Sales Tax Omissions in Property Claim Settlements: Can They Do That?

Consider the typical homeowners settlement procedures followed by an insurance company adjuster for damages to your structure or dwelling:

• The insurance company sends out a company or an "independent" adjuster who works for it, and the adjuster then prepares an estimate for repairing or replacing the damages, or who obtains an estimate for the same from an insurance company contractor with whom the company adjuster or the insurance company works on other claims.

• The adjuster applies depreciation to nearly all if not all of the line-items in their estimate for the work in question, often even for costs covering labor, though this is not permitted by new California Regulations or California State law. (See CA Insurance Code, section 2051[b][2]: "In case of a partial loss to the structure, a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life ofthat structure." Labor does not have a "useful life" nor is it "normally subject to repair and replacement!)

• The adjuster includes the traditional though often insufficient (especially in California [see Merl Vandervort, CR. CGR, “The 10 and 10 Myth,” as published in The Bluebook of Cleaning, Reconstruction and Repair Costs [Lake Forest, CA: The Bluebook International, Inc., 2002], pages xx-xxi) general conractor's overhead and profit and materials sales tax appropiate for the county in which the materials will be purchased.

• The resulting total is then sent to you for use in beginning the restoration work to your dwelling or other structure by your contractor, with an amount usually withheld for the depreciated value (or Actual Cash Value in most cases) of the dwelling until your home has been completely rebuilt.

Again, the typical steps in this process from the carrier's perspective are:

1. The company adjuster writes or obtains a Replacement Cost estimate.

2. The company adjuster depreciates, at his or her sole discretion (unless you have a public adjuster assisting you!), amounts to be withheld, based on your home's age and condition, until the repair/replacement of the damages is completed.

3. The company adjuster adds or approves in most cases only the traditional allowances for a contractor's general overhead and profit (10%/10%) as well as the appropriate materials sales tax.

4. The company adjuster then issues a payment for the amount calculated in the above three steps for use by you or your contractor in repairing the dwelling or other structures damaged by a covered peril, with an amount withheld for depreciation until all of the repairs are completed (some companies, such as AAA and State Farm issue the full Replacement Cost according to their estimate, with no dwelling depreciation holdback).

Now consider the typical homeowners settlement procedures followed by an insurance company adjuster for your total loss personal property (= your contents):

• The insurance company sends out a company or an "independent" adjuster who works for it to compile an inventory of all the destroyed personal property.

• The insurance company representative compiles a Replacement Cost Value for the non-salvageable personal propery.
• The insurance company applies depreciation to the Replacement Cost Value based on their assessment of the items' ages and condition, resulting in an Actual Cash Value.

• The insurance company issues you payment for the Actual Cash Value of the destroyed personal property, holding back the depreciation and the sales tax (Allstate and a couple of others are exceptions here) until you actually replace the items in question.

Let's restate this process again so that the steps likely involved in the insurance company's valuing and settlement of your total loss personal property claim are clear:

1. The insurance company prepares a contents inventory.

2. The insurance company applies a cost to replace to each item.

3. The insurance company decides how much to knock off the cost to replace in view of their assessement of how old or worn out (used) the item is.

4. The insurance company then pays you the used value, but will pay you the sales tax or the full cost to replace the items in question until you actually do replace them.

Okay, setting aside the fact that you or your public adjuster can establish your own Replacement Cost Value with supporting documentation and negotiate the amount to be withheld for the age and condition of each and every single item you claim, what's missing above from the contents settlement process that is included in the structure or dwelling process described previously? Don't worry, I will not make you go back and forth through the summaries to find it. The answer is: sales tax.

Insurance companies such as Century-National, State Farm, AAA, and others (again, Allstate and some other insurance companies are exceptions to this rule) routinely leave off of their Actual Cash Value settlements allowances for personal property sales tax though, again, they include it in their Replacement Cost Value repair estimates for dwelling or structure claims. Why the difference?

Based on my over thirteen years of claims adjusting experience, I believe it because they do not think you will replace much of your personal property, and what you do replace you will provide a receipt showing the total cost which they will then pay you if they believe the item is comparable to what you lost. They know you will likely rebuild your property, and that your contractor will be looking for that materials sales tax, so they include it. But they should include it both for dwelling and personal property Replacement Cost Value calculations, and subsequent Actual Cash Value payments, because sales tax is a part of the Replacement Cost Value.

You are entitled to an Actual Cash Value settlement for your lost property under most policies, and the Actual Cash Value amount is based on the Replacement Cost Value which should, again, include the slaes tax. But if you or our representative do not bring this fact to the insurance company's attention then they will likely not include sales tax in their personal property claim settlement calculations, leaving you with less money up front to use in replacing your property or to keep should you decide to cash out for the Actual Cash Value settlement. Can they do that? Insurance companies are not supposed to settle your claim for less than the Actual Cash Value of the full and proper Replacement Cost Value, inclusive of sales tax, but they will if you let them.

For more information about how to successfully negotiate your property insurance claim, how to evaluate public insurance adjusters, choosing repair contractors, and understanding many of your rights and obligations in a property claim settlement, see Property Claims Adjusting: A Complete Guidebook for the Consumer, California Homeowners Edition (Murrieta, CA: Premier Claim Consultants, 2007).

For more information about public adjusters in general, expert witness services, property claims adjusting, appraisals, and litigation support, visit my website at http://www.premier-claim-consultants.com/.