Insurance companies are typically required to pay personal and structural property losses on an “Actual Cash Value” basis. When that is the case, the insured has a right to receive that “Actual Cash Value” payment even if repairs are never made or the property is never replaced. Under California law, the amount of that payment is determined by reducing the estimated cost of repair or replacement by an amount of physical depreciation.
California laws state when depreciation cannot be taken and how it must be determined when it can be. If an insurance company depreciates your property for reasons other than its age and condition or fails to explain to you the basis for its depreciation, the insurance company is violating these laws. If it depreciates building components that are not normally repaired and replaced, such as interior framing or marble, the insurance company is likely violating these laws. If it depreciates the sales tax for the cost to repair or replace any component, or depreciates the cost of labor or overhead and profit, it, too, is likely violating these laws.
Because the amount the insurance company deducts as depreciation can substantially reduce the payment, it is vital to scrutinize it. The first step is requesting the insurance company’s estimate, which in many cases will be an estimate prepared using the Xactimate software. The estimate should explain what components are being depreciated and how much. The second step is to demand that the insurance company justify the amount it is taking and explain the basis on which it is taking it.
Ivo Labar has been on the front line of ensuring fairness in depreciation practices for years. He has handled numerous class actions on this subject for years which have changed California law. Dan Veroff worked with Mr. Labar on a recent class action that helped clarify these laws in the context of structural components and sales tax.