A class action lawsuit filed against Allstate in South Carolina raises the newly raised practice by some insurers of depreciating labor when repairs are made.1 I thought that the lawsuit was very well plead and was surprised to see citations to a law review article written in part by public adjuster Don Wood, and another citation to the Property Insurance Coverage Law Blog.

Don Wood et al., Insurance Recovery After Hurricane Sandy: Correcting the Improper Depreciation of Intangibles Under Property Insurance Policies, 42 TORTS, INS. & COMPENSATION L.J. 19, 24 (Winter 2013) (“I was taught many years ago that depreciation, when it was applied, must be done on a line-by-line, item-by-item basis…. I obtained charts of the average lifespans of materials. A few sample pages from the National Association of Home Builders is attached. Material lifespans shown in the attachment were derived from reports of product manufacturers. Nowhere in any of the lists of materials is any labor item mentioned …”); Chip Merlin, Few Judges and Insurance Regulators Worked In Property Claims: Understanding New Insurance Rulings, PROP. INS. COV. LAW BLOG (August 16, 2017) (“when I was starting out, an older and experienced GAB [General Adjustment Bureau] adjuster told me they never depreciated labor.”)

The lawsuit is filed by very fine attorneys I have had the pleasure to meet and get to know. Austin Mehr, Eric Peterson, and Brandon McWherter are experienced first-party property insurance lawyers. Brandon McWherter sometimes publishes articles on his Tennessee Insurance Litigation Blog. Brandon was also the successful lead counsel in a separate “depreciation of labor” case I noted in, Can Labor Be Depreciated When Considering Actual Cash Value?

This current class action case is another instance of Allstate insurance company warning in its national advertising that consumers should not purchase “cheap insurance” while Allstate’s claims department is making Allstate policies “cheap insurance.” I noted this in, Can My Insurance Company Deduct Labor Costs When I Have A Replacement Cost Policy? What Allstate Does Not Say In Its Ads:

Some insurance company claims managers for some companies have their creative insurance lawyers argue the opposite and against their customers’ interests to depreciate labor. Allstate and other insurers are obviously doing this. These insurers and their agents should be honest and warn their customers about this claims adjustment tactic which cheapens the insurance they sell. Unlike Allstate, many insurance companies treat their customers fairly and do not depreciate labor.

I started joking with some Merlin Law Group attorneys about how one even goes about depreciating labor. Labor does not wear out. Using the broad evidence rule, it may go up or may go down in value depending on inflation, whether new technology makes the previously applied labor less and the marketplace for labor rises or falls upon demand and supply after a loss.

I gave an example of the labor cost to replace an old mainframe computer with an equal computer today to show how labor costs can be dramatically less today than when first incurred. Air guns are faster than hammers and make construction less costly. How do you consider that depreciation of labor calculation since the method of labor is different and may never have existed at the time the previous worn material was put in place? The old method of labor did not wear out and the new one had not been invented.

From the insurance company’s view, this is a matter about playing the float and reducing the amount payable on policies they market as “replacement cost” policies. It is another example of the insurance industry racing to the bottom while some insurers, like Chubb, sell real replacement cost policies and are more interested in their customers following a loss, while others only advertise that they do.

Thought For The Day

Our Strategic Vision is to deliver substantially more value than the competition by reinventing protection. . . .
—Allstate Insurance Company—“The Good Hands Company”
1 Floyd v. Allstate Indemnity Co., No. 4:20-cv-00183 (D.S.C. – Complaint filed Jan. 20, 2020).

  • Mark Jacoby

    Dear Mr. Merlin,

    The right to depreciate labor is written into the HW2135 State Farm policy as you already know, and suspect that other underwriters will surely to follow in suit the leading brand for property Insurance in the USA. Advocates for Insured’s rights recognize the absurdity of depreciating anything other than the durable goods portion of restoration cost.

    What is missing in the argument is that the basic tenant of Insurance, to recover from a loss, is jeopardized by allowing depreciation of labor. For instance, Ohio allows for 100 percent deprecation. If labor is included in depreciation, ACV claim awards under 30% will not meet the threshold of value to tender the required 1/3 contractual deposit for quality construction repairs.

    Therefore, allowing labor depreciation is extremely prejudicial for those who have limited cash resources and/or limited earnings. It’s just another hurdle to parry claim payouts and increase profits. It’s contrived and disingenuous. The wealthy can afford the deposit. The poor cannot. The end result will be escalating urban blight and a widening gap of wealth when more property is forfeited. Destitution and crime are directly proportional.

    Corporations surreptitiously attempt to equate philanthropy and patriotism with ethics by bombarding us with slick advertising, specifically designed to confuse and distract us, often with humor delivered by celebrity spokesmen. But we know that image is merely a part of their profit quotient, so it up to us to actually demand ethical behavior from all parties. Since default human behavior is to act in our own best interests, strategically we need to show the underwriters and the judicial system that it is in their own best interest to protect recovery for all and not depreciate labor.

    I sincerely appreciate you and your entire firm, and all your efforts to protect the policy holder.

    Your Friend,

    Robin Hood

  • Phillip Coutu

    Love the article. My back ground is roofing, insurance adjusting and public adjusting.

  • When depreciating something – a car, a house, a t.v. – you start with its value new and determine it’s value old. The parts, the steel in a car, the wood in a house, the plastic in a t.v., are a very small part of its value. It takes the labor of a person to take those parts and make a car, a house or a t.v.

    To depreciate only the parts is not reasonable since it is a small part of the value. To reach a real value of a damaged piece of property by only depreciating its parts and not including – as part of the value – the labor used to make the product creates a false value.

    I understand when a court or legislature prohibits depreciation of “labor” the insured recovers more ACV money but it is clearly unfair and the result is false.

  • Phillip Coutu

    the assumption is that air nailers make the technology of putting on a roof.
    In the Manitowoc hailstorm of 1999, My crew (4) raced a hand nailing crew on an exact shingle roof 0f 84 squares directly across the street. 1.) Hand Nailing; Quicker set up, safer, superior installation, no hoses or major equipment
    to trip over, break down. no air nailer cleaning, nail air hose or compressor break down. Then the air nailer components that break

    2.) Air nailing; See above

    Conclusions: The air nailing crew had more shingles on the second day at noon, the air nailing crew(me) eventually caught up at the end of day two.
    We finished about identical on 84 sq over two days .However, the hand nail crew has a better application and a better roof installation. I had no mechanical issues with my guns or compressors over the two days. Don’t forget the increased cost of equipment purchase and on going repairs, never mind the extra added danger of equipment and hoses on the roof

    Final Result: Hand Nailing is superior, just as fast and a better roof.
    I used to average 10 residential roofing estimates a day in 1998. Now, with Xactimate, Eagleviews, photos about 3-4 a day. This does not count the down time meeting adjusters and debating every issue and cost. Love or hate technology, micromanaging every aspect often does not make life easier or always produce more productivity as the masses have been sold and bought into. Just realized writing this that I am now very experienced and getting old.

    Philip Coutu

  • Stephen Sarasohn

    I’ve said this before in response to previous posts on this blog so I’ll be brief. When you have to repaint a building, both the original paint and the original labor have lost their value. While labor doesn’t physically depreciate since it’s intangible, it does, in fact, have a life expectancy and lose value. A warranty loses value, without physical depreciation, since it has a finite life expectancy.

    This is a double edge sword. In a commercial loss, it may benefit the insured to depreciate the undamaged property as much as possible to reduce or eliminate a coinsurance penalty.