Homeowner alert: Some insurers ‘depreciate’ labor costs for repair claims
Kreidler looks at rulemaking to prevent the practice; what homeowners should know in the meantime
Washington state Insurance Commissioner Mike Kreidler is taking steps to close a little-known loophole in homeowner insurance policies but encourages homeowners to check their policies in the meantime.
At issue is some insurers’ use of depreciating labor costs for homeowner insurance claims that involve repairs. Depreciation in insurance terms means a decrease in the value of property over time, usually as the result of wear and tear from use, deterioration or obsolescence. For example, if your dishwasher causes a leak that damages your flooring and cabinets, your insurer will depreciate the cabinet and flooring based on their condition and the expected lifespan for the original materials. Insurers will match the type and quality of the materials that were damaged.
When a homeowner has property damage that is covered under their replacement cost policy, the insurance company investigates the loss, estimates the cost of the damage, and then issues an actual cash value (ACV) payment. The ACV payment is the replacement cost minus depreciation. It is not uncommon for insurance companies to depreciate 30% to 60% of replacement cost when making an ACV payment. Additionally, insurers withhold the depreciated amounts until repairs are completed, which can be months after the loss.
In recent years, some insurers have started depreciating the labor costs associated with home repairs. There’s no standard to determine what, if any, depreciation should apply to labor costs. Labor is a service that does not lose value over time, unlike most tangible building items, so the practice of applying a depreciation to it is murky at best.
Based on feedback from insurance consumers and lawmakers, Commissioner Kreidler is considering rulemaking to prohibit insurers’ ability to depreciate the cost of labor for home repairs. Four other states have already forbidden the practice — California, Montana, Tennessee and Vermont.
In the meantime, here is some information that homeowners should know:
Check your policy to see if it says the insurer can depreciate labor. Wording could be along the lines of:
It’s particularly important to check your policy if you are insured by one of the companies that we know are depreciating labor costs:
- State Farm
- Liberty Mutual
If your policy allows the insurer to depreciate labor costs and you have a claim, the contractor you work with may require you to pay labor costs up front. Otherwise, the contractor is forced to float the cost of paying its employees until all repairs are complete. That can mean a large output of cash for policyholders that they won’t get back until months later.
If you aren’t sure what your policy covers, contact your agent or broker.