Bulletin providing guidance on depreciation of labor

[LOGO] Mark Gordon Governor THE STATE OF WYOMING Department of Insurance 106 E. 6th Ave. • Cheyenne, Wyoming 82002 Jeffrey P. Rude Commissioner # BULLETIN TO: ALL PROPERTY AND CASUALTY INSURERS, PRODUCERS, AND ADJUSTERS FROM: JEFFREY P. RUDE, INSURANCE COMMISSIONER RE: DEPRECIATION OF LABOR AND ADJUSTMENT OF INSURANCE CLAIMS DATE: APRIL 19, 2023 This Bulletin is intended to provide guidance regarding determining costs when adjusting insurance claims involving damage to property other than claims under a motor vehicle policy. Pursuant to Wyo. Stat. § 26-13-124, an insurer is required to settle claims based upon all the available information obtained after a reasonable investigation. It is understood that the cost of materials and labor may vary from place to place and that settlement of claims may be affected by the location-specific costs associated with the repair. Because of these differences in costs based on the location of the damaged property, what is the "usual and customary" expenses associated with any given repair may vary by location. Insurers should be prepared to provide documentation of how they determined the usual and customary costs of materials associated with any repair to property based on what is the usual and customary charges in the area where the repair is being done. After conducting a reasonable investigation regarding the usual and customary costs of materials in a given location, depreciation may be deducted from the total amount paid to the consumer in Actual Cash Value (ACV) policies where the contract language allows for the deduction of depreciation. However, the cost associated with an insurance claim regarding damage to property involves not only the cost of the materials, but also the cost of the labor involved to install the materials and make the necessary repairs. The cost of labor may also vary according to the location of the damaged property. As with the usual and customary costs associated with materials, the insurer should be prepared to provide documentation regarding how labor rates were determined in the location where the repairs are being made. As stated above, the cost of materials may be depreciated in ACV policies when the contract language allows for depreciation. The depreciation is allowed under the theory that the existing materials of the property have experienced wear and tear and are therefore less valuable than new materials. However, the cost of labor is separate from the materials and does not undergo wear and tear. Because labor does not undergo wear and tear like materials, it has been a longstanding position of the Department that labor may not be depreciated when adjusting a claim for damage to Administration (307) 777-7401 • Fax (307) 777-2446 • http://doi.wyo.gov/ • Licensing (307) 777-7319 • Consumer Affairs (307) 777-7402 property. Accordingly, any policy form filed with the Department should not contain language allowing for the depreciation of labor. Any policy forms filed with language allowing for depreciation of labor will not be approved by the Department until the language regarding depreciation of labor has been removed. For any adjustment to insurance claims involving damage to property, insurers selling either ACV or replacement cost policies should be prepared to identify the policy language upon which they rely if they intend to pay an amount less than the actual cost of the repair, including the basis for the amount of depreciation applied. Finally, an insurer should be prepared to provide documentation that they communicated the basis of their decision to pay less than the full amount of the repair to the consumer, and, where appropriate, that they provided the consumer the opportunity to utilize a more competitively priced contractor or materials, prior to incurring expenses beyond what would be paid by the insurer. If there are any questions regarding the above, please feel free to contact the Staff Attorney, Becky McFarland, at 307-777-6889 or Tana Howard, Deputy Commissioner, at 307-777-6896. 2