In California, licensed insurance companies usually settle their homeowners and commercial property claims in one of two ways:
1) They negotiate Replacement Cost Values (RCV) for destroyed personal or business property and for any dwellings or buildings similarly destroyed by a covered loss. Then they reduce the RCV by an amount representing the reduction in value between the destroyed items' RCV and the value of the items at the time of the loss based on their age and condition. This reduced value is known as the Actual Cash Value (ACV). The decision about how much to reduce the RCV by is usually arbitrary, or based on very poor or inaccurate market data for the items' life expectancy. Little consideration is ever actually given to the condition of the item, that is, how much it has actually been used or depreciated during its useful life. A simple formula of age multipled by another rather arbitrary figure representing an item's life usage per year is followed by most insurance companies when assigning depreciation to the RCV of an item. Prior to certain new Regulatons, such a formula usually also applies depreciation to the labor needed to make a repair or the labor needed in replacing damaged or destroyed dwellings (residential structures) or buildings (commercial structures).
2) Or insurance companies will pay the full RCV as determined by their adjusters and as subsequently negotiated with the insured or with the insured's representative (such as a public insurance adjuster), without any deduction for physical depreciation of the dwelling or building. However, prior to these new Regulations, the insurance companies who follow this method for dwellings or buildings would not do so for contents or for Business Personal Property. Here they would follow the formula described in 1) above, and then assign a depreciated value to the personal or business contents based on an rather arbitrary assessment of the items' age and condition. (Examples of California insurers who currently follow this method of payment for residential and commercial structures and contents include State Farm and AAA.)
The decision as to how much of the business or homeowners contents' RCV should be depreciated is, again, usually arbitrary or based on very poor or inaccurate market data for the items' life expectancy. Rarely does an insurance company adjuster ever provide a written assessment explaining in detail how they calculated the depreciated value for your contents settlement. With these new Regulations, the manner of applying depreciation and the explanation that must be provided to insureds will change.
Consider this: Most all California homeowners policies allow you the option of settling your claim for the Actual Cash Value of the property. What, then, if you decide you do not want to replace some of your destroyed contents and instead keep the money that truly reflects the value of the property at the time of the loss? For example, if the insurance company adjuster has withheld 35% for an item that should only have 15% withheld for the true difference between its RCV (cost to repair/replace) and its ACV (= its condition at the time of the loss), then you could be out 20% for this one item! Now, transfer that across your entire personal or business contents total loss inventory and you can see how much money we are talking about, using only a 15% difference in calculated values. (The differences are often much farther apart, in fact.)
Additionally, if more money is withheld from your structure payments than should have been withheld based on the actual age and condition of the property at the time of the loss, then you could run into problems with your contractor not having enough money available up-front (for the down payment) and during the repair process (for progress payments). This could not only slow things downs considerably and keep the work from being completed in a timely manner, but it could also keep you from making the full replacement or repair needed to obtain the total Replacement Cost Value! How, then, can a California consumer protect him- or herself from these very likely possibilities?
The first layer of protection is to know your rights in a property claim settlement. Again, recently the California Fair Claims Settlement Practices Regulations have been revised in favor of consumers. On August 30, 2006, these Regulations were recently revised to include the following standards:
1) They negotiate Replacement Cost Values (RCV) for destroyed personal or business property and for any dwellings or buildings similarly destroyed by a covered loss. Then they reduce the RCV by an amount representing the reduction in value between the destroyed items' RCV and the value of the items at the time of the loss based on their age and condition. This reduced value is known as the Actual Cash Value (ACV). The decision about how much to reduce the RCV by is usually arbitrary, or based on very poor or inaccurate market data for the items' life expectancy. Little consideration is ever actually given to the condition of the item, that is, how much it has actually been used or depreciated during its useful life. A simple formula of age multipled by another rather arbitrary figure representing an item's life usage per year is followed by most insurance companies when assigning depreciation to the RCV of an item. Prior to certain new Regulatons, such a formula usually also applies depreciation to the labor needed to make a repair or the labor needed in replacing damaged or destroyed dwellings (residential structures) or buildings (commercial structures).
2) Or insurance companies will pay the full RCV as determined by their adjusters and as subsequently negotiated with the insured or with the insured's representative (such as a public insurance adjuster), without any deduction for physical depreciation of the dwelling or building. However, prior to these new Regulations, the insurance companies who follow this method for dwellings or buildings would not do so for contents or for Business Personal Property. Here they would follow the formula described in 1) above, and then assign a depreciated value to the personal or business contents based on an rather arbitrary assessment of the items' age and condition. (Examples of California insurers who currently follow this method of payment for residential and commercial structures and contents include State Farm and AAA.)
The decision as to how much of the business or homeowners contents' RCV should be depreciated is, again, usually arbitrary or based on very poor or inaccurate market data for the items' life expectancy. Rarely does an insurance company adjuster ever provide a written assessment explaining in detail how they calculated the depreciated value for your contents settlement. With these new Regulations, the manner of applying depreciation and the explanation that must be provided to insureds will change.
Consider this: Most all California homeowners policies allow you the option of settling your claim for the Actual Cash Value of the property. What, then, if you decide you do not want to replace some of your destroyed contents and instead keep the money that truly reflects the value of the property at the time of the loss? For example, if the insurance company adjuster has withheld 35% for an item that should only have 15% withheld for the true difference between its RCV (cost to repair/replace) and its ACV (= its condition at the time of the loss), then you could be out 20% for this one item! Now, transfer that across your entire personal or business contents total loss inventory and you can see how much money we are talking about, using only a 15% difference in calculated values. (The differences are often much farther apart, in fact.)
Additionally, if more money is withheld from your structure payments than should have been withheld based on the actual age and condition of the property at the time of the loss, then you could run into problems with your contractor not having enough money available up-front (for the down payment) and during the repair process (for progress payments). This could not only slow things downs considerably and keep the work from being completed in a timely manner, but it could also keep you from making the full replacement or repair needed to obtain the total Replacement Cost Value! How, then, can a California consumer protect him- or herself from these very likely possibilities?
The first layer of protection is to know your rights in a property claim settlement. Again, recently the California Fair Claims Settlement Practices Regulations have been revised in favor of consumers. On August 30, 2006, these Regulations were recently revised to include the following standards:
Section 2695.9 Additional Standards Applicable to First Party Residential and Commercial Property Insurance Policies
(f) When the amount claimed is adjusted because of betterment, depreciation, or salvage, all justification for the adjustment shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment, depreciation, or salvage. Any adjustments for betterment or depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property. The basis for any adjustment shall be fully explained to the claimant in writing.
(1) Under a policy, subject to California Insurance Code Section 2071, where the insurer is required to pay the expense of repairing, rebuilding or replacing the property destroyed or damaged with other of like kind and quality, the measure of recovery is determined by the actual cash value of the damaged or destroyed property, as set forth in California Insurance Code Section 2051. Except for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment.
These Regulations will help keep insurance companies from acting arbitrarily in applying depreciation to RCVs for covered structures and for personal or business contents, by requiring them to 'fully explain in writing' the basis for their "adjustments for betterment or depreciation ... reflect[ing] a measurable difference in market value attributable to the condition and age of the property." Any such "adjustments for betterment or depreciation" also cannot apply to "the expense of labor necessary to repair, rebuild or replace covered property."
Previously, insurance companies did not separate out the cost of labor from the materials in repair estimate unit costs. They simply attached a depreciation percentage to the entire line-item cost, inclusive of labor. Thus, insurance companies have been depreciating "property normally subject to repair and replacement during the useful life of the property" and "the expense of labor necessary to repair, rebuild or replace covered property," though such labor should not be subject to the same standard of depreciation as materials that have an actual "useful life."
Of the new Regulations provided above, section 2695.9(f) was actually set to be included in the California Fair Claims Settlement Practices Regulations back on July 23, 2003. But insurance companies, through their trade associations, appealed the new California Regulations cited above on the basis that "insurers will be subjected to unreasonably burdensome, and in some instances impossible, standards that will prove extraordinarily expensive to insurers and ultimately to consumers" (PISC, et al. v. Garamendi, LASC, case number BC298284, "Complaint for Declaratory and Injunctive Relief," page 3, filed July 1, 2003).
The above Regulations were subsequently put on hold, and only recently has the appeal case been finalized in favor of California consumers. You can read the Press Release by the California Department of Insurance, here. These new Regulations will require that insurance companies provide details pertaining to their RCV deductions, showing exactly where and how they determined the “measurable difference in market value attributable to the condition and age of the property" in question. Insurance companies will also be precluded from depreciating any labor listed separately or as it exists as a part of a unit cost in a construction repair estimate, which estimates often serve as the basis for property claim ACV structure payments.
For assistance with your property insurance claim as a whole, and in investigating and negotiating the amounts paid and withheld by your insurance company for the settlement of your claim, you should consider hiring a public insurance adjuster.
For more information about how to evaluate and hire a public insurance adjuster, choosing repair contractors, and understanding many of your rights and obligations in a property insurance claim see my book, Property Claims Adjusting: A Complete Guidebook for the Consumer, California Homeowners Edition (Murrieta, CA: Premier Claim Consultants, 2007).
For more information about public adjusters, expert witness services, property claims adjusting, appraisals, and litigation support, visit our website at http://www.premier-claim-consultants.com/.
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