Accardi v. Hartford Underwriters Ins. Co.

Accardi v. Hartford Underwriters Ins. Co., 2018 NCBC 109.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF WAKE 18 CVS 2162

THOMAS ACCARDI,

Plaintiff,

v. ORDER AND OPINION ON
DEFENDANT’S MOTION TO DISMISS
HARTFORD UNDERWRITERS
INSURANCE COMPANY,

Defendant.

THIS MATTER comes before the Court on Defendant Hartford Underwriters

Insurance Company’s (“Hartford”) Motion to Dismiss. (“Motion”, ECF No. 8.)

THE COURT, having considered the Motion, the briefs filed in support of and

in opposition to the Motion, the arguments of counsel at the hearing, and other

appropriate matters of record, CONCLUDES, in its discretion, that the Motion

should be GRANTED for the reasons set forth below.

Whitfield Bryson & Mason, LLP, by Daniel K. Bryson, J. Hunter Bryson, Gary
E. Mason (pro hac vice), Jennifer S. Goldstein (pro hac vice); Kozonis &
Klinger, by Gary M. Klinger (pro hac vice); and Waskowski Johnson Yohalem
LLP, by Daniel R. Johnson (pro hac vice), for Plaintiff.

Ellis & Winters LLP, by Stephen D. Feldman and Kim E. Rinehart (pro hac
vice) for Defendant.

McGuire, Judge.
I. FACTS AND PROCEDURAL BACKGROUND

1. The Court does not make findings of fact on motions to dismiss under

N.C. Gen. Stat. § 1A-1, Rule 12(b)(6) (hereinafter the General Statutes will be

referred to as “G.S.” and the Rules of Civil Procedure will be referred to as

“Rule(s)”), but only recites those facts included in the complaint that are relevant to

the Court’s determination of the Motion. See, e.g., Concrete Serv. Corp. v. Inv’rs

Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d 755, 758 (1986).1

A. Summary of Dispute

2. In this case, Plaintiff Thomas Accardi2 (“Accardi”) challenges the

method by which Hartford calculates the “actual cash value” (“ACV”) for property

damage claims under Hartford homeowners’ insurance policies. Hartford calculates

ACV by determining the current cost of repair or replacement of the damaged

property, depreciating the repair or replacement cost by an amount based on the

age and condition of the property immediately prior to the damaging event, and

subtracting from that amount the insured’s deductible.

3. Accardi claims “Hartford routinely understates [ACV] by depreciating

the labor component of repair costs instead of only the physical item that is subject

1 The facts recited herein are drawn exclusively from the Complaint (ECF No. 3) and the

Plaintiff’s insurance policy. (ECF No. 8.2.)
2 Accardi purports to bring his claim on behalf of an as-yet unidentified class of similarly

situated individuals insured by Hartford who allegedly were underpaid on their claims
because labor costs were depreciated from their benefit payments. (ECF No. 3, at ¶¶ 2–3.)
Accardi has not yet moved for class certification, and, as a result, the class-based
allegations are not properly before the Court at this time. The Court addresses only
Accardi’s individual allegations for breach of contract.
to wear, tear, and obsolescence.” (Compl., ECF No. 3, at ¶ 1.) Accardi argues that

Hartford should not depreciate the labor costs because “labor does not depreciate

over time.” (Id. at ¶ 26.) Accardi characterizes this dispute as a “single legal

question, common to all members of the class . . . [c]an an insurer obligated to

reimburse [ACV] under materially identical policy language refuse to pay amounts

it attributes to the depreciation of labor?” (Id. at ¶ 2.)

4. Hartford contends that ACV, as commonly used and as used in

Hartford policies, has a plain meaning that includes depreciation of both the labor

and material components of the current repair or replacement cost. Hartford

argues that this definition is consistent with the purpose of indemnity insurance,

which is designed to restore the insured to the pre-damage position. Hartford

further argues that depreciating both material and labor is consistent with North

Carolina law, and that there are no North Carolina cases that support Accardi’s

contention that labor costs should be excluded from depreciation.

B. The Policy and Accardi’s Claim

5. Accardi owns a home in Fuquay Varina, North Carolina (the “Home”).

(ECF No. 3, at ¶ 11.) At all times relevant to the Motion, the Home was insured

under a homeowners insurance policy provided by Hartford (“The Policy”). (Ins.

Pol’y, ECF No. 8.2.) The Home was damaged in a hail storm on or about September

1, 2017. (ECF No. 3, at ¶ 11.) “The roof, siding and garage of the Home were

damaged in the storm and required repair and restoration.” (Id.)
6. The Policy is a hybrid ACV/replacement cost policy.3 Under The

Policy, when an insured property suffers covered damage, Hartford is required to

pay Accardi the ACV for the damaged property. The ACV is calculated by finding

the total current repair or replacement cost for the damaged property, reducing that

total cost for depreciation, and then reducing that amount by Accardi’s deductible.

(ECF No. 8.2, at p. 15.) Hartford pays Accardi this amount as the ACV. If Accardi

chooses to have the repairs performed, and the repairs cost more than the amount

initially paid as the ACV, then Hartford will reimburse Accardi for the amount he

actually incurred for the repair or replacement up to the amount that was initially

depreciated when arriving at the ACV. (Id. at pp. 32–33, 46.) If Accardi chooses not

to make the repairs, Hartford does not reimburse him for depreciation.

7. The Policy exempts wind and hail damage to the roof from this

recovery scheme, and Accardi is not entitled to reimbursement for depreciation for

these types of damages to his roof regardless of whether he undertakes expense to

repair or replace the roof. (Id. at p. 15.)

8. After the Home was damaged and his claim was accepted by Hartford,

Hartford sent an inspector out to Accardi’s property to evaluate the claim.

Hartford’s inspector estimated that the total repair or replacement cost for the

damage to Accardi’s house, including damage to his roof, was $10,287.28. (ECF No.

3 “Traditionally, insurers have provided two different types of property insurance for
homeowners. One is the ACV policy, and the other is a replacement cost policy. . . . The
most prominent form of homeowner’s coverage is currently a hybrid between the two types
of policies. Coverage is first provided on an ACV basis until the repairs are completed.
Then, a supplemental payment is made so the total cost of the repair or replacement is
paid, less the deductible.” Jessica Peterman, Actual Cash Value and Depreciation of Labor
on Homeowner’s Policies, 82 No. L. Rev. 551, 556 (2017).
3, at ¶ 17; Ex. A, at p. 5.) The estimated repair cost included both labor and

materials. (ECF No. 3, at ¶ 17.) Hartford then applied depreciation of $3,043.92 to

reduce the estimated cost to $7,243.36. (Id. at ¶ 23.) The amount calculated for

depreciation included depreciation for labor, materials, and sales taxes on

materials.4 Finally, Hartford subtracted the $500 deductible applicable under The

Policy, arriving at a total ACV payment of $6,743.36. (Id.) Accardi does not allege

that he made the repairs to the Home or that he sought reimbursement of any

depreciation.

9. Accardi does not argue that Hartford should not have reduced the ACV

for depreciation, only that Hartford cannot include in the depreciation an amount

attributable to labor. Accardi alleges that depreciation of labor costs when

calculating ACV is a breach of Defendant’s obligations under The Policy because

“labor does not depreciate in value over time” and, therefore cannot be a component

of depreciation. (Id. at ¶¶ 26, 29–30.)

10. The term ACV appears several times in The Policy, but ACV is not

defined in the definitions section. (ECF No. 8.2, at pp. 19–20.) However, an

addendum to The Policy entitled “Important Information About Your Roof

Coverage” states:

You will note your policy includes Actual Cash Value
(ACV) Loss Settlement for covered windstorm or hail
losses to your Roof. This means if there is a covered
windstorm or hail loss to your roof, [Hartford] will
deduct depreciation from the cost to repair or
replace the damaged roof. In other words, [Hartford]

4 Accardi does not challenge the amount depreciated for taxes in this lawsuit.
will reimburse for the [ACV] of the damaged roof
surfacing less any applicable policy deductible.

(Id. at p. 15 (emphasis added).) The Policy does not expressly define the term

“depreciation.”

11. The Complaint alleges a single claim for breach of contract (ECF No. 3,

at ¶¶ 48–54). Hartford filed the Motion on April 27, 2018. (ECF No. 8.) Hartford

also filed an accompanying Brief in Support of its Motion. (ECF No. 9.) On May 25,

2018, Accardi filed his Brief in Opposition to Defendant’s Motion to Dismiss. (ECF

No. 19.) On June 18, 2018, Hartford filed a Reply. (ECF No. 24.) The Court held a

hearing on the Motion on July 26, 2018. The Motion is now ripe for disposition.

II. LEGAL STANDARD

12. In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court’s

inquiry is “whether, as a matter of law, the allegations of the complaint, treated as

true are sufficient to state a claim upon which relief may be granted under some

legal theory, whether properly labeled or not.” Harris v. NCNB Nat’l Bank, 85 N.C.

App. 669, 670, 355 S.E.2d 838, 840 (1987). Dismissal of a claim pursuant to Rule

12(b)(6) is proper “(1) when the complaint on its face reveals that no law supports

plaintiff’s claim; (2) when the complaint reveals on its face the absence of fact

sufficient to make a good claim; [or] (3) when some fact disclosed in the complaint

necessarily defeats the plaintiff’s claim.” Oates v. JAG, Inc., 314 N.C. 276, 278, 333

S.E.2d 222, 224 (1985). The Court construes the complaint liberally and accepts all

allegations as true. Laster v. Francis, 199 N.C. App. 572, 577, 681 S.E.2d 858, 862

(2009). However, the Court is not required “to accept as true allegations that are
merely conclusory, unwarranted deductions of fact, or unreasonable inferences.”

Good Hope Hosp., Inc. v. N.C. Dep’t of Health & Human Servs., 174 N.C. App. 266,

274, 620 S.E.2d 873, 880 (2005). In addition, the Court may consider documents

which are the subject of plaintiff’s complaint and to which the complaint specifically

refers, including the contract that forms the subject matter of the action. Oberlin

Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001).

13. Accardi’s only claim is for breach of contract. “The elements of a claim

for breach of contract are (1) existence of a valid contract and (2) breach of the terms

of [the] contract.” McLamb v. T.P. Inc., 173 N.C. App. 586, 588, 619 S.E.2d 577, 580

(2005). “An insurance policy is a contract between the parties, and the intention of

the parties is the controlling guide in its interpretation.” Rouse v. Williams Realty

Bldg. Co., 143 N.C. App. 67, 69, 544 S.E.2d 609, 612 (2001) (citation omitted).

Under North Carolina law the construction and
application of the policy provisions to the undisputed facts
is a question of law for the court. Where the policy
language is clear and unambiguous, the court’s only duty
is to determine the legal effect of the language used and
to enforce the agreement as written. Furthermore, in the
absence of an ambiguity, the language used must be given
its plain, ordinary, and accepted meaning. No ambiguity
exists in a contract unless the court finds that the
language of the parties is fairly and reasonably
susceptible to either of the constructions for which the
parties contend. If the court determines that the contract
is not ambiguous, the court must enforce the contract as it
was written and may not remake the contract under the
guise of interpreting the ambiguous provisions.

Cone Mills Corp. v. Allstate Ins. Co., 114 N.C. App. 684, 686–87, 443 S.E.2d 357, 359

(1994) (internal citations and quotations omitted). Nevertheless,
it is fundamental that that which is plainly or necessarily
implied in the language of a contract is as much a part of
it as that which is expressed. If it can be plainly seen
from all the provisions of the instrument taken together
that the obligation in question was within the
contemplation of the parties when making their contract
or is necessary to carry their intention into effect, the law
will imply the obligation and enforce it.
...
However, no meaning, terms, or conditions can be implied
which are inconsistent with the expressed provisions.

Lane v. Scarborough, 284 N.C. 407, 410–11, 200 S.E.2d 622, 624–25 (1973) (internal

citations and quotation marks omitted); see also Shelton v. Duke Univ. Health Sys.,

179 N.C. App. 120, 124, 633 S.E.2d 113, 116 (2006) (quoting Lane).

III. ANALYSIS

14. The issue for determination by the Court is an extremely narrow one.

Accardi concedes that The Policy is a valid contract, and that The Policy provides

for payment of the ACV to Accardi under the facts of this case. Accardi also

concedes that ACV is properly arrived at by depreciating the total repair or

replacement cost by some amount. Accardi’s sole argument is that the cost of labor

cannot be depreciated in determining ACV. Therefore, the question before the

Court is whether the terms of The Policy are unambiguous in providing that

depreciation for labor can be included in calculating the ACV.

15. In support of their respective positions, the Parties make lengthy

academic arguments. Accardi relies primarily on scholarly writings, treatises, and

other non-case law sources that state labor, unlike physical property, cannot

physically deteriorate over time and, therefore, should not be depreciated. (ECF
No. 19, at pp. 5–7.) Hartford counters with its own law review article and treatises

supporting its view that depreciation necessarily includes depreciation for labor

costs. (ECF No. 9, at pp. 9, 12; ECF No. 24, at pp. 5, 8.) The Court does not find

these scholarly and other writings to be dispositive of the issue.

16. Both Parties also cite to a raft of court decisions from other

jurisdictions purportedly supporting their arguments. (ECF No. 9, at pp. 17–20;

ECF No. 19, at pp. 8–12.) Many of the cases are fact intensive, involve policy

language different from The Policy, arise in jurisdictions with instructive statutory

or regulatory guidance on the meaning of ACV, or arise in jurisdictions with no

prior case law interpreting the term ACV. (Id.) Nevertheless, on balance, the Court

finds the reasoning of the courts in the decisions cited by Hartford to be more

persuasive. See, e.g., In re State Farm Fire & Cas. Co., 872 F.3d 567 (8th Cir. 2017);

Papurello v. State Farm Fire & Cas. Co., 144 F. Supp. 3d 746 (W.D. Pa. 2015).

17. Finally, both sides argue that only their interpretation truly serves the

principles of indemnity underlying insurance coverage. Accardi argues that true

indemnification requires Hartford to pay Accardi the estimated depreciated cost for

“used materials” plus the total current cost of the labor needed to “install [the

hypothetical used] materials at no cost to” Accardi. (ECF No. 19, at p. 17.)

Hartford argues that in North Carolina, indemnity requires Hartford to pay the

homeowner an ACV equal to the fair market value of the damaged property

immediately prior to the loss, and that in most cases paying the homeowner for the

depreciated cost of the materials but the full current labor costs of repair will result
in the homeowner receiving more than fair market value and constitutes a

“windfall” to the insured. (ECF No. 9, at pp. 11–15.) Although both of these

arguments have some appeal, the Court concludes, as discussed further below, that

determining ACV by deducting for the depreciation of labor costs is more consistent

with the principles of indemnity.

18. The Court has thoroughly considered the Parties’ arguments and

concludes, on the facts of this case and based on the underlying law of North

Carolina, that the term ACV as used in The Policy is not “reasonably susceptible to

more than one interpretation,” and that the term ACV unambiguously includes

depreciation for labor costs. See, e.g., Allstate Ins. Co. v. Chatterton, 135 N.C. App.

92, 94, 518 S.E.2d 814, 816 (1999); Cone Mills Corp. v. Allstate Ins. Co., 114 N.C.

App. 685, 687, 443 S.E.2d 357, 359 (1994) (“No ambiguity exists in a contract unless

the court finds that the language of the parties is fairly and reasonably susceptible

to either of the constructions for which the parties contend.”).

19. First, although ACV is not contained in the definitions section, The

Policy contains a definition of ACV. The roof coverage addendum states that ACV

will be calculated by deducting depreciation “from the cost to repair or replace.”

(ECF No. 8.2, at p. 15.) In addition, The Policy provides for “replacement cost at the

time of loss without deduction for depreciation” for limited types of personal

property and contrasts replacement cost with ACV coverage applicable to the

property under certain circumstances. (Id. at pp. 44–45.) When an insurance

policy
contains a definition of a term used in it, this is the
meaning which must be given to that term wherever it
appears in the policy, unless the context clearly requires
otherwise. . . . In determining the meaning of a term,
resort may be had to other portions of the policy and all
clauses of it are to be construed, if possible, so as to bring
them into harmony.

Rouse, 143 N.C. App. at 70, 544 S.E.2d at 612 (internal citations and quotation

marks omitted). The definition of ACV in the roof coverage addendum should be

read in harmony with the use of that term elsewhere in The Policy. Finally, while

contending that the lack of a definition of ACV in the Policy is somehow significant,

Accardi concedes that deducting some amount from the cost to repair or replace for

depreciation is an appropriate definition of ACV. Therefore, the Court concludes

that the term ACV in The Policy is unambiguous and that calculation of ACV

includes a deduction for depreciation.

20. The Court further finds that the term “depreciation” as used in

determining ACV is not ambiguous. The Policy does not distinguish between

depreciation for labor costs and materials costs and require that they be treated

differently. See Riggins v. Am. Family Mut. Ins. Co., 281 F. Supp. 3d 785, 788–89

(W.D. Missouri 2017) (holding that depreciation as used in homeowner’s policy

included depreciation of labor costs, in part, based on fact that “nothing in

Plaintiff's policy language limits or excludes labor from the depreciation

calculation”). Accardi’s argument for a definition of depreciation that excludes labor

costs would require the Court to read into The Policy a nonexistent provision

excluding labor costs from depreciation. The Court cannot rewrite The Policy in

this way. Woods v. Nationwide Mut. Ins. Co., 295 N.C. 500, 506, 246 S.E.2d 773,
777 (1978) (“[I]f the meaning of the policy is clear and only one reasonable

interpretation exists, the courts must enforce the contract as written; they may not,

under the guise of construing an ambiguous term, rewrite the contract or impose

liabilities on the parties not bargained for and found therein.”).

21. The language in The Policy also must be interpreted in light of North

Carolina appellate case law. The North Carolina Court of Appeals has held that

“[t]he term ‘actual cash value’ means the fair or reasonable cash price for which the

property could be sold in the market in the ordinary course of business, and not at

forced sale, or what property is worth in money, allowing for depreciation.” Surrat

v. Grain Dealers Mut. Ins. Co., 74 N.C. App. 288, 293, 328 S.E.2d 16, 20 (1985)

(emphasis added). In Surratt, the Court also held that ACV is “synonymous” with

fair market value. Id. While Surrat does not directly address the question of

depreciating labor costs in determining ACV, there are no reported North Carolina

cases that have held or even suggest that the term depreciation does not include all

depreciation, including depreciation of labor costs.

22. Finally, the Court concludes that the only reasonable interpretation of

depreciation as it is applied in determining ACV in The Policy must include

depreciation for labor costs. Accardi concedes that depreciation should be

interpreted to mean “the decrease in home or property value since the time it was

built or purchased due to age or wear.” (ECF No. 3, ¶ 22; emphasis added.) The

value of a house, or a component part of a house such as a roof, garage or the siding,

is more than simply the costs of the materials used; the value necessarily includes
the cost of the labor used to assemble and finish the materials. Papurello v. State

Farm Fire & Cas. Co., 144 F. Supp. 3d 746, 770 (W.D. Pa. 2015) (holding that the

value of covered property under the insurance policy necessarily includes the labor

costs involved in assembling property). In this Court’s view, it does not make

logical sense to separate the cost of labor from that of physical materials when

evaluating the depreciation of a house or its component parts. The labor costs must

be considered in determining the current value. As appropriately summarized by

Defendant:

Accardi’s policy does not insure against damage to
material or labor costs; it insures against damage to
“property.” Property, like Accardi’s roof or flashing or
paint, is the product of both material inputs and labor
inputs. Its value is the product of those inputs. But when
the property ages, its physical condition declines,
reducing its present value. This present value can be
estimated by calculating the cost (both in material and
labor) to replace the property today, but for older
property, this estimate only works if the entire
replacement costs are depreciated. These present-day
costs are depreciated so that the total replacement cost
today can be used as a measure of the property’s current
value.

(ECF No. 9, at p. 13.)

23. Accardi proposes that ACV is properly calculated by depreciating from

present cost of repair or replacement of the property for wear and tear to materials,

but not depreciating for the cost of the labor to assemble or install those materials,

and reimbursing the homeowner for the full current cost of the labor that would be

needed to make the repairs. (ECF No. 19, at pp. 16–18.) This proposed definition of

ACV gives the insured substantial benefits of a replacement cost policy, without
requiring the homeowner to make the actual repairs. The Policy allows Accardi to

recover some of the labor costs that were depreciated in arriving at the ACV for

certain types of covered losses if Accardi actually makes the repair and the cost of

repair exceeds the ACV payment.

24. Accardi’s insistence that ACV should include an up-front award of full

labor costs of repair is illogical. Accardi did not purchase a replacement cost

insurance policy; he purchased a hybrid ACV/replacement cost policy. A policy that

paid full repair or replacement cost for all losses would undoubtedly cost Accardi

substantially more in premium payments because of increased risk exposure placed

on Hartford. To allow Accardi to purchase, pay lower premiums for, and make

claims under a hybrid insurance policy, yet receive reimbursements like someone

who chose a replacement cost policy, would allow Accardi to receive a windfall.

Gilbert v. N.C. Farm Bureau Mut. Ins. Cos., 155 N.C. App. 400, 404, 574 S.E.2d 115,

118 (2002) (interpreting similar insurance policy provision permitting the insurer to

pay the homeowner the ACV, and not the full repair and replacement cost unless

and until the insured made actual repairs, and holding that an interpretation of the

contract allowing for payment of repair or replacement cost regardless of whether

repairs were actually made would “allow plaintiffs to reap a windfall profit from a

loss”).

25. The Court concludes that the term ACV as used in The Policy is not

reasonably susceptible to the interpretation proposed by Accardi, and is

unambiguous. The Court further concludes that Hartford did not breach the terms
of The Policy when it depreciated both material and labor costs in the calculation of

the ACV of Plaintiff’s claim. Accardi’s claim for breach of contract should be

dismissed.

IV. CONCLUSION

26. Defendant’s Motion to Dismiss Plaintiff’s claim for breach of contract is

GRANTED, and Plaintiff’s claim is DISMISSED, WITH PREJUDICE.

SO ORDERED, this the 22nd day of October, 2018.

/s/ Gregory P. McGuire
Gregory P. McGuire
Special Superior Court Judge
for Complex Business Cases