adminSite Administrator  Guest Posts:24  
| 04/11/2010 11:59 AM |
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The following question was received via Support email:
Jim wrote;
"On a commercial ACV policy, can the carrier withold non-recoverable depreciation on the labor to install the new shingles? We know the material is depreciated." |
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Ray Hall Senior Member Posts:2443 
| 04/11/2010 3:39 PM |
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I think you may be confused about some thunb rules. Think of replacement of any componant of a building as "betterment" "Is the policy holder inhanced in any way. A new roof is enhancement and betterment would apply to the operation. It takes material and labor and betterment applys to both.
Now if a window lite is broken in a 12 pane window and the lite cost $4.95 and the minimum cost was $75.00 to replace one lite in 12, no betterment is involved. Just think this way and the answer will always come to you. |
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| 04/11/2010 11:36 PM |
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My answer would depend on the state the loss occured. While many of the states have ruled that depreciation is taken only on the materials, there are still some that allow depreciation to be taken on labor, materials and sales tax. It may be legal in the above or not. The writer needs to find out what that particular states rulings are about depreciation.
Rocke Baker
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Tim_Johnson Member Posts:243
| 04/12/2010 8:34 AM |
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Texas DOI told me that removal (a labor only operation) should not be depreciated but the replacement is subject to depreciation. The replacement is one operation, materials and labor,,,,,,,,,,,according to them.
Tim Johnson
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Ray HallSenior Member Posts:2443
| 04/12/2010 11:23 AM |
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If an automobile has labor and material involved in the production line and is ACV. Why would a structure not have betterment at the time of the loss ? |
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Leland Advanced Member Posts:741
| 04/12/2010 4:11 PM |
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california material cost only
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| 04/12/2010 4:35 PM |
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California! gafaw! Generally speaking (we have to use common sense here) a product usually has material, labor,taxes and possibly other costs involved in its manufacture. As that product grows older, it breaks down, gets some wear and tear and it lessens in value. This lessening in value depends on many factors. In simple terms, if we have a 30 year roof (manufacturer certifies that under normal circumstances it should last for 30 years) that is 15 years old and is totalled out due to extensive hail damage and the policy is Actual Cash Value (ACV) it will usually be depreciated 50% and then the deductible taken.
Naturally if there are specific laws in specific juridictions you would follow those rules or laws in any application of depreciation. Also remember to follow the guidelines of the carrier that is paying you. They will usually know if there are any exceptions any a particular state or locale.
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Tim_JohnsonMember Posts:243
| 04/12/2010 6:49 PM |
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Ray,
No depreciation can be applied to Texas 1st party auto claims any longer. If they have bald tires and wore out paint they get new tires and paint. It is not the same on 3rd party claims.
Tim Johnson
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Ray HallSenior Member Posts:2443
| 04/12/2010 7:13 PM |
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Did not know that about bald tires. I had a garage liability claim a while back and the IA appraiser took 10% betterment on an engine with 53K. The factory warranty was 100K. Seems the warranty on the engine was an additional 47K not a new 100K. I recommended no betterment as this was a thumb rule, not facts. Got over ruled. I think she took the big Boston carrier to small claims court.
This cost the 3rd party $700. from a large Garage not putting on a new Oil Filter, BECAUSE it was too hard to take the loosened oil filter off ( after one try)as something was covering it (Santa Fe). Yep Garage liability is broad coverage, probably the broadest. But it does not cover fire or theft if the shop has either. |
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| 04/15/2010 3:21 AM |
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I have less experience than any of the people answering so far, but I believe Davis vs. Mid-Century answered this. The roof removal is covered by the contract language such as, "We will pay your expenses to remove debris of Covered Property caused by or resulting from a Covered Loss...." I am not a lawyer and it has been three years since I reviewed the case, but I believe the court ruled that the old roof materials were debris. I believe they mentioned there would be no reason why the contract couldn't depreciate debris removal, but since words to that effect were not in the contract, it was not subject to depreciation.
Your question was about an AC policy. I don't see how you can depreciate debris removal on AC settlement.
I worked for some companies that take deferred depreciation on RCV roof removal (which is labor) and I studied this case for a while to figure out how they could do this. I believe the old roof is not debris until it is removed, therefore witholding the depreciated portion of removal until the removal happens seems appropriate. If they never get around to removing the roof, it would not be debris. Immediately upon removal, the debris would be payable...but deferred until removed.
I only follow guidelines and am not competent to have a legal opinion, but I do have to have good faith basis for what I do.
Calif., Florida, and perhaps a few other states might have specific regulations differing from this. |
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sbeau4014Founding Member Member Posts:427
| 04/15/2010 7:48 AM |
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Randy, keep in mind that the Davis v Mid Centery ruling would only apply to the court jurisdiction for where it came down, which I believe it was the federal 10th circuit out of Okla. Has no bearing for other jurisdictions, and the state courts don't need to follow that ruling, although a lot of the times they do (with the exception of places like Louisiana). The depreciation factor on labor only items, along with the labor part on labor and material repairs has been an area of big debate since the early 90's in various jurisdictions and there is a fair amount of caselaw out there in the country to cover it. Anyone going to work in claims in an area that they don't know the caselaw rulings on this needs to research it. You apply depreciation on labor only repairs, and the caselaw doesn't allow it, you are opening yourself up to a bad faith situation.
The question that was originally posted can be answered by "Depends, could be yes and could be no". Policy will probably not say anything about it in the language, so one has to know what the caselaw in the area says to it, and there is no indication in the question as to where this situation is at. Rocke hit the nail on the head with his post.
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LelandAdvanced Member Posts:741
| 04/16/2010 2:04 PM |
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just my two cents... depreciation of the labor needed to remove roof materials makes about as much sense as applying depreciation to masking for painting or the fee for building permits.
Look, the insured had a roof or a painted wall. It wasn't a new roof or new wall, so he doesn't get paid for a new one. How does the ACV calculation work? New price minus depreciation equals the value of what the insured had.
The only things that make sense to depreciate are things that are worn that are part of the physical building. If Texas courts want to allow depreciation on the labor to install, fine, I'll do that when I work in Texas.
But how could anybody even think of putting depreciation on the labor to remove shingles? I know an adjuster that puts depreciation on the masking, when you paint walls. This just doesn't make any sense. I mean if it's fair game to put depreciation on anything and everything, why not depreciate sales tax and overhead and profit while we're at it? In my opinion there has to be a boundary, some kind of guideline, and it should be base on the policy/case law for the state, and common sense.
Depreciating removal labor just seems to be against common sense.
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| 04/16/2010 4:58 PM |
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I don't remember in over 30 years of adjusting of depreciating the labor used in removal of shingles per se. The depreciation was also based on betterment. You have old shingles on the roof being replaced by new. Based on life expectancy, conditions specific for a particular etc drove the amount taken. However, when shingles were estimated at one price off and on, the labor on and off as well as the material prices were obscured. You also take off a certain SF and have to add some waste when installing.
Now to painting, painting is usually estimated by the SF. That SF price usually includes normal expected cover up and masking. Depreciation is taken on the SF price. Now if you broke it down into Painting A per SF and B masking per SF then you could depreciate the painting and not the masking. When you do flood claims, you have to show depreciation on all depreciable items in your estimate. If it's not depreciable, you don't depreciate it.
When you go out on storm, these questions and applications need to be clarified with who you are working for and the policy you are dealing with.
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Ray HallSenior Member Posts:2443
| 04/16/2010 9:34 PM |
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When a house painter looks at the exterior of an old frame house, he knows it will take him longer to clean the surface and more paint than a frame house that has light smoke that can be washed away with detergent. Now the SF of the house , times the unit price is the measurable unit that come out of your puter.
Now is the smoked house inhanced if it gets a new paint job and it was done a week before the smoke. NO depreciation. Now on this first house 75% depreciation, because of condition. A buyer will only pay xxx for the house, but if it has a new paint job I would bring more. But, labor is a big factor and you can,t depreciate labor. Yes you can if "betterment" is involved.
If one crew takes of a comp roof off a house the house is "inhanced" The 2nd crew use nails instead of staples to install the new shingles. The house is inhanced-betterment= depreciation by age on both operations.
Ever read a sign that says "sold as is" takes a lot of labor to get up to standard, cost of labor must be depreciated if applicable. |
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carribbeandreams2004Guest Posts:7
| 07/12/2010 2:10 AM |
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How can labor legally be depreciated? The whole "betterment concept" is incomprehensible to me. Example: If a person has an RCV policy then they will get replacement cost, indemnification, etc... I believe the same indemnity concept still applies for ACV policy but of course the benefits will only be on an acv basis with non-recoverable depreciation applied. To make a long story short - The cost of doing the job is not going to decrease because an insurance company wishes to depreciate the labor to replace shingles. If a court would allow that it does not seem fair to me. Especially if a hurricane hits and there is huge demand for re-roof work due to a lack of contractors in the area. A lack of contractors on scene for a hurricane has not been a problem since 2005. But it could happen (hopefully in 2010). Anyway... I look forward to replies.
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| 07/13/2010 10:47 AM |
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This is just my opinion. Let's say you have an old bucket fixed with rope to a well. You have RCV coverage on the bucket either by endorsement or because it is fixed to the property. A hail stone (covered peril) knocks a hole in the bottom of the bucket.
You have two coverages, ACV and RCV. You can get ACV settlement immediately. Actual Cash Value is Replacement cost minis depreciation for age, wear and tear, and obsolescence. If you take the money and then replace the bucket within the time frame required by the policy, you can file for the reasonable amount you spent to replace the bucket.
Upon the occurrence of your replacing the bucket, you submit receipt of that replacement, a final RCV settlement will be made. If you haven't replaced the bucket, there is DEFERRED depreciation except in certain states like Florida that requires you to be paid upfront. Florida cares that you payed an extra premium. Florida doesn't care that you are bettered and make a profit off the insurance.
Alternately, if your adjuster determines it is less expensive to repair your bucket, he will pay you the reasonable cost to patch the hole. You get new labor and materials to patch the hole. Now your bucket holds water; you are indemnified. There is no depreciation on the labor to repair the bucket because it is still an old bucket...no betterment.
From the minute the iron ore is taken from the ground there is labor added to the raw materials of the bucket. There is labor in the manufacture of the bucket, in the transportation of the bucket to market, in the selling of the bucket at Wal-mart, and in braiding the rope to the buckets handle. All of the labor is contained in the price of the bucket. If there is depreciation on the price of the bucket, there is depreciation on the labor needed to make the bucket.
This is the labor theory of value. It was first hinted at by Hume, then explained fully by Adam Smith in 1776 "The Wealth of Nations." All wealth begins with labor. Some modern economists don't subscribe to the labor theory of value. I believe the differences in state views on labor depreciation stems from the different ways labor value of a commodity is viewed politically.
California, Florida and other states do not understand labor as I have explained it. They would be right in their state because they are the authority!
As adjusters it is our job to apply depreciation the way the carrier and the state defines it for the policy we are adjusting. We don't have to understand the "Labor theory of value." None of this is in the policy! We just have to follow the carrier rules in good faith as defined by the state we are working in.
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ChuckDeatonLife Member Senior Member Posts:1110 
| 07/13/2010 8:11 PM |
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Show me, in any policy, the word "betterment".
"Prattling on and on about being an ass with experience doesn't make someone experienced. It just makes you an ass." Rod Buvens, Pilot grunt
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LelandAdvanced Member Posts:741
| 07/13/2010 10:32 PM |
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The word "betterment" does appear in Texas DOI bulletins and Texas court cases:
Commissioner's Bulletin No. B-0014-00
February 24, 2000
TO: ALL INSURANCE COMPANIES, CORPORATIONS, EXCHANGES, MUTUALS, RECIPROCALS, ASSOCIATIONS, COUNTY MUTUALS, LLOYD´s, OR OTHER INSURERS WRITING AUTOMOBILE INSURANCE IN THE STATE OF TEXAS
RE: DEDUCTION BY AN INSURER ON FIRST PARTY CLAIMS FOR BETTERMENT OR DEPRECIATION
The purpose of this bulletin is to remind admitted insurers writing private passenger automobile insurance in the State of Texas of legal requirements concerning deduction for betterment or depreciation on first party claims. This issue often arises when an automobile is repaired and the damaged parts are replaced with parts that have a longer useful life than the remaining useful life of the parts prior to damage.
The standard Texas policy for private passenger automobiles, adopted by the Department under Texas Insurance Code Article 5.06, provides that an automobile insurer´s contractual liability for first party claims for a loss to a covered vehicle under Collision or Other Than Collision (Comprehensive) Coverage is the lesser of the following three options, less any applicable deductible:
1. Actual cash value of the stolen or damaged property;
2. Amount necessary to repair or replace the property with other of like kind and quality; or
3. Amount stated in the declarations of the policy.
Option (1), to pay the actual cash value, applies when the insurer elects to declare the covered automobile a total loss. Option (2), to repair or replace, obligates the insurer to pay the total cost necessary to repair or replace property with parts of like kind and quality, minus any applicable deductible.
When an automobile is repaired, some insurers questioned whether they could deduct for betterment or depreciation. Some insurers took the position that because the automobile is made better by the use of the replacement parts, they should not be required to pay the total amount of the replacement parts, less any applicable deductible. These insurers contended that they should be required to pay only the amount equal to the value of the damaged parts before the damage occurred, less any applicable deductible.
The Third Court of Appeals addressed betterment in Great Texas County Mutual Insurance Co. v. Lewis, 979 SW2d 72, issued on November 5, 1998. In that case, the court did not allow the insurer to deduct for betterment or depreciation. In accordance with this decision, when an insurer elects to use option (2), above, to repair or replace the property with other of like kind and quality, the insurer should not deduct for betterment or depreciation.
Insurers are expected to ensure that their claims adjusting practices are in accordance with the law as interpreted by the court. Questions regarding this bulletin should be directed to the undersigned at (512) 322-3430.
David Durden
Associate Commissioner
Property & Casualty Program
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Ray HallSenior Member Posts:2443
| 07/14/2010 12:28 AM |
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This is a commish rule on AUTO claims. Depreciation does apply to labor, if any depreciation is in order. Betterment is another work for enhancement. If something is enhanced its not an ACV settlement. 99.7 of all auto policys are ACV claims on total loss payments or repairs. A new quarter panel would not be an enhancement, but if the auto needed a new paint job on the whole vehicle, before the quarter panel was smashed, the total paint job would be depreciated by condition as this would be betterment.
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| 07/14/2010 7:56 AM |
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Betterment is just a word used to describe the difference between new and old. It describes the difference between what was actually damaged and what was paid for to replace. It doesn't have to be in the policy; it just describes what happens when someone gets new to replace something lost that was partially used up and old.
Before replacement premiums (I think) betterment was something public policy tried to prevent from happening in insurance to discourage fraud...people letting their property burn because it was worth more in insurance than it was in market. After replacement cost policies with extra premium, I guess the extra premium plus the requirement that the insured actually replaced the lost item rather than pocket the cash money was theoretically an offset to the betterment. I'd like to hear someone explain that "better." I'd also like someone from Florida to explain what happened to the social policy to prevent betterment in insurance. I think the original theory behind betterment was that premiums would explode. That would never happen in Florida...right?
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