California insurance code mandate if a property insurance actually requires cash value payment, the payment must be based on the real estate depreciation for two types of claims: (1) a partial loss for a structure, ie. ] a home or building and (2) damaged content, ie personal property or business personal property. 1 Fortunately, there is guidance on how depreciation is applied. Cal. Ins. Code § 2051 states that the actual cash value is the amount that it would cost the insured to repair, rebuild or replace the damaged property, unless a reasonable and reasonable deduction for physical depreciation based on the condition of the property at the damage or policy limit,  California's lawmakers are currently discussing legislation, Assembly 188, which would require an insured to be paid equally for the total loss of a building, as an insured is paid for a partial loss of a building, ie actual cash value.
Cal. Ins. Code § 2051 and Kal. Code Right. titmouse. 10, 2695.9, parameters are stated on the depreciation application and requires that depreciation reflects the actual property's actual condition at the loss. Under cal. Ins. Code 2051, physical depreciation can only be applied to the components of a design that are normally subject to repair and replacement during the actual life span. According to this statute, an insurer can only apply depreciation of building parts that are actually expected to suffer wear and tear. The threshold issue before depreciation can be applied is if the component is normally replaced by the home or the building owner. If it is not a replacement component, what is the amount of maintenance required to keep the component in good condition? For example, a building's foundation, structural elements, walls and pipelines are usually not replaced and it is therefore inappropriate to apply any depreciation. It is also inappropriate to apply depreciation at any cost in a building estimate that does not relate to building properties. Thus, an insurer cannot deduct depreciation for labor, plans, permits, overheads and profits. If a building component requires minimal maintenance, the amount of depreciation that can be applied should be limited. For example, a brick wall will probably never be replaced, but it can be subject to some maintenance every ten to twenty years.
California also requires that depreciation cannot be applied based solely on the age of the building component. California Insurance Regulations mandate that any adjustments for depreciation must reflect the measurable difference in market value attributable property age and terms. 2 Consequently, depreciation must be based on the actual condition of the damaged property. Factors to consider include how the insured retained the property, when was the building component last replaced and what was the quality of the property or component. If you can substantiate the property was good to excellent condition, you can support minimal depreciation deductions.
Based on California's depreciation guidelines, to properly evaluate the proper amount of depreciation to apply, it is very important to asses and evaluate the property of the property prior to the loss. This includes gathering as much information from an insured person through pictures, insured contractors or detailed oral information. This information will help to minimize and properly assess depreciation.
1 Cal. Ins. Code § 2051.
2 Kal. Code Right. titmouse. 10, § 2695.9.