A hotly debated proposed rule under the Office of the Insurance Commissioner of Washington State was approved on November 12, 2021 and will go into effect on January 1, 2022.
Table of Contents:
Here is an excerpt from the official Rule Making Order, for the proposed and approved rule titled Prohibiting depreciation of labor on property claims (R 2021-04):
The practice of depreciating labor costs on insurance payments for property damage claims floats a significant part of the labor repair costs to the consumer and their repair contractor, unfairly shifting a burden to the consumer during the repair process and likely against the principle of indemnity. [emphasis added] The Commissioner has seen a steady rise of policy forms that are writing this practice into their definition of Actual Cash Value. The Commissioner implemented rulemaking to prohibit the depreciation of labor on property claims."
🚨 The Issue
Depreciation of labor when calculating Actual Cash Value of a property insurance claim has been subject to litigation and controversy for many years. The Office of the Insurance Commissioner of Washington State issued a warning to homeowners about this issue on June 30, 2021:
Washington state Insurance Commissioner Mike Kreidler is taking steps to close a little-known loophole in homeowner insurance policies but encourages homeowners to check their policies in the meantime.
As insurance industry regulation is primarily at state level, each state has been a battleground for this specific issue at both regulatory and civil levels.
Where I am in Minnesota, Replacement Cost Value coverage is the norm for Homeowners policies, with the exception of a concerning trend of ACV-only coverage for roofing. While it is common in certain states to offer ACV-only coverage in varying situations for Homeowners policies (such as Texas), this trend was isolated, and is now expanding to states like mine. I will write about this newly emerging coverage threat for Homeowners at another time.
📣 Opposition and Support
❌ The letters of opposition - many different reasons for opposition to the rule were cited. I will highlight two of them below.
✉️ A joint statement by the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA), and the NW Insurance Council (NWIC) stated these opposition points:
1) The proposed regulation exceeds the regulatory authority of the Office of the Insurance Commissioner (OIC) [...] 2) The proposed regulation could adversely impact affordability of insurance, and discourage consumers from repairing damaged property, i.e. being good personal risk managers. [...] 3) The proposed regulation is based upon inaccurate underwriting assumptions, which could adversely impact insurers’ ability to provide consumers with rates that properly reflect risk of loss exposure.
✉️ The insurer State Farm cited these points in a letter of opposition to the rule:
1. The Proposed Rule Will Provide a “Windfall” to Many Insureds. [...] 2. The Comment Letter Submitted by United Policyholders Misstates Historical Insurance Practices with Respect to Depreciation of Estimated Labor Costs. [...] State Farm has reviewed the comment letters submitted to date regarding the Proposed Rule and is concerned that the comment letter submitted by United Policyholders on July 15, 2021 (the “UP Letter”), presents an especially misleading picture of historical insurance practices. [...] 3. The Proposed Rule Does Not Account for State Farm’s Longstanding Practice of Releasing Depreciation Upon Submission of a Signed Repair Contract.
✅ Letters of support - below are some of the cited reasons from the letters of support, which were outnumbered by the letters of opposition.
Excessive and improper depreciation by insurance company adjusters is an all too common unfair claim practice that interferes with loss indemnification. [...] Specifically, when insurers reduce actual cash value claim payouts by depreciating labor, they are failing to meet their duty to indemnify insureds for a necessary cost of restoring insured assets to pre-loss condition. Improper depreciation of labor by insurance companies creates shortfalls in repair and rebuilding financing for property owners and negatively impacts the local, state, and federal government entities that have an interest in communities’ successful economic recovery and the restoration of property tax bases. [...] Insurance Consumers Have a Right to Know What Type of Insurance Coverage They Are Purchasing Approximately 50% of property insurance carriers depreciate labor in calculating ACV payments to their insureds, whereas the other 50% do not—yet, no carrier advertises on its website or in its marketing materials what labor depreciation is or how it operates to significantly lower claim payments. When shopping for homeowners’ coverage, then, how are consumers to know what type of ACV insurance they are considering purchasing? The answer to this fundamental question is clear and supports the proposed rulemaking here: because of the dramatic impact of withholding labor as depreciation—coupled with the diametrically opposed approaches to withholding labor within the homeowners’ insurance market, policyholders do not know what coverage they have purchased until after a claim arises. The clarity provided by R2021-04 ensures that policyholders will know precisely what they are buying in an insurance policy at the time they are purchasing it.
✉️ The Building Industry Association of Washington also submitted a letter of support for the rule, with these points and others:
First, the proposed rule is good policy. At the heart of all insurance contracts is the concept of indemnity- that the insured should be made whole as is reasonably possible. While depreciation of an asset such as a residential or commercial structure is reasonable, easily ascertainable and part of the standard interpretation of the “actual cash value” in such contracts, recent efforts by the insurance industry nationwide to further reduce payments to insureds by depreciating of the labor costs completely undermines the core principle of indemnity. Put plainly, the insured is not made whole. [...] Second, courts in numerous states, including here in Washington, have not allowed depreciation of labor costs. The federal Eastern District of Kentucky for example, outlined the unfairness of such a policy, noting that “[t]he very idea of depreciating the value of labor defies good common society.” Bailey v. State Farm Fire & Cas. Co., No. CIV.A. 14-53-HRW, 2015 WL 1401640, at *8 (E.D. Ky. Mar. 25, 2015). The Court applied general principles of indemnity – “make the insured whole; give the insured what she had before the loss – nothing more; nothing less.” [...] Finally, trying to implement provisions of an insurance contract that limit recovery by depreciating labor costs results in practical difficulties. There will be significant delays in payments to contractors (since labor cannot likely be depreciated until conclusion of all work) and significant out-of-pocket costs to insureds that they may not be in a position to bear.
❗️ Why This Rule Matters to Policyholders in All US States and Territories
While insurance regulation lies with each state, precedent and rulings from one state can affect adjacent states, as courts or legislature may look to their neighbors to study their stances on certain issues.
Within each state, there different ways that claim payment calculation and coverage terms can be determined or assessed, including through individual policy language, case law, Insurance Commissioner rules, statutes, and private agreement between insurer and policyholder. The difference between these different methods include if they are binding or precedent, and if it applies to one policyholder or many. Rules and statutes are two of the most expansive and enforceable consumer protections available, making this ruling a "win" for policyholder advocacy.
I believe that it is possible for policyholders to be afforded the protections they deserve, while affording insurers a regulatory framework that allows them to offer healthy and competitive market choices for consumers. United Policyholders stated this well in their letter supporting the rule, which I highlighted and linked in the previous section:
UP recognizes and appreciates the extremely important role insurance companies play in modern society. Profitable and financially stable insurance companies promote a healthy society, allowing risk of loss to be spread widely and fairly. [emphasis added] When the system works, prompt and proper payment goes to those who have suffered life-altering catastrophes affecting their persons and property. Unfortunately, some insurance companies employ unfair business practices when adjusting claims in order to bolster their bottom line. [emphasis added]
As a business owner, I wholly understand that insurance companies are operating a business, and that a business must have profit to remain in operation. I respect that. However, it is very possible - and the right thing - for a business maintain a profit while ethically providing services and products within regulatory framework that protects not just individual consumers, but our society as a whole.
Thank you, Commissioner Kreidler,