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Calculate Fair Cash Value and Depreciation in California | Property Insurance Protection Law Blog



Insurance originating from the McCarran-Ferguson Act of 1945 is regulated by the states. Knowing variations in laws and regulations is a necessity for insurance professionals who cross state lines. These state-by-state variations in law include the basics, such as determining replacement cost and actual cash value.

Check out Chip Merlin’s latest blogs, The devil is in the details when making a claim with Church Mutual Insurance Companyand California requires payment with actual cash value with codeto better understand why this topic is ripe for discussion.

Specifically, this blog follows up Victor Jacobelli’s March 2019 post, Applying Depreciation in California – Understanding the Guidelines. At the time of Victor̵

7;s blog post, the California legislature drafted a bill that has since been codified with an effective date of January 1, 2020. Essentially, it amended California Insurance Code § 2051 to require a uniform method for determining the actual cash value of a structure and personal property , regardless of whether there was a total or partial loss: Actual Cash Value = Replacement Cost – Depreciation. This was a monumental shift away from allowing a fair market value assessment of total loss structures—a method that leaves many policyholders underinsured because remodeling costs often and predictably exceed the fair market value of a home. This is especially true when considering increases in demand following a major disaster. Here is a comparison of the former §2051 language (stamped) and current language (highlighted):

To help determine what constitutes a “fair and reasonable deduction for physical depreciation,” California has adopted guiding rules, which also provide policyholder protections. 10 CCR 2695.9(f) states:

(f) When the amount claimed is adjusted due to improvement, diminution in value or salvage, all justification for the adjustment shall be contained in the claim record. Any adjustments shall be discernible, measurable, itemized and itemized as dollar amounts and shall accurately reflect the value of the improvement, depreciation or salvage. Any adjustments for improvements or depreciation shall reflect a measurable difference in market value attributable to the property’s condition and age and shall apply only to properties that are normally subject to repair and replacement during the property’s useful life. The basis for any adjustment must be fully explained to the claimant in writing.

(1) Under an insurance policy, covered by California Insurance Code Section 2071, where the insurer is required to pay the cost of repairing, rebuilding, or replacing the property destroyed or damaged with another of like kind and quality, the measure of recovery is determined by the actual the cash value of the damaged or destroyed property, as set forth in California Insurance Code Section 2051. Except for the inherent labor costs included in the cost of manufactured materials or goods, the cost of labor required to repair, rebuild or replace covered property is not part of physical depreciation and shall not be subject to depreciation or improvement.

Four aspects of this rule section require further attention. First, a policyholder or policyholder advocate must not face an uneven level of information when negotiating a claim involving adjustments for impairment, often an imperfect science. In California, insurance companies must record and share their justifications, in writing, as to the basis of each distinguishable, measurable, itemized and specific dollar amount of each adjustment. This burden is on the insurer, not the policyholder.

Second, a depreciation adjustment in California must reflect a measurable difference in market value based on both age and fitness. While many states may allow insurers to rely on depreciation charts based solely on age, California requires that the condition of the property be considered. Therefore, no single application should be used. For example, grandma’s 20-year-old sofa that had a plastic cover may be subject to less depreciation than the one-year-old sofa that the family with five young children and three pets owes. It is useful to remind adjusters that the permit must be considered, especially if they are from overseas.

Third, the ordinance repeats the language of the statute that allows depreciation only on property that is normally subject to repair and replacement during the life of the property. Property components, such as the foundation, should therefore not normally be subject to adjustment for impairment.

Finally, in recent years, courts across the country have decided whether insurance companies in their states can write down work when calculating the actual cash value. In fact, we have quite a few blogs on the subject.

California has weighed in on the uncertainty, clarifying in its regulation that “the cost of labor required to repair, rebuild or replace covered property is not part of physical depreciation and shall not be subject to depreciation or improvement.”1

Don’t leave depreciation income on the table. Request justifications for depreciated items, provide evidence of the condition of your structure and personal property, and do not accept depreciation adjustments for non-depreciated property or labor costs.
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1 Cal. Code Reg. 10 CCR 2695.9(f)(1).


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