Chip Merlin | Property Insurance Coverage Law Blog | August 16, 2017
Most judges and insurance regulators have never worked in property insurance claims departments. For that matter, few insurance attorneys have either (Merlin Law Group’s Javier Delgado worked his way through school as an independent adjuster). But, when I was starting out, an older and experienced GAB adjuster told me they never depreciated labor and the deprecation of repairs rarely occurred.
As a young insurance defense attorney, I was also taught to review insurance industry reference materials to determine how the insurance industry interpreted their own insurance policies before marching off thinking that my legal interpretation was correct and embarrassing the insurance defense firm then known as Paul B. Butler & Associates. That firm is now the 100 plus insurance defense firm known as Butler Weihmuller Katz Craig.
Paul Butler subscribed to the Fire, Casualty & Surety Bulletins Service as an important reference source that I had to check before issuing opinion letters. Here is what that publication talks about its history and mission:
Over 85 Years of Excellence
The Fire, Casualty, & Surety Bulletins (FC&S) service was started in 1929 by Edward J. Wolgemuth, founder of The National Underwriter Company. FC&S exists to this day as the premier property and casualty information service.
For more than 85 years, FC&S has provided objective information—particularly in the area of insurance policy interpretation—to all types of insurance professionals.
The complete print service is comprised of eight volumes: Fire & Marine, Personal Lines, Casualty & Surety, Umbrella, Directors & Officers Liability, Guide to Policies I and II, and Companies & Coverages.
In keeping with its goal of providing quality information that is easy to use, FC&S was one of the first to offer information in a computer-based format. The first electronic version was developed in 1989, followed by various electronic iterations throughout the 1990s.
The current FC&S Online permits subscribers to retrieve over 5,000 documents through a state-of-the-art content management system and graphical user interface. Today’s FC&S Online brings information and analysis to the desktops of thousands of insurance professionals throughout the world.
(Emphasis Added)
Here is what that source to the insurance industry since 1929 has said about the deprecation of labor:
Depreciation of Labor
Should depreciation be applied to demolition, cleaning, and odor control costs following a fire loss?
December 5, 2014
We have a commercial client who suffered a fire damage claim to his retail market. In the course of settlement, the insurance company applied depreciation to the demolition, cleaning, and odor control that is needed on the claim. We do not feel that depreciation is applicable to demolition, cleaning, or odor control methods and should apply only to the replacement or direct repair of the building. We are looking for some guidance on this part of the negotiation.
New Hampshire Subscriber
It has been our position that depreciation should not apply to labor unless a policy explicitly states that it should. We do, however, recognize that courts have come to varying conclusions on the topic. The following excerpt from a column written by a former FC&Seditor for one of National Underwriter’s publications, Claims Magazine discusses some of the court decisions on the topic:
Two similar cases reached the Oklahoma Supreme Court and were answered within a day of each other in 2002. Both cases involved damage to roofs and an ACV settlement, and both addressed depreciation of labor.
In the first, Redcorn v. State Farm, the court said that a “roof is the product of both materials and labor,” and so depreciation of labor costs were allowable. But in a dissenting opinion, three justices argued that labor costs should not be depreciated. A roof, they stated, was not a single product consisting of “labor-and-shingles,” but was a combination of products (shingles and nails) and a service (labor to install). Labor cannot lose value over time.
One dissenting justice also pointed out that prior to the loss the insured had an installed sixteen-year old roof, and to be indemnified meant he was entitled to the value of the sixteen year old shingles plus the cost of installing them.
The second case before the same court (Branch v. Farmers Ins.) also dealt with depreciation of labor. In this instance the court was asked to determine if labor costs for tear-off of a damaged roof could be depreciated, or whether these costs properly should be covered as “debris removal”? In answer to the first question, the court said that labor to install the new roof was a cost the insured was reasonably likely to incur, and so it was rightly included within the meaning of “replacement cost.” It followed, then, that labor could be depreciated along with materials.
But having said that, the court noted that homeowners policies contained a separate coverage for debris removal following a covered loss. If a roof were damaged to the extent it had to be replaced, then, said the court, the damaged portion was rubble, or debris. And, if the whole roof had to be torn off to repair or replace the damaged portion, then those torn off pieces must also be considered rubble. Therefore, although the cost of the labor to replace the roof could be depreciated, the cost to remove the debris of the old roof could not.
(Emphasis added)
Do you think that judges ruling on medical issues, medical malpractice lawyers, and regulators of doctors would understand how to practice medicine without first consulting medical reference sources and medical treatises? Would they learn how and what the proper medical procedures would be by reading judges opinions in medical malpractice claims? The answer is “no.” It would be silly to do so.
But judges ruling on insurance property claims—usually with no experience in the insurance industry, insurance lawyers, and insurance regulators usually never review insurance adjustment treatises and insurance industry materials to learn how the insurance policy was designed to work. Instead, judges and lawyers read past judicial decisions and only the arguments made by lawyers in briefs that also fail to research insurance industry reference materials. Unlike the medical legal field, where medical reference research is at the forefront, there is a dearth of research in the legal property insurance field. I am not certain what insurance regulators look at, but my observation is that the modern insurance regulator has insurance company lobbyists sitting in the waiting rooms with issues they would like to discuss.
It is no wonder why we get some decisions that are historically not correct and not the way property insurance adjustment has been done. Some modern insurance companies allow their attorneys and lobbyists to argue ways out of the traditional bargain to win the case or get a competitive edge. Once that case decision or regulation comes out, claims handling changes and more companies and their attorneys attempt to argue out of a bargain that many former claims adjusters would never think of doing. At Property Loss Research Bureau conferences, property insurance defense attorneys teach their property insurance claims managers the new case law and suggest that claims procedures change or old ones challenged.
We are constantly adding old and current insurance reference materials to our library. They come in handy to stop some of these novel arguments made by clever insurance defense attorneys. Ruck DeMinico is our reference librarian and I have often called him the “secret weapon” for our attorneys trying to help our policyholder clients. I still follow the advice I learned long ago, “check out the FC&S Bulletins before sending out that opinion letter.”