Washington state Insurance Commissioner, Mike Kreidler is making moves to close a little-known, but significant, loophole in homeowner insurance policies.
What Kreidler is bringing to light is some insurers' use of depreciating labor costs for homeowner insurance claims involving home repairs. As we all know, depreciation is a decrease in the value of property over time, usually from wear and tear from normal use, deterioration or obsolescence. Insurers will generally match the type and quality of the materials that were damaged.
When a homeowners property damage is covered under a replacement cost policy, the insurer investigates the loss, estimates damage cost, and issues an actual cash value (ACV) payment, which is replacement cost minus depreciation. Insurers can depreciate anywhere from 30 to 60 percent of replacement cost when making an ACV payment. Insurers also tend to withhold the depreciated funds until repairs are completed, which is often months after a loss occurs.
Insurers recently have begun to depreciate labor costs that are associated with their home repairs. There is currently no standard to determine what, if any, depreciation should apply to labor costs. Unlike a tangible building item, labor is a service that does not lose value over a period of time. In fact, the cost of most labor has increased significantly in the recent past. So, applying depreciation to labor is a questionable business.
Kreidler is currently considering making a rule to prohibit the ability of insurers to depreciate the cost of labor for home repairs. Other states have already forbidden the practice, including California, Montana, Tennessee, and Vermont.
The commissioner identified four popular homeowners insurers who depreciate labor costs, State Farm, Allstate, Farmers, and Liberty Mutual.
Kreidler encourages policyholders to check their policies in the meantime.
You can read Kreidler's proposed rule here.