Robert Trautman | Property Insurance Coverage Law Blog | July 17, 2015
Anyone who has made their living in the insurance claims business over the last few years has heard of the Farmers “Next Gen” policy. I thought it would be a good idea to look at this policy and compare it to the standard HO 3 policy. The first stop on this tour is a natural place to begin, the Definitions section. The first definition in the “Next Gen” policy is actually not found in the standard HO 3 policy and that is Actual Cash Value (ACV). Because it is not generally defined in policies, there are tons of cases on the subject. My colleague, Shane Smith, has been writing a great series on calculating ACV in different states.
The “Next Gen” policy defines ACV as follows:
Actual Cash Value – means the reasonable replacement cost at time of loss less deduction for depreciation and both economic and functional obsolescence.
We mat depreciate all replacement costs, including by way of example but not limited to the costs of material and labor. The “Actual Cash Value” of the lost or damaged property may be significantly less than its replacement cost.”
Go ahead and give that definition a second read. I know it took me a few readings to let that sink in. This is a complete redefinition of ACV that will drastically reduce what Farmers policyholders will receive for a covered loss. First, deprecation is traditionally as a result of physical changes to an item brought about by use and the passage of time. Farmers new definition changes the game completely. While depreciation has always been a subjective analysis, this definition adds new components to that subjective analysis. Now the carrier can depreciate an item, if is economically obsolete? If an insured has older items that cannot be replaced but are of little economic value(think family heirlooms that are not true antiques), Farmers can depreciate them to the point were the insured will receive no compensation for the items.
Even with these issues, perhaps the most offensive part of this definition is the depreciation of labor. As I mentioned above, traditionally depreciation was used by insurance carriers to recognize the physical change brought about to items by time and use. How then does labor depreciate? The labor used to paint a wall does not change or lessen in value over time the way the actual paint does. Likewise, the labor of a carpet layer in installing carpet does not lessen in value when children walk across it with muddy shoes. The point is, the labor used to build or repair a home does not change over time the way the materials do and Farmers stating that they will depreciate labor seems to simply be a way to pay less for claims.
Ultimately, I would assume Farmers added in the definition to lessen arguments with insureds over depreciation issues. However, adding to the subjective factors that adjusters can consider will increase litigation between Farmers and their insureds.