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Last Post 06/16/2009 6:01 PM by  Roy Estes
Depreciation on labor
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greencaus
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04/30/2009 5:59 PM
    I just started working for a company that wants me to depreciate not only materials, but also labor.  I know this has been an industry wide debate for years, but what I would like to know is if there is a written standard floating around.  All help is appreciated.
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    okclarryd
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    04/30/2009 9:11 PM
    Depends on the state. In Oklahoma, removal labor is depreciable but installation labor is not.
    Larry D Hardin
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    Tim_Johnson
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    04/30/2009 9:15 PM
    What state? I just had a conversation with Texas DOI. They said that tear off is not subject to dep. but put back is, as it is part of the overall operation. I did not agree with that ruling, if put back is subject to dep. then tear off should be as well. The guy I spoke with did not seem that knowledgeable about the subject and put me on hold twice to consult with his co workers.
    Tim Johnson
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    HuskerCat
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    04/30/2009 10:44 PM
    Guess the wagons circle again...ACV only applies to replacement cost of material & install labor the way I was taught by an old-timer and his old-timers.   Rippin" & removin' has no materiial or ACV considerations, it includes the labor cost 100%.  Even after I moved on, it's been the same way with every carrier I've worked for, whether staff or IA.  Check the walls of that guy's cubicle, and see if there's a CPA diploma hanging there in place of an AIC, or whatnot. 
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    HuskerCat
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    04/30/2009 11:06 PM
    I had to go back & read the prior posts, and decide who I was responding to.  Then I re-read Larry's again about Oklahoma rules.  Those seem to be contrary to any sensible thing I've ever heard.  Does that mean that there is no true replacement cost coverage in Oklahoma, since the RC applies to the replacement material/labor only...and the property owner is responsible for the tear-off labor at ACV?  How do you calculate ACV labor?  It can be difficult enough in some cases to justify material lifetime values.  The best thing, I suppose, is that replacement takes place within the allotted timeframe and all of this becomes a moot point as long as there is RC coverage in force.
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    greencaus
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    05/01/2009 12:27 PM
    Do you know of anything in writing that sets this as an industry standard in Oklahoma?
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    greencaus
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    05/01/2009 12:31 PM
    OK, maybe I wasn't clear in the first post.  When replacing a roof, this company wants me to depreciate the labor for putting the shingles back on in addition to depreciating the materials.  They do not allow for depreciation on the  tear-off.  I don't agree with depreciating labor to put back on or tear-off.  Labor is not a wearable item that is subject to depreciation.  In my mind, depreciation applies to nouns and not verbs.
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    Medulus
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    05/01/2009 4:23 PM
    Yeah! What the Husker dude said in his first post! (The second post I didn't totally understand. I think he just drank some Loup River water and was thinking out loud in a delirium).

    Certain state regulations or court precedents may require depreciation be applied only to materials. If so, do it when you're working in that state. The company you are working for wants you to do it a certain way, do it that way. If you disagree, then write in the narrative report something tactful like "per XYZ company standards, depreciation has been taken on both labor and materials" and move on. You want written standards? Who would have the authority to write standards like that for the whole industry? Maybe the claim guru?

    Depreciation of both labor and materials on items that include materials such as replacement has a long tradition in our industry. It has also long been standard practice not to depreciate labor only items. That's my standard, and I just wrote it. That's the best I can give you.
    Steve Ebner CPCU AIC AMIM

    "With great power comes great responsibility." (Stanley Martin Lieber, Amazing Fantasy # 15 August 1962)
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    HuskerCat
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    05/02/2009 3:11 AM
    You're right, Mudulus One....the Loup is a little murky right now.  I think The Daryl'z'zz' brother Larry was playing with us on that comment.  Notice his absence?  If I cup my ear to the south, I hear chuckling & ice cubes meetin' Mr Daniels in OKC!.  Cudo's LDH!!
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    okclarryd
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    05/02/2009 11:08 PM
    Actually, Ah'm in Baton Rouge enjoyin' some o' them mint juleps.

    Farmers set this precedent several years ago on a claim in Moore, OK.

    Somebody correct me if I have it wrong. I'm old and feeble and forgetful and need all the help I can get.

    Removal labor is depreciable (recoverable) to ensure that the damaged roofing is removed. No "roof-overs".

    Installation labor is not depreciable as there are two separate activities or items involved, one of pure labor and one of pure materials, which depreciate (recoverable).

    Maybe.
    Larry D Hardin
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    RandyC
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    05/03/2009 2:55 AM

    Davis vs. Mid-Century is a case you might want to look at.
     
     
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    HuskerCat
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    05/03/2009 3:38 AM
    Randy, I think you should go ahead and get your law degree.  You are so able to drone on with your posts that I'm sure you could also bore the jury to death long enough to get a verdict.  I, on the other hand, just need to find one of those Dodge City hanging judges to take me out of my misery quickly.  And by the way, it's practice.  
     
    Before you all jump on me... just let me say it one time "Hee Haw"...jackass at work! 
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    RandyC
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    05/03/2009 4:04 AM
    I fixed it, thanks.
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    Ray Hall
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    05/06/2009 12:35 PM
    Any componant of a house is subject to depreciation. IF the property  damaged is " betterment". A gallon of paint will cover about 450 sf. it cost about .5.5 cents top for material and from 50 to 80 cents labor and profit. If a room needs walls and ceiling BEFORE the storm and after the staining from the storm it still needs it. NO BETTERMENT. turn in your license, this will not fly.
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    Mike Smith
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    05/06/2009 5:19 PM
    In California, you can only depreciate materials, which is usually the setting I use in Xactimate no matter where I'm adjusting. I've never had a complaint from any company I've worked for, but maybe they just didn't notice.
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    Ray Hall
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    05/06/2009 5:37 PM
    I have worked in Ca. several times over the years and I have never read or had a question come up about betterment as I know what it is and the carriers also had the same mind set. Let Steve and Bob Havey give this a pro,s answer. Now if you are talking about new for old coverage, its a new topic.
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    BobH
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    05/07/2009 12:48 AM
    Posted By Mike Smith on 06 May 2009 05:19 PM
    In California, you can only depreciate materials, which is usually the setting I use in Xactimate no matter where I'm adjusting. I've never had a complaint from any company I've worked for, but maybe they just didn't notice.
    That of course is California law.  I am working a storm in Georgia right now, and the default settings for Xm8 are being used by the carrier and they would not want you to change them to "materials only".  The default setting would include depreciating labor associated with a repair that gives them a new wearable surface (not framing, drywall, etc.)
    Ray is right, you have to focus on the repair step and are they getting newer-better condition stuff than they had.  We never depreciate a "detach-reset" labor item. 

    Mike, you and I worked for years before that law went into effect in California and caused us to change the default settings.  You may recall that after that change a couple years back, painting a room had almost no depreciation even if you took 50% cuz the can of paint was cheap compared to the labor.  Didn't used to be that way, and for most of the 50 states it is still labor + materials you depreciate (if the repair is subject to depreciation, ACV). 
     
    Like most of the paths we walk, the edges and gutters are set by state law.  Florida says pay RCV...

    Bob H
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    Leland
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    05/07/2009 5:49 AM
    It is California case law. I read the case once, and the judge was sarcastically asking if more depreciation should be applied to labor from an older worker vs a younger worker. In other words he was making the point that (in his mind) depreciation on labor is a ridiculous idea. Obviously Texas judges or DOI think differently.

    As far as betterment goes how about sealing for odor control? If you tear down smoke damaged drywall and spray sealer in the stud bay, is that betterment? I don't think so.

    The paint on the walls is a betterment because (usually) the insured had old paint and they are now getting new paint.

    If the painter is using oil base paint and the kitchen pilot light ignites the fumes, starting a fire, would you depreciate the paint in the just painted rooms? Paint that is one hour old at the time of loss?
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    Ray Hall
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    05/07/2009 3:24 PM
    It,s really a common sence question. I always think "betterment" rather than depreciation and i don,t get my old brain in a bind.
     
     I remember the "nailable surface" lawsuits in Texas very well. The short version is the insurance commish stated a comp. laid over a wood shingle (deck) had to be all torn off and new deck applied. Three small Texas carriers disagreed and about 197 insurance carriers in Texas rolled over for the commish.
    The three Texas Carriers sued the commish on the rule and won. This was about 1990-91.
     
    Replacement cost coverage has been written on property insurance for over 50 years. It is an "extra" for an additional cost. Some contracts have the built in language, such as a HO-3.
     
    If I ever get another dwelling roof claim from the Texas carriers, I will have some fun with the roofing salesman.
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    Medulus
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    05/07/2009 4:54 PM
    I bet you will, Ray. See what happens when I sit back and don't answer your challenge? It brings out two of our community's most knowledgeable to answer the question. I do remember the materials only ruling coming down. I didn't live here then, but I was working a cat here. State Farm did their usual - err on the side of caution -- and immediately told their adjusters to stop depreciating estimates entirely until they decided what to do. However, by far the majority of the claims I handle now are in other states and handled through IA's while I monitor the team I put in place. So I was glad to have Bob and Leland step up to the plate to confirm that my knowledge was up to date.

    Florida seems to have some special laws about depreciation (or lack of the same), but they don't apply to the commercial claims I handle in Florida, so I don't know them. In most states the depreciation of labor and materials is standard practice when there are materials involved in the operation. However, Mike's observation is correct. Since most estimates do not break out labor and materials separately, few examiners will bother with or notice whether you have depreciated labor and materials or only materials. I think maybe I've had the depreciation I applied questioned maybe once in the last ten years. That was by a PA who wanted a higher payment for himself up front. He called me a few choice names in the process.

    That having been said, apply the depreciation in every estimate so I won't send the estimate back to you. I am tired of sending estimates back to adjusters who should know better -- especially when I sent them an instruction sheet with the assignment telling them to do it. I hear far too often, "But it's a replacement cost policy." I shouldn't have to explain to someone claiming to be a General Adjuster that ACV is paid up front.
     
    BTW, when I get to 500 posts I wonder if I get to be an advanced member like Racko and Sir Harvey.
    Steve Ebner CPCU AIC AMIM

    "With great power comes great responsibility." (Stanley Martin Lieber, Amazing Fantasy # 15 August 1962)
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