 120 percent of the limit applying to the damaged building.

         The policy does not define "actual cash value" or depreciation, or describe the methods employed to calculate "actual cash value." The policy also does not explain how American Family determines the difference between replacement cost value and actual cost value. The policy states under the conditions section for actual cash value that

[295 Neb. 863] [i]f at the time of loss, the Increased Building Limit Coverage as provided under the Supplementary Coverages - Section I applies and the building is not repaired or replaced, [American Family] will pay the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building.

         After inspecting the storm damage, American Family provided Henn with a written estimate that explained the calculations for replacement cost value, actual cash value, and depreciation for the claim. The written estimate defined actual cash value as being "based on the cost to repair or replace the damaged item with an item of like kind and quality, less depreciation." The estimate further stated that "replacement cost" was the "cost to repair the damaged item with an item of like kind and quality, without deduction for depreciation." In the estimate, American Family's adjuster determined that the cost to repair and replace the damaged portions of Henn's home with new materials would be $3, 252.60. From this amount, American Family subtracted $276.67 in depreciation, to arrive at an actual cash value amount of $2, 975.93. American Family then subtracted Henn's $1, 000 deductible, leaving her with an actual cash value payment of $1, 975.93. The depreciated amount includes both material costs and labor costs. The estimate did not show how much it depreciated from building materials as opposed to labor.

         American Family sent Henn a letter stating that Henn had 1 year from the date of the loss to complete the repairs and receive any difference between the actual repair costs and the actual cash value payment. Henn failed to make a claim for payment of replacement costs.

         Henn filed the current action in the district court for Douglas County, Nebraska. American Family removed the case to the U.S. District Court for the District of Nebraska based on diversity of citizenship under 28 U.S.C. § 1332 (2012). American Family subsequently filed a motion for summary judgment, arguing that the policy was unambiguous [295 Neb. 864] and that the issues could be resolved as a matter of law. Henn contends that summary judgment was not proper, because "the term 'actual cash value' is ambiguous, that actual cash value should not include depreciation of labor, and [that] the policy provision should be construed in her favor.''

         The U.S. District Court found that "resolution of the motion involves a question of law in Nebraska on which there is no controlling precedent in the decisions of the Nebraska Supreme Court." The U.S. District Court certified the question to the Nebraska Supreme Court. American Family's motion for summary judgment is being held in abeyance until this court responds to the certified question.

         Again, the question certified is: "May an insurer, in determining the 'actual cash value' of a covered loss, depreciate the cost of labor when the terms 'actual cash value' and 'depreciation' are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated?"

         ANALYSIS

         This court must determine whether the term "actual cash value" unambiguously allows for depreciation of labor in the insurance policy. Both parties agree that depreciation is an element of actual cash value. But Henn argues that the language in the policy does not unambiguously allow for labor depreciation and that American Family's depreciation of labor resulted in underindemnification of her loss.

         Conversely, American Family argues that "actual cash value" as used in the policy is not ambiguous, because the term incorporates the concept of depreciation from the cost of repairs, which includes both materials and labor. American Family contends that actual cash value is merely an interim payment and that depreciation of both materials and labor properly indemnifies the insured.

         A court interpreting an insurance policy must first determine, as a matter of law, whether the contract is [295 Neb. 865] ambiguous.[1] In an appellate review of an insurance policy, the court construes the policy as any other contract to give effect to the parties' intentions at the time the writing was made. Where the terms of a contract are clear, they are to be accorded their plain and ordinary meaning.[2] But when an insurance contract is ambiguous, we will construe the policy in favor of the insured.[3] A contract is ambiguous when a word, phrase, or provision in the contract has, or is susceptible of, at least two reasonable but conflicting meanings.[4] Regarding words in an insurance policy, the language should be considered not in accordance with what the insurer intended the words to mean but according to what a reasonable person in the position of the insured would have understood them to mean.[5] While an ambiguous insurance policy will be construed in favor of the insured, ambiguity will not be read into policy language which is plain and unambiguous in order to construe against the preparer of the contract.[6] There is no legal requirement that each word used in an insurance policy must be specifically defined in order to be unambiguous.[7]

         Some background on how this court calculates actual cash value is helpful. This court has set forth three approaches to determining actual cash value: "(1) [W]here market value is easily determined, actual cash value is market value, (2) if there is no market value, replacement or reproduction [295 Neb. 866] cost may be used, (3) failing the other two tests, any evidence tending to formulate a correct estimate of value may be used."[8]

         The first approach, market value, has been used by this court in several cases to calculate actual cash value.[9] This court has defined market value as "the amount for which property may be sold by a willing seller who is not compelled to sell it to a buyer who is willing but not compelled to buy it."[10] And in deciding market value, the jury "should consider the situation and condition of the property as it was at that time and all the other ...


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