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The word "betterment" doesn't have to be in the policy, but it is always better to use policy words when explaining how we settle claims. Using words that we understand and the insured does not...is poor communication. Chuck is right! The more we read and use words from the policy the better. That is the contract the carrier has with the insured. Maybe the insured doesn't read the policy, but the adjuster should know it inside and out! When the insureds does read the policy, he should find the same words the adjuster uses to explain his estimate.

Randy, I agree with you on that point. For example when I do a coinsurance schedule I try to use the coinsurance terminology that is in the policy. If the policy says "coinsurance penalty" and shows a percentage deduction, I show it that way. If the policy says "percentage compensable" and shows how much can be paid, not how much is subtracted, then I show it that way. Same mathematical result, but two different ways of describing and calculating it.

If a policy insures the "building" my SOL will show "building" not "dwelling" or vice versa.

However there are legal terms from case law that specifically apply to the policy even though those words don't appear in the policy.

Consider the following statement:

"No depreciation was applied to the fence repairs as only 4 boards were replaced; in the opinion of the undersigned this was not a betterment"

This sentence, in my opinion, would be perfectly fine to have in a narrative report even if the policy doesn't have the word "betterment".

There are so many examples of valid terminology that doesn't appear in the policy.

The term "like kind quality" may appear in the regulations but not in the policy.

So I do agree it is a good idea to try to use policy language where appropriate and it is also a good idea to try to explain things in plain English.

But I think adjusters have to be careful not to assume a word like "betterment" is not relevant because it doesn't appear in the policy.

Given a choice between using the word "depreciation" or the word "betterment" to describe an Actual Cash Value calculation, it usually would be better to say "depreciation" because that is the word in the policy.

But if you're trying to describe how a fence is not really better than it was before the loss because only a few boards were changed, "betterment" is really the best word to use even if it doesn't appear in the policy.

I probably lost a few with my mention of the "labor theory of value." I bring this up to explain why different states have such different viewpoints on labor. The classical economic view of value of a commodity derived mostly from labor with a little value thrown in for raw materials. The historical concept of private property rights came from Hume and John Locke who thought God provided the raw materials but after an individual collected the materials and worked them into a finished product that labor was the difference and that labor added should extend into ownership rights of the property created.

Karl Marx embraced the labor theory of value and extended it. I don't think he believed much in God, so labor was about as holy as one could get. We all know what he thought of "private property rights." Marx believed capitalists exploited labor and cheated the worker out of his (collective) rights. Neo-classical economists trying to distance themselves from Marx came up with the "utility theory of value." They believed that after a property was produced it became remote from the labor that created it. Some labor is more productive than other labor. Capital makes labor more productive, so the new view was that the value of a property was in its utility...not the labor that went into the production of it.

Now it we go back to my bucket, under the utility theory of value, the bucket is just a bucket remote from the labor that went into its production. If we depreciate the value of the bucket for age wear and tear, we would be depreciating the utility of the bucket...not the labor. The rope that fixed the bucket to the well that was braided on to the bucket handle would not be labor remote from the bucket but would have value of its own right. Under this view, the bucket could be depreciated for its utility...but the labor that went into fixing the bucket to the well would not be depreciated.

I think these totally differing economic views are reflected in the various court decisions in different states. I don't think one is more right than the other, just different. They will probably always be different. Out of respect for states rights and the federal system of our government, we should just accept the views of the state where we are working and apply those rules as are appropriate. The carrier will know their position and may be willing to defend it in court if it is a little different than than the Dept. of Insurance view. There may be differing views from the courts in that state. Our responsibility is to act in good faith, but we also work for the carrier. Most of the courts where the law is unsettled understand the difference between unsettled law and bad faith.

I often work for a carrier that does depreciate labor for almost all replacement items. I've heard of adjusters that will not do this. I respect that. I wrestled with this years ago but after reading the case law became comfortable with the carrier's position. That carrier probably could care less about "theory of value." They probably don't care what I think, but if I didn't do it their way, I would not be working for them. It just helps me understand the differences that I see state to state.

Keeping in mind that each policy may contain certain provisions and requirements with respect to the ACV vs. RCV calculation and that each state may have specific case law that may be applicable, the simple answer is yes.

The Oklahoma Supreme Court found that ACV meant “replacement cost less depreciation." Accordingly, the court held that, “... A roof is the product of both materials and labor.” In relying on the Rochester American Insurance Company v. Short, 1953 OK 4, 252 P. 2d 490 (Okla 1953) and McAnarney v. Newark First Ins. Co., 247 N.Y. 176 (N.Y. 1953) cases, the court then answered the certified questions in the affirmative and stated that labor costs associated with installation of the new roofs could be depreciated. However, labor associated with tearing off and removal the old, damaged roof, was not as it was included in the debris removal coverage of the policy which did not allow for depreciation. (see specific policy information as it relates to your specific claim.)

The Oklahoma high court issued a nearly identical opinion in Redcorn v. State Farm Fire & Casualty Company, 55 P. 3d 1017 (Okla. 2002), in which the insured’s roof was damaged by either wind or hail. Although, Redcorn involved an actual cash value policy rather than a replacement cost coverage policy, the court held that the ACV calculation method would be the same, that is, replacement cost less depreciation. The insured contended depreciation of labor is inconsistent with the principle of indemnity under the theory that the cost to install depreciated shingles (if it were possible to purchase them) would be the same as the cost to install new shingles. The court disagreed, holding that a “roof does not have a separate market value from the building it covers,” and is the product of labor and materials which cannot be separated as they were not insured separately. If the insured’s argument were followed, he would be receiving the benefit of a hybrid policy he did not pay for, to wit: a policy of actual cash value for roofing materials and replacement cost for labor, resulting in unjust enrichment to the insured. Id. at 4.

An “actual cash value policy” is a pure indemnity contract with the purpose of making the insured whole by compensating him/her for the actual value of the property lost or destroyed.
A “replacement cost coverage” policy reimburses the insured for the full cost of repairs, even if that results in putting the insured in a better position than prior to the loss.

Travelers Indemnity Co. v. Armstrong, 442 N.E.2d 349 (Indiana 1982). For example: If the insured’s 10-year old roof with a “life span” of 20 years is completely destroyed by windstorm, under an ACV policy, the insured would be entitled to payment of only the ACV of the old roof less depreciation, deterioration, and obsolescence, which may or may not be sufficient to replace or repair the roof. Under a replacement cost policy, if the insured actually repairs or replaces the roof, the insured would be entitled to payment for all necessary costs associated with repairing/replacing the roof with one of like kind and quality, and would end up with a brand new roof which could increase the value of the insured’s home. Of course in the latter case, the insured has paid a higher premium for replacement cost entitling him to the added benefit.

Replacement cost insurance is the way to buy insurance. The Homeowners (Package) policy gives this coverage for an additional premium, the additional premium can not be split out if you want a HO-3 . But it can be split out if you purchase a HOA (Tx) as it does not have RC provisions; however many people say co insurance penalty on a HO-3 no such animal, its a penalty for NOT Insuring to 80% of replacement cost.(non complying)

I have not seen this penalty applied or even heard of it in 35 years. I brought this up one time with State Farm and the answer was. Forget about it, if we write a Homeowners on it.... IT comply's . But the TX. HOA still requires 80% to RC... is that fair? Nope but who will sue? Will it be you?

 

*** This whole topic is about collecting more premium.... many years ago most people only purchase a low amount of hazard insurance, and the underwriters thought of 80 co on commercial cover.***

Does any state allow co -insurance on a dwelling & contents in the USA. (Non admitted LLoyds type except)