Calculating Actual Cash Value and Depreciation in California | Property Insurance Law Blog


    Under the McCarran-Ferguson Act of 1945, insurance is regulated by the states. Knowledge of variations in laws and regulations is a necessity for insurance professionals who cross state lines. These state-to-state variations in law include basics such as determining replacement value and actual cash value.

    Check out Chip Merlin’s latest blogs, The devil is in the details when you file a claim with Church Mutualand California requires payment of the actual cash value per codeto better understand why this topic is ripe for discussion.

    In particular, this blog continues on Victor JacobelisMessage for March 2019. Applying Depreciation in California – Understanding the Guidelines. At the time of Victor’s blog post, the California Legislature was drafting a bill that has since been codified with an effective date of January 1, 2020. Essentially, it amended § 2051 of the California Insurance Code to require a uniform method of determining actual cash value for building and personal property, whether total or partial loss: Actual cash value = Replacement cost – Depreciation. It was a monumental shift from being able to assess the fair market value of buildings to general loss, a method that left many policyholders underinsured because renovation costs often and predictably exceeded the home’s fair market value. This is especially true when you consider spikes in demand after a widespread disaster. Here is a comparison of the previous §2051 language (stripped out) and the current language (emphasized):

    To help determine what constitutes a “fair and reasonable deduction for physical depreciation,” California has adopted governing rules that also provide policyholder protection. 10 CCR 2695.9(f) states:

    (f) If the claimed amount is adjusted due to improvement, depreciation, or salvage, the entire justification for the adjustment must be contained in the claim file. Any adjustments must be tangible, measurable, itemized, and dollar-denominated, and must accurately reflect the cost of the improvement, depreciation, or elimination. Any improvements or depreciation adjustments must reflect a measurable difference in market value relative to the condition and age of the property and apply only to property that is normally subject to repair and replacement during the property’s useful life. The basis for any adjustment must be fully explained to the applicant in writing.

    (1) Under a policy, pursuant to Section 2071 of the Insurance Code of California, where the insurer is required to pay the cost of repairing, restoring, or replacing the property destroyed or damaged with other property of like kind and quality, the amount of recovery shall be the actual cash value of the property damaged or destroyed, as set forth in California Insurance Code Section 2051. Except for internal labor costs that are included in the cost of materials or goods manufactured, the cost of labor required to repair, restore, or replace covered property is not a component of physical depreciation and is not subject to depreciation or improvement.

    Four aspects of this rule section require further attention. First, the insured or the insured’s attorney should not be faced with an uneven level of information when negotiating a claim involving a depreciation adjustment, which is often an imperfect science. In California, insurers are required to record and share their justifications, in writing, as the basis for any tangible, measurable, itemized and specific dollar amount of any adjustment. That burden is on the insurer, not the insured.

    Second, the California depreciation adjustment must reflect a measurable difference in market value based on and age and condition. While many states may allow insurers to rely on depreciation schedules based solely on age, California requires consideration of the condition of the property. So don’t use one application that fits all. For example, a 20-year-old granny couch covered in plastic may have less depreciation than a one-year-old couch owed by a family with five young children and three pets. It is helpful to remind adjusters that the condition must be addressed, especially if they are from another state.

    Third, the rule repeats language in the statute that permits depreciation only on property that is normally subject to repair and replacement over the useful life of that property. Therefore, components of the property, such as the foundation, should not normally be subject to an adjustment for depreciation.

    Finally, in recent years, courts across the country have determined whether insurers in their states can depreciate labor when calculating actual cash value. In fact, we have quite a few blogs on this topic.

    California has reduced the uncertainty and makes clear in its provision that “the cost of labor necessary to repair, reconstruct or replace covered property is not a component of physical wear and tear and is not subject to depreciation or improvement.”1

    Don’t leave depreciation receipts on the table. Ask for justification for depreciable items, provide evidence of the condition of your structure and personal property, and do not accept depreciation adjustments for non-depreciable property or labor costs.
    1 cal. code reg. 10 CCR 2695.9(f)(1).

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