A bulletin proposed by the Maryland Insurance Administration that would classify the depreciation of labor in property claims settled on an actual cash value (ACV) basis as an unfair claims practice has drawn opposition from the insurance industry.
In the draft bulletin, the administration said that labor differs from goods and materials because it does not deteriorate or lose value over time. As a result, the administration maintains that labor costs should not be subject to depreciation when settling property loss claims.
“This practice contradicts the very purpose of insurance – to restore the insured to the approximate financial position they were in prior to a covered loss – by unfairly shifting significant responsibility for labor repair costs to the insured,” the bulletin says.
If finalized, the bulletin would prevent regulators from approving any policy forms that allow for labor depreciation. Insurers with existing policies containing labor-depreciation provisions would be required to amend those policies within 90 days of the bulletin’s publication.
The American Property Casualty Insurance Association (APCIA) submitted comments opposing the proposed change. The industry group argued that labor and material costs are interdependent and cannot be separated without affecting the valuation of a property.
“When the economic value of a building or other physical asset decreases, it is not limited to a decrease in value of the materials,” said Nancy Egan, APCIA vice president, state government relations for the Mid-Atlantic region.
“Rather, it is the total economic value of the property that declines as the property’s physical condition deteriorates over time through wear, tear and obsolescence. Therefore, applying depreciation to the total economic value (i.e., the materials and the embedded labor) accurately restores the insured to the position they were in prior to the loss,” Egan said.
While Maryland courts have not ruled on the issue of labor depreciation in ACV claims, other jurisdictions have. In 2019, the Tennessee Supreme Court ruled that labor costs cannot be depreciated when policy language is ambiguous, deciding in favor of insured parties.
The court found that unclear policy terms must be interpreted to benefit the insured, setting a precedent that has influenced how insurers handle labor depreciation disputes elsewhere.
Egan noted that while Maryland courts have not addressed the issue of labor depreciation in ACV claims, courts in other states have determined that depreciating labor costs is permissible.
The APCIA also disputed claims that depreciating labor imposes a significant financial burden on policyholders, stating that insured parties are not barred from recovering the full cost to replace damaged property.
According to Egan, policyholders are typically not required to pay the full cost of repairs upfront to receive full replacement cost value payments. ACV payments are usually sufficient to cover deposits needed to start work, she wrote.
Additionally, Egan said that claims professionals often collaborate with contractors if there are concerns about whether replacement cost value payments will adequately cover the cost of repairs.
The proposal follows the Maryland Insurance Administration’s broader regulatory approach. Recently, the administration increased civil penalties for unauthorized insurers to $125,000 and raised fines for violations committed by producers and adjusters to $5,000.
Broader concerns raised by APCIA tie into national advocacy efforts, where the group has pointed to legal system abuses – including frivolous lawsuits and third-party litigation funding – as contributing factors to rising insurance costs.
APCIA estimates that such legal actions impose a $443 billion burden on the US economy, impacting both insurers and policyholders.
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