Maryland Insurance Administration proposes labor cost depreciation prohibition on ACV claims
The Maryland Insurance Administration (MIA) has proposed a bulletin that states property insurers cannot depreciate labor costs when settling claims on an actual cash value (ACV) basis.
The bulletin doesn’t specify any particular line of insurance, such as automobile or homeowners, despite primarily using home property categories of expenses as examples.
“The cost of repairing or replacing damaged property is generally considered to be the sum of two categories of expenses: (1) materials (e.g., shingles and nails); and (2) labor (e.g., roofing contractor),” the bulletin states. “When settling a property loss claim on an ACV basis, an insurer calculates and deducts depreciation to reflect the actual value of the property, based on its physical condition at the time of the covered loss.
“The ACV of damaged property is the cost of replacing the damaged property with materials of like kind and quality, minus the depreciation of materials being replaced. Unlike physical goods and materials, labor does not wear out or lose value over time. In fact, the market value of labor tends to increase over time. Therefore, labor costs associated with repairing damaged property may not be depreciated when settling a property loss claim on an ACV basis. ”
The administration says that if committed with frequency, it would indicate a general business practice and an unfair claim settlement practice under § 27-304(6) of the Insurance Article, Subtitle 27.
This practice contradicts the very purpose of property insurance – to restore the insured to the approximate financial position they were in prior to a covered loss – by unfairly shifting significant responsibility for labor repair costs to the insured.
In its public comments to the MIA, the American Adjuster Association voiced its support for the bulletin.
“The depreciation of labor on repairs has long been a contentious issue,” wrote Caeden Tinklenberg, the association’s president. “We agree with the administration’s conclusion that labor is intangible and does not depreciate over time as materials do. By publishing this bulletin, Maryland will join a growing number of states that are recognizing the need to officially prohibit the depreciation of repair labor.
“While this issue may seem like common sense, insurers commonly depreciate (often significantly) the labor component of property repairs to reduce the payout on everyday claims. The concept of labor depreciation is rarely well enough understood by homeowners to be able to argue the issue with their insurer. This bulletin will provide relief to policyholders who we anticipate will commonly reference this bulletin to ensure their insurers are paying the full cost of labor without applying depreciation.”
The National Association of Mutual Insurance Companies (NAMIC) wrote in its comments that the proposed bulletin’s “prohibition on labor depreciation may lead to unintended consequences for consumers, insurers, and the market.”
“[D]epreciation applies to the whole of the product, as materials and labor cannot necessarily be separated in assessing the total loss value,” wrote Gina Rotunno, NAMIC’s Mid-Atlantic regional vice president. “Therefore, it is reasonable that labor, as an integral part of any completed product, naturally depreciates with time along with the materials. Depreciating labor is not inconsistent with established economic and accounting principles. Indeed, Federal tax law, real estate appraisals, and construction accounting treat labor as a depreciable component of an asset’s value.
“The proposed bulletin marks a significant departure from longstanding approvals previously granted by the MIA for policy forms that explicitly allow for labor depreciation. Insurers have structured their products and pricing around these approved forms, and a sudden reversal would create substantial operational and compliance challenges. These challenges include the need for policy revisions and system updates, both which require considerable time.”
NAMIC also states that courts in Oklahoma, Minnesota, and South Carolina have ruled that labor can be depreciated if the insurance policy clearly states so.
“Furthermore, consumers may wish to choose different kinds of coverage to lower their costs,” NAMIC wrote. “It is important to note that an ACV policy does NOT include the cost to restore an item to its pre-loss condition, either through repair or replacement. Consumers who want to ensure the undepreciated replacement cost of their property may opt to purchase a Replacement Cost Value (RCV) benefit policy or more comprehensive coverage. Policies which provide ACV only coverage are generally less expensive because the consumer is purchasing less coverage; RCV benefit policies provide for higher coverage amounts and are generally more expensive.”
According to NAMIC, prohibiting labor depreciation could also “potentially undermine this process by pressuring insurers to issue full labor payments up front, even before repairs have begun.”
The Mid-Atlantic Association of Public Insurance Adjusters (MAPIA) wrote in its comments that policyholder organizations and individuals have written to express their support for the proposed bulletin.
“We join them in applauding the efforts of the MIA to protect the interests of policyholders in MD,” wrote Holly K. Soffer, MAPIA ‘s counsel. “The cost of labor does not lose value over time, and unfortunately, often increases instead. Depreciation of these intangible labor costs causes property owners to be unable to have the funds in hand to repair their properties. We appreciate the strong position of the MIA that such a practice to depreciate such labor costs constitutes an unfair claim settlement practice and will not be allowed to be issued in any policy form in MD.”
The American Property Casualty Insurance Association (APCIA) wrote in opposition to the bulletin, citing its failure to “recognize that the value of property is a byproduct of both the labor and materials that go into making a finished product.”
“The material and labor components that make up a property’s economic value are necessarily intertwined,” wrote Nancy J. Egan, APCIA’s Mid-Atlantic state government relations vice president. “They cannot be separated when calculating depreciation without artificially overstating the value of damaged property… the total economic value of the property that declines as the property’s physical condition deteriorates over time through wear, tear, and obsolescence.”
APCIA also cited Supreme Court rulings in North Carolina and South Carolina to substantiate their opposition.
“As the North Carolina Supreme Court explained, ‘[t]he policy language provides no justification for differentiating between labor and materials when calculating depreciation, and to do so makes little sense.’ Accardi v. Hartford Underwriters Ins. Co., 838 S.E.2d 454, 457 (N.C. 2020). This is because ‘[t]he value of a house is determined by considering it as a fully assembled whole, not as the simple sum of its material components.’
“Similarly, the South Carolina Supreme Court explained that ‘the market has one price for [a] roof because the materials and labor costs are ‘embedded’ in it;’ ‘[t]hus, when a typical homeowner replaces a roof, she pays for the roof as one unit.’ Butler v. Travelers Home & Marine Ins. Co., 858 S.E.2d 407, 411 (S.C. 2021). ‘[I]t makes no sense for an insurer to include depreciation for materials and not for embedded labor.'”
Several other associations also submitted comments, which can be viewed here.
If finalized, insurance companies with existing policies that contain labor depreciation provisions would have to make amendments within 90 days of the bulletin’s publication.
In a hearing before the Homeland Security & Governmental Affairs Subcommittee on Disaster Management, District of Columbia, and Census last month, Allstate and State Farm adjusters were questioned about their handling of natural disaster claims. Chairman Sen. Josh Hawley (R-Missouri) said oftentimes, third-party adjusters write a report in good faith only to have an insurance company intervene and ask that they change their estimate, with the policyholder never made aware of the changes.
“The policyholder gets no say in the process and the policyholder is left to try and put back together their life as these insurance companies make billions and billions of dollars in profits,” Hawley said.
He said his staff is working to investigate insurance companies’ responses to the disasters and will continue to do so.
“This is a system that promises homeowners that they are ‘in good hands,’” Hawley said. “That they will watch over them ‘like a good neighbor,’ and after billions and billions of dollars in premiums are collected and pocketed by these insurance companies, the people who are left holding the bag are the policyholders. American citizens, at their moment of maximum despair, there’s something wrong with that system. There needs to be some accountability.”
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