In everyday life we all rely on our insurance company to come through for us, to cover us and pay our claim when we make one.  Why else would we pay so much in monthly insurance bills? The point of insurance is to cover us when something goes wrong. We pay the insurance companies to have our backs. Unfortunately, insurance companies often seem to be more concerned about protecting their own bottom lines than honoring claims. Many times claims aren’t paid on time, or in full. Sometimes insurance companies flat out deny claims that should be paid.

These problems can happen to any of us, in any type of scenario. In light of all the folks suffering from losses and damages caused by the recent hurricanes, this blog focuses on one way some homeowner’s insurance companies manipulate the numbers to deny legitimate claims.

We all have a deductible on our insurance policies, which is the amount we have to pay before the insurance will kick in and pay for our losses.  Some deductibles are higher than others, but we all have one whether its $600 or $6,000.

“Replacement Value” is what it actually costs to repair or replace what was damaged or lost. Most insurance policies don’t pay “replacement value”. Instead, most insurance companies pay property damage claims on what they call an “actual cash value” basis. To calculate “actual cash value”, most insurance companies subtract “depreciation” from the “replacement value”.

Insurance companies calculate “depreciation” by figuring out how old what was lost or damaged is, then reducing its value by a determined percentage for each year we had the lost or damaged item. For example, let’s say a windstorm tore off a canopy of a mobile home that extended over the front steps to keep you dry in the rain. To buy a new canopy today would cost $500 for the materials and $500 for the labor to replace it, for a total of $1,000 (round numbers for this example). But if you bought that canopy two years ago, the insurance company is going deduct a certain percentage in value, say 20% for each year you owned it assuming the general life expectancy of a canopy is five years (which would be $100 a year using the number in this example). So the insurance company would say the “actual cash value” of the canopy that is going to cost $1,000 to replace is only $800.  ($1,000 minus two years of depreciation at $100 a year – $200, equals $800).  Then, if that $800 is more than the deductible, the insurance company will pay the difference between the “actual cash value” and the deductible. If the deductible was $600, the insurance company would pay $200.

This doesn’t sound fair, but unfortunately that is what the law lets insurance companies do on actual cash value policies (some policies do permit recovery of the deductible after the insured comes up with his own money and actually pays to have the loss or damage replaced or fixed).

But some insurance companies are doing what at least one Federal Court has ruled is not fair, and against the law.  Some insurance companies are deducting depreciation for the costs of labor to make the necessary repairs in addition the depreciated costs of materials.  Common sense tells us that the cost of labor does not go down (depreciate) over time, but that doesn’t stop some insurance companies from trying to depreciate labor to lessen what they owe. Using the same example, above, the insurance company would apply two years depreciation to both the material costs ($500 – $200) and the labor costs ($500-$200) to come up with an “actual cash value” of $600.  Again assuming a $600 deductible, the insurance company would deny the claim since it was not more than the deductible ($1,000 – $400 = $600). But that would be a wrongful denial under many insurance policies.

Sound confusing?  It is.  And that is exactly what many insurance companies are counting on – that it will be so confusing folks will assume the insurance company must be right and let the insurance company get away with paying less than it owes, or in some cases with wrongfully denying a legitimate claim.

The bottom line is that companies have to pay what they owe in order to protect us all from financial harm. So if you have to make an insurance claim ask the insurance company to carefully explain how they came up with the amount paid, or not paid. If the insurance company depreciated the cost of labor, you may have a legal right to seek damages from the insurance company. If there are any questions about whether an insurance company paid what it actually owed, or whether a claim denial was valid, contact an insurance bad faith lawyer for a free consultation. The team at Van Cleave Law has been helping people stand up to their insurance companies for more than twenty years.