Labor Depreciation: Why Your Insurance Company Can't Depreciate Work Costs

Of all the ways insurance companies shortchange claim payouts, depreciating labor may be the most indefensible. The concept is simple: you cannot buy "used labor." A roofer charges the same rate whether they are installing shingles on a new home or replacing 20-year-old shingles on yours. There is no "depreciated" version of a plumber's hourly rate. And in California, labor depreciation is not just a bad practice — it is expressly prohibited by regulation.

What Is Labor Depreciation?

When an insurance company calculates your actual cash value (ACV) payment, they subtract depreciation from the replacement cost. Properly done, depreciation should only apply to materials that have actually lost value due to age and wear. A 20-year-old asphalt shingle has less useful life remaining than a new one — that depreciation makes sense.

But many carriers apply depreciation to the labor portion of the estimate as well. They calculate a blanket percentage — say 25% or 40% — and apply it to the entire estimate, including all labor costs. This can represent thousands of dollars on a typical claim.

California: Prohibited by Regulation

California addresses labor depreciation through a Fair Claims Settlement Practices regulation, against the backdrop of the statutory ACV framework. The regulation contains the operative prohibition; the statute supplies the depreciation framework that the regulation implements.

Read together, these provisions establish a clear rule for California first-party property claims: the carrier may not depreciate the labor portion of a repair or replacement estimate. The only narrow exception is for “intrinsic labor” that is already embedded in the cost of a manufactured material — for example, the factory labor that went into producing a shingle or window unit is part of the material itself. The labor an insured will pay a contractor to install or replace the damaged component is not subject to depreciation, period.

Despite the clear regulatory text, some carriers and their estimating software still apply depreciation to combined material-plus-labor line items, which has the practical effect of depreciating labor. Where that happens, the carrier is in violation of § 2695.9(f)(1), and the insured has a direct regulatory citation for the challenge.

Out-of-State Context

Outside California, a growing number of state courts and regulators have reached the same conclusion through different routes:

• Arkansas — Shelter Mut. Ins. Co. v. Goodner
• Georgia — multiple rulings
• Kentucky — Hicks v. State Farm
• Oklahoma — Redlin v. Grinnell Mut.
• Illinois, Hawaii, and others

California’s express statutory and regulatory prohibition is among the cleanest positions in the country. In states where the law is less clear, the underlying logic is the same: labor is a service, not a physical object, and it has no “condition” that degrades with age.

How to Challenge Labor Depreciation (California)

1. Request the carrier's estimate with materials and labor itemized separately on each line. If the estimate uses a combined line-item rate without a labor breakout, request the breakout in writing.
2. If the carrier applied a blanket depreciation percentage to combined line items, request a recalculation that excludes labor from the depreciation base — citing 10 CCR § 2695.9(f)(1) directly.
3. Document the labor-cost portion that the carrier improperly depreciated. The dollar impact is the labor portion multiplied by the depreciation percentage applied — and that dollar figure is what the insured is being underpaid.
4. Put the challenge in writing, with the verbatim regulatory text quoted. A written record matters because a documented violation may support escalation, a complaint to the California Department of Insurance, or an attorney's later bad-faith evaluation.
5. If the carrier refuses, consider invoking appraisal or consulting a Public Adjuster for claim negotiation and documentation, or an attorney for legal advice.

This article is for informational purposes only and does not constitute legal advice. Insurance policies and applicable law vary by state and by policy form. Consult with a licensed professional regarding your specific situation.

Written by Leland Coontz III, Licensed Public Adjuster, CA License #2B53445.