Arkansas Insurance Department–Depreciation of Labor Prohibited When Calculating Actual Cash Value Payment in Property Claims
Sep 17, 2014
The Arkansas Insurance Department (“Department”) issued Bulletin 13B-2013 on September 16, 2014 to clarify its position on the depreciation of labor in property claims.
In the document, the Department explained that, when an insurance claim is filed for structural loss, the relevant insurance policy requires payment of the replacement cost (“RC”) or actual cash value (“ACV”) depending on the terms of the policy. Certain items may be depreciated in value to account for their age, and wear and tear. The value of items that are eligible for depreciation in policies with only ACV loss settlement provisions are what the Department is seeking to clarify. The Bulletin does not apply to RC policies that hold back a portion of the replacement cost until repair or replacement is completed.
An initial damage repair settlement typically contains estimates for debris removal, tear-off labor, materials and the repair of labor. Of these components, only materials are subject to depreciation for calculating ACV payment. Labor of any kind related to the repair, rebuilding or replacement of covered property cannot be depreciated.
Depreciation is typically considered when determining ACV, albeit on a case-by-case basis. According to the Department, the most important guiding principle for calculating depreciation is that it must be actual, not artificial. Depreciation is artificial–and therefore improper–if it is based on a calculation formula set in advance. Depreciation also must be “reasonable, not excessive,” the Department explains. Artificial or excessive depreciation is a violation of fair claims settlement practices.
In the case of a total loss by fire or natural disaster of the property insured, Valued Policy Law in Arkansas Code Annotated §23-88-101 requires that a property insurance policy–other than for flood and earthquake insurance–shall be held and considered to be a liquidated demand against the company taking the risk for the full amount stated in the policy. Deductions for co-insurance or deductibles are not allowed. Arkansas law makes no distinction as to the type of property policy involved.
Bulletin 13B-2013 reminds that this is not a new Department position. Following the issuance of Bulletin 13-2013 on July 5, 2013 (replaced by Bulletin 13A-2013 on July 18, 2013), the Department granted all insurers 90 days to ensure claims-handling procedures involving the depreciation of labor were in conformance. It was assured that formal market conduct reviews on non-complying claims adjustment procedures would not be conducted during this grace period.
The Department cautioned that it will continue to deal with any related complaints.
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