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).