Labor Depreciation: Can Labor

Insurance companies routinely apply depreciation to the labor portion of repair estimates, reducing policyholder payments by thousands of dollars. The practice rests on a premise that deserves scrutiny: that the act of installing a roof shingle, hanging drywall, or wiring an electrical panel somehow “wears out” over time, just like the materials themselves. A growing number of courts and regulators across the country have examined that premise and found it to be exactly what common sense suggests — a logical impossibility. In California, the question has been definitively resolved by the legislature: depreciating labor is prohibited by both statute and regulation.

This article examines labor depreciation in depth: the fundamental question of whether services can depreciate, California's statutory and regulatory prohibition, the out-of-state case law that converged on the same answer, the industry arguments for and against, the real-dollar impact on policyholders, how Xactimate handles labor depreciation behind the scenes, and what an insured can do to challenge it.

The Fundamental Question: Can a Service Physically Deteriorate?

Depreciation, in the insurance context, is supposed to reflect the loss of value that occurs as physical property ages, wears, and deteriorates. A 20-year-old composition shingle has less remaining useful life than a new one. Its granules have eroded, its flexibility has decreased, and its ability to shed water has diminished. Depreciating the shingle makes sense — you are accounting for the physical condition of a tangible object that has degraded over time.

But what about the labor required to install that shingle? The roofer's work — climbing the ladder, positioning the shingle, driving the nails — is a service performed at a point in time. It does not sit on the roof aging alongside the shingle. It does not erode, crack, or lose flexibility. The service was performed, it was consumed at the moment of installation, and it ceased to exist as a distinct thing. There is no “used” version of roofing labor that a policyholder can purchase at a discount. When the shingle needs to be replaced 20 years later, the roofer does not offer a “depreciated” labor rate that reflects the age of the old shingle. The labor cost is the labor cost, period.

This is not a novel or controversial observation. It is a straightforward application of the definition of depreciation itself. The word “depreciation” means a decrease in value due to wear and tear, decay, or decline. Services do not wear. Services do not decay. A plumber's hourly rate does not decline because the pipes they installed ten years ago have aged. An electrician does not charge less to rewire a circuit just because the old wiring was 30 years old. Labor is consumed at the moment it is performed and has no residual physical existence that can deteriorate.

The distinction matters enormously in dollar terms. On a typical property damage claim, labor represents 35 to 50 percent of the total repair estimate. When an insurer depreciates labor alongside materials, it significantly inflates the depreciation deduction and reduces the policyholder's Actual Cash Value (ACV) payment accordingly.

The Logical Argument: Same Labor, Different Shingle

Consider two identical houses side by side, both damaged in the same hailstorm. Both need full roof replacements. Both have the same square footage, the same pitch, and the same shingle type specified. The only difference is age: House A has a five-year-old roof, and House B has a 25-year-old roof.

The materials will be depreciated differently — House B's older shingles have consumed more of their useful life, so the material depreciation will be higher. That makes sense. But the labor to tear off the old roof and install the new one is identical. The same crew, the same number of hours, the same tools, the same process, the same cost. The roofer does not charge House A less because the shingles were newer, and the roofer does not charge House B more because the shingles were older. The labor cost for both houses is exactly the same.

If labor depreciation were logical, the policyholder at House B should be able to walk into the marketplace and purchase “depreciated labor” — roofing installation services at a 50 percent discount because the old roof was 25 years old. No such market exists. No contractor offers discounted labor based on the age of the materials being replaced. The concept is a fiction that exists only on insurance company spreadsheets.

This thought experiment illustrates the core problem with labor depreciation. The policyholder's actual loss — the amount of money they must spend to hire a contractor and restore their property — includes the full cost of labor regardless of the age of the damaged materials. Depreciating labor does not reflect any real-world reduction in cost. It simply reduces the insurer's payment below what the repair actually costs.

States That Have Prohibited Labor Depreciation

A growing number of states have addressed the labor depreciation question directly, through court decisions, regulatory action, or legislation. The trend is clear and accelerating: jurisdiction after jurisdiction is concluding that labor cannot be depreciated because it does not physically deteriorate.

Arkansas: Adams v. Cameron Mutual Insurance Co.

The Arkansas Supreme Court addressed labor depreciation in Adams v. Cameron Mutual Insurance Co., 430 S.W.3d 675 (Ark. 2013). The policyholder's home sustained hail damage, and Cameron Mutual depreciated both materials and labor when calculating the ACV payment. The court examined the policy language, which defined ACV as replacement cost less depreciation, and focused on what “depreciation” means.

The court concluded that depreciation accounts for the physical wear and deterioration of tangible property over time. Labor, the court held, is not subject to this kind of physical depreciation. The cost of labor does not decrease because the materials being replaced are old. The court ruled that Cameron Mutual improperly reduced the policyholder's payment by depreciating the labor component and ordered recalculation without labor depreciation.

The Adams decision was significant because it was one of the earliest state supreme court rulings squarely addressing and prohibiting the practice. It set the stage for similar holdings across the country.

Kentucky: Estes v. State Farm Fire & Casualty Co.

In Estes v. State Farm Fire & Casualty Co., the Kentucky court examined whether State Farm could depreciate both labor and materials when determining ACV on a property damage claim. The policyholder argued that labor is a cost of restoration, not a physical component of the damaged property, and therefore cannot depreciate.

The court agreed. It held that depreciation reflects the physical deterioration of tangible materials over time. Labor, as a service, does not physically deteriorate. The court found that State Farm's depreciation of labor was improper and that ACV should be calculated by depreciating only the materials, not the labor required to install them.

The Estesdecision is frequently cited in labor depreciation disputes because it directly confronts the logical impossibility of depreciating a service. The court's reasoning is straightforward: you cannot wear out the act of installing something.

Oklahoma: Redcorn v. State Farm Fire & Casualty Co.

Oklahoma addressed the issue in Redcorn v. State Farm Fire & Casualty Co., a case involving hail damage where State Farm depreciated both labor and materials in calculating ACV. The policyholder challenged the labor depreciation component.

The court examined the ordinary meaning of “depreciation” and concluded that the term refers to a loss in value due to physical wear and deterioration. Because labor is a service, not a physical component of the property, it does not experience physical wear and deterioration. The court prohibited the practice of depreciating labor, holding that ACV calculations must depreciate only the materials that have actually lost value due to physical aging.

The Redcorn decision is notable for the clarity of its reasoning. The court did not find the question to be close or ambiguous. Labor does not wear out. The analysis was as simple as that.

Virginia: Bureau of Insurance Administrative Ruling

Virginia addressed labor depreciation through its Bureau of Insurance rather than through litigation. The Bureau examined the practice of depreciating labor in property insurance claims and issued a ruling that labor costs should not be depreciated when calculating ACV. The Bureau's reasoning followed the same logic as the court decisions in other states: depreciation is intended to account for the physical wear and deterioration of tangible property, and labor is not tangible property that physically deteriorates.

The Virginia approach is significant because it demonstrates that the labor depreciation issue can be resolved through regulatory action without the need for costly litigation. A state insurance department has the authority to interpret how ACV should be calculated and to prohibit practices that are inconsistent with sound actuarial and claims-handling principles.

Michigan: Liss v. Homeowners Choice

Michigan courts have addressed the labor depreciation question in Liss v. Homeowners Choice, where the insurer depreciated both labor and materials on a property damage claim. The policyholder argued that labor cannot “wear out” and should not be subject to depreciation.

The court examined the nature of labor as a service performed at a specific point in time. Unlike a shingle or a pipe that degrades over years of exposure to the elements, the service of installing that shingle or pipe does not continue to exist in a form that can deteriorate. The court found that depreciating labor was improper because labor simply does not have the physical characteristics that allow for depreciation.

Washington: Rulemaking Process

Washington has addressed labor depreciation through a rulemaking process led by the Office of the Insurance Commissioner. The state undertook a regulatory examination of how insurers calculate ACV and whether the practice of depreciating labor is consistent with the proper definition of depreciation. The rulemaking process invited public comment from both industry participants and consumer advocates.

Washington's approach through rulemaking reflects a growing recognition that labor depreciation is a systemic practice affecting large numbers of policyholders, not merely an isolated claim-handling dispute. When a state insurance department addresses the issue through regulation, the resulting rule applies uniformly to all insurers operating in the state, rather than requiring each policyholder to litigate the issue individually.

The Broader National Trend

Beyond the named decisions above, plaintiff-side commentary identifies several other jurisdictions where courts or insurance regulators have weighed in against labor depreciation in various contexts. A practitioner researching the issue outside California should consult primary sources for each jurisdiction rather than relying on summaries: the holdings are fact-specific, sometimes turn on particular policy language, and have evolved over time.

Among states whose courts or regulators have published opinions or guidance limiting labor depreciation, the analytical thread is consistent: depreciation is a measure of physical wear on tangible property, and labor — the service of installing materials — does not lend itself to that measure. California’s statutory regulatory prohibition (10 CCR § 2695.9(f)(1)) reflect that same reasoning, codified directly rather than left to case-by-case interpretation.

States That Have Allowed Labor Depreciation

It should be acknowledged that some jurisdictions have permitted insurers to depreciate labor, though the reasoning in these decisions tends to be less developed and more focused on deference to insurance company discretion than on a careful analysis of what depreciation actually means.

The primary argument in states that allow labor depreciation is that the policy language defines ACV as replacement cost minus depreciation, and the policy does not distinguish between labor and materials when it refers to depreciation. Under this reasoning, the insurer is entitled to depreciate the entire replacement cost, including the labor component, because the policy does not carve out labor from the depreciation calculation.

Some courts have also relied on the concept that labor and materials are inseparable components of the finished product, and that depreciating the finished product necessarily includes depreciating the labor that went into creating it. Under this view, a 20-year-old roof is a single asset whose value has declined, and parsing that decline into separate labor and material components is artificial.

These decisions, however, tend to accept the insurer's framing of the question without examining whether the concept of depreciation can coherently apply to something that does not physically exist. They treat the absence of a specific policy exclusion for labor as permission to depreciate it, rather than asking the more fundamental question: does the definition of depreciation encompass services at all? Courts that have examined the question more carefully — asking what depreciation actually means rather than what the policy fails to exclude — have consistently concluded that it does not.

Texas and Mississippi are among the states where courts have been more receptive to the insurance industry's position on labor depreciation. In Texas, the Lam v. United Property & Casualty Insurance Co. line of cases allowed depreciation of embedded labor, though the reasoning has drawn criticism from legal commentators. These decisions focus heavily on the policy language and less on the nature of depreciation itself.

California's Position: Prohibited by Both Statute and 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 labor-depreciation prohibition; the statute supplies the depreciation framework that the regulation implements.

Regulation: 10 CCR § 2695.9(f)(1)

California's prohibition on depreciating labor lives in the Fair Claims Settlement Practices Regulations — the operative regulatory provision is 10 CCR § 2695.9(f)(1):

Statutory backdrop: Cal. Ins. Code § 2051(b)

The regulation operates against the statutory ACV framework in Cal. Ins. Code § 2051(b), as restructured by AB 188 (Stats. 2019, ch. 59), effective January 1, 2020. AB 188 (2019) eliminated the prior § 2051(b)(1)/(b)(2) bifurcation between total and partial losses, making the same replacement-cost-less-depreciation formula apply to either. The statute uses “thing lost or injured” and does not contain a labor-depreciation prohibition itself — that point is addressed by the regulation above.

Read together, § 2695.9(f)(1) and § 2051(b) 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 a 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.

Why the Practice Continues Despite the Clear Rule

Despite the clear statutory and 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 10 CCR § 2695.9(f)(1), and the insured has a direct statutory and regulatory citation for the challenge. The earlier “physical depreciation” and “condition” arguments under the pre-2019 version of § 2051 are now largely superseded — the legislature simply wrote the prohibition directly into the statute, leaving no interpretive ambiguity. For a detailed overview of California's Fair Claims Settlement Practices, see our separate article.

The “Embedded Labor” Argument

The insurance industry's primary defense of labor depreciation is what is sometimes called the “embedded labor” theory. The argument goes like this: when labor is used to install materials, the labor becomes “embedded” in the finished product. The finished product — the installed roof, the completed plumbing system, the finished drywall — is a single asset that depreciates as a whole. Because labor is an inseparable component of the finished product, depreciating the finished product necessarily includes depreciating the labor that produced it.

This argument has a superficial appeal, but it collapses under examination for several reasons.

Xactimate Refutes the “Inseparable” Claim

The most powerful counter to the embedded labor argument comes from the insurance industry's own estimating tool. Xactimate, the software used by most insurance carriers to generate repair estimates, separates every line item into distinct labor and material components. When an adjuster prices a line item for “Remove and replace composition shingles,” Xactimate breaks that price into a specific dollar amount for materials and a specific dollar amount for labor. The software does not treat them as an inseparable unit. It treats them as distinct cost categories with distinct prices.

If labor and materials were truly “inseparable,” there would be no reason for the industry's own estimating platform to separate them. The fact that Xactimate provides separate labor and material figures for every single line item demonstrates that the industry itself recognizes these are distinct cost components. Carriers cannot simultaneously rely on Xactimate's separated labor and material figures to build their estimates and then claim those same figures are “inseparable” when it comes time to calculate depreciation. You can examine how your carrier handled this by obtaining the ESX file from your claim.

The “Embedded” Theory Conflates Two Different Things

The embedded labor argument confuses the product with the process. A roof is a product — a tangible thing that exists on top of a house. The process of installing that roof is a service — an activity performed by workers over a period of time. The product depreciates. The process does not. Saying that the labor is “embedded” in the finished product is like saying that the act of painting is “embedded” in the painting. The paint on the canvas may fade over time, but the artist's act of applying it does not.

Insurance policies cover the cost of repairing or replacing damaged property. That cost includes both materials and labor. The materials may have depreciated, but the labor to install new materials has not — because there is no old labor to depreciate. Each repair requires new labor performed at current rates. The “embedded” theory ignores this reality by treating a past service as though it were a physical component of the current structure.

The Replacement Cost Reveals the Truth

Consider what happens when the policyholder collects the replacement cost payment. Under a replacement cost policy, the insurer pays the full cost of repair after the work is completed, including full labor at current rates. The insurer does not demand a “depreciated” labor receipt. The insurer does not require the policyholder to find a contractor willing to perform labor at 60 percent of the going rate because the old materials were 40 percent depreciated. The full replacement cost — including full labor — is paid without depreciation.

If the insurer acknowledges at the replacement cost stage that labor costs the same regardless of the age of the materials being replaced, it is illogical to pretend otherwise at the ACV stage. The ACV payment is supposed to represent the value of the damaged property, and the policyholder cannot replace that property using “depreciated” labor. The only labor available in the marketplace is current-rate, full-price labor.

The Dollar Impact: How Much Labor Depreciation Costs You

The financial impact of labor depreciation is substantial and often underestimated by policyholders who do not examine their estimates closely. To understand the magnitude, consider a typical residential property damage claim.

On a $50,000 repair estimate, the labor component typically represents 35 to 50 percent of the total, or roughly $17,500 to $25,000. When the insurer applies depreciation to the full estimate — including labor — the additional depreciation attributable to labor alone can range from $5,000 to $15,000 or more, depending on the depreciation rate and the age of the damaged components.

Here is a concrete example:

• Total RCV estimate: $50,000
• Material component: $27,500 (55% of estimate)
• Labor component: $22,500 (45% of estimate)
• Depreciation rate applied: 40% (based on a 20-year-old roof with a 25-year useful life assigned by the carrier)

If the carrier depreciates both materials and labor:

• Material depreciation: $27,500 × 40% = $11,000
• Labor depreciation: $22,500 × 40% = $9,000
• Total depreciation: $20,000
• ACV payment: $50,000 − $20,000 = $30,000

If the carrier depreciates only materials (the correct approach):

• Material depreciation: $27,500 × 40% = $11,000
• Labor depreciation: $0
• Total depreciation: $11,000
• ACV payment: $50,000 − $11,000 = $39,000

The difference is $9,000. On a single claim. That $9,000 is money the policyholder needs to pay their contractor, and it is money the insurer retains by applying a concept — physical depreciation — to something that cannot physically depreciate.

On larger commercial claims or claims involving extensive interior damage with high labor-to-material ratios (such as drywall, painting, and finish carpentry), the impact is even more dramatic. A $200,000 commercial claim with a 50 percent labor component and 30 percent depreciation loses $30,000 solely due to labor depreciation. For more on how depreciation schedules and useful life determinations affect your payout, see our detailed breakdown.

How Xactimate Handles Labor Depreciation

Understanding how Xactimate handles depreciation is essential because this software generates most property damage estimates in the United States. If your claim involves Xactimate — and it almost certainly does — the depreciation decisions were made within this platform.

Xactimate allows the adjuster to choose how depreciation is applied on each line item. The software provides three distinct options:

• Depreciate materials only: Depreciation is applied only to the material cost component of the line item. The labor portion remains at full replacement cost.
• Depreciate labor only: Depreciation is applied only to the labor cost component. This option is rarely used but exists in the software.
• Depreciate both labor and materials (L & M): Depreciation is applied to the total line item cost, including both labor and materials. This is the default setting used by many carriers, and it is the setting that results in the highest depreciation deduction.

The fact that Xactimate provides these separate options is itself significant. Verisk, the company that owns and develops Xactimate, built the software to allow depreciation to be applied to labor and materials independently precisely because these are recognized as distinct cost components. If labor and materials were truly inseparable, there would be no need for separate depreciation options.

Here is what this means for your claim: the decision to depreciate labor is not automatic. It is not dictated by the software. It is a choice made by the adjuster (or, more commonly, a directive from the carrier's claims department). The adjuster actively selects whether to depreciate materials only, labor only, or both. If the adjuster chose to depreciate both labor and materials on your claim, that was a deliberate decision — and it is a decision that can be challenged.

How to Determine What Was Depreciated on Your Claim

The depreciation settings are visible in the Xactimate estimate, but they are not always obvious on the summary pages that insurers typically provide to policyholders. To see exactly how depreciation was applied to each line item, you need access to the underlying estimate data.

The most effective way to examine your carrier's depreciation methodology is to obtain the ESX file for your claim. The ESX file is the native Xactimate file that contains all the data, settings, and calculations behind the estimate. When opened in Xactimate, the ESX file reveals:

• Whether depreciation was applied to labor, materials, or both on each line item
• The specific depreciation percentage applied to each item
• The useful life assigned to each component
• Whether the adjuster used Xactimate's built-in depreciation categories or entered custom values
• Any modifications or overrides to the standard pricing

Reviewing the ESX file is one of the strongest tools available for challenging depreciation. If the file shows that the adjuster selected “L & M” (labor and materials) depreciation across the estimate, that is concrete evidence of labor depreciation that can be challenged using the arguments discussed in this article. For a guide on obtaining and using the ESX file, see our article on your rights to the ESX file. For strategies on challenging other aspects of the carrier's estimate, see how to challenge a Xactimate estimate.

How to Challenge Labor Depreciation in California

If your insurance company has depreciated labor on your claim, you have strong grounds to challenge the practice. Here is a systematic approach.

Step 1: Request the Complete Depreciation Schedule

Before you can challenge depreciation, you need to see exactly how it was applied. Send a written request to your adjuster asking for a complete depreciation schedule that shows, for each line item: the useful life assigned, the age used, the depreciation percentage, and whether depreciation was applied to labor, materials, or both. Under California regulations, the insurer must provide a reasonable explanation of the basis for the claim payment, and the depreciation schedule is part of that explanation.

Step 2: Identify the Labor Depreciation

Review the depreciation schedule to determine whether labor was depreciated. Look for entries that show depreciation applied to “L & M” (labor and materials) or entries where the depreciation is calculated on the total line item cost rather than just the material component. If the insurer applied a blanket depreciation percentage to the entire estimate without separating labor from materials, that is labor depreciation.

Step 3: Cite the Regulation Directly

Put the challenge in writing and quote the regulatory prohibition verbatim. 10 CCR § 2695.9(f)(1): “Except for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment.” The statutory ACV framework is at Cal. Ins. Code § 2051(b). This is not a policy argument or a request for interpretation — it is a direct citation to a regulatory prohibition that the carrier is required to follow.

Step 4: Make the Logical Argument

Supplement the statutory argument with the logical one: it costs the same amount of labor to replace a five-year-old component as a 25-year-old component. The policyholder cannot purchase “depreciated” labor in the marketplace. No contractor offers a discounted labor rate based on the age of the materials being replaced. The labor cost is determined by current market rates, not by the age of the item being repaired. Depreciating labor creates a mathematical deduction that does not correspond to any real-world cost savings available to the policyholder.

Step 5: Out-of-State Authority Is Background, Not Required

Because California has its own express statutory prohibition, out-of-state cases are not strictly necessary to make the challenge. They are useful as background — they show that courts and regulators in Arkansas (Adams v. Cameron Mutual), Kentucky (Estes v. State Farm), Oklahoma (Redcorn v. State Farm), and others all reached the same conclusion as the California legislature. If the carrier pushes back, cite the California statute and regulation first; the out-of-state authority can be brought in to reinforce the conclusion that the national consensus aligns with the California rule.

Step 6: Quantify the Impact

Calculate the exact dollar amount of improper labor depreciation on your claim. Review each line item and determine how much depreciation was applied to labor versus materials. Present this number to the adjuster — it is harder to dismiss a specific dollar figure than a general objection. Request that the carrier recalculate the ACV payment with depreciation applied only to materials, and provide the revised payment amount you are requesting.

Step 7: Escalate If Necessary

If the field adjuster denies your request, escalate to a supervisor or manager. If the carrier continues to apply labor depreciation despite your challenge, consider filing a complaint with the California Department of Insurance, invoking the appraisal provision in your policy, or consulting with a licensed Public Adjuster or attorney. The California Fair Claims Settlement Practices Regulations require that the insurer's claim handling practices be reasonable, and there is a strong argument that depreciating something that cannot physically depreciate is not reasonable.

The Connection to Recoverable Depreciation

Under a replacement cost policy, the depreciation deducted from the initial ACV payment is supposed to be “recoverable” after repairs are completed. The insurer pays ACV upfront and withholds the depreciation until the policyholder submits proof of completed repairs, at which point the withheld depreciation is released.

Labor depreciation complicates this process in a way that harms policyholders. When labor is improperly depreciated, the ACV payment is artificially reduced. This means the policyholder receives less money upfront to begin repairs. Many policyholders cannot afford to begin repairs without adequate initial funding, creating a cash-flow barrier that delays or prevents the very repairs the carrier will later require as proof before releasing the withheld depreciation. The policyholder is caught in a catch-22: they need the money to start repairs, but they cannot get the money until repairs are complete.

Even when the policyholder does complete repairs and recovers the withheld depreciation, labor depreciation causes harm during the interim period. The policyholder had to find alternative funding — personal savings, credit cards, home equity loans — to bridge the gap between the artificially reduced ACV payment and the actual cost of beginning repairs. The interest and opportunity costs of that bridge financing are real expenses caused by the improper depreciation of labor. For information on the time limits for recovering withheld depreciation, see our dedicated article on that topic.

Labor-Intensive Trades: Where the Impact Is Greatest

The impact of labor depreciation varies significantly depending on the type of work involved. Some trades are material-heavy, while others are labor-heavy. Understanding where labor represents the largest share of the repair cost helps identify where labor depreciation does the most damage.

• Painting:Paint is relatively inexpensive. The labor to prep surfaces, prime, and apply multiple coats represents most the cost — often 70 to 85 percent. Labor depreciation on painting line items eliminates most of the ACV payment.
• Drywall finishing: The materials (joint compound, tape, sandpaper) cost far less than the skilled labor required to achieve a smooth, paint-ready surface. Labor is typically 65 to 80 percent of the total cost.
• Demolition and tear-off:Removing damaged materials is almost entirely labor. There are no new materials involved — just the labor to remove and dispose of the old ones. Depreciating this labor is particularly indefensible because the work produces no finished product at all.
• Electrical work:The cost of wire, outlets, and switches is a fraction of the electrician's labor to install them. Labor typically represents 60 to 75 percent of electrical line items.
• Plumbing: Similar to electrical, plumbing labor far exceeds the cost of pipes and fittings on most residential repair line items.
• Tile installation: While tile materials can be expensive, the labor to prepare the substrate, set the tile, and grout is highly skilled and time-intensive, typically representing 55 to 70 percent of the total cost.

On claims that involve significant painting, drywall, and demolition — which describes most interior damage claims from water, fire, or smoke — labor depreciation can consume more of the policyholder's payment than material depreciation. The policyholder ends up being shortchanged primarily on the component of the estimate that cannot logically depreciate.

Overhead and Profit: A Related Issue

Labor depreciation is closely related to another common insurer practice: depreciating overhead and profit (O & P). Overhead and profit represent the general contractor's markup for managing a multi-trade repair project. Like labor, O & P is a cost of performing the work, not a physical component of the property. It does not age, wear, or deteriorate.

Many of the same arguments that apply to labor depreciation also apply to O & P depreciation. If the insurer depreciates O & P alongside labor and materials, the policyholder faces a triple reduction: depreciation on materials (which may be legitimate), depreciation on labor (which is logically impossible), and depreciation on O & P (which is equally illogical). The cumulative effect can be devastating, reducing the ACV payment by 40 to 60 percent on older properties.

When challenging labor depreciation, it is worth examining whether the carrier also depreciated O & P. If so, the same arguments apply, and the additional recovery from eliminating O & P depreciation can be substantial.

The National Trend: Where This Is Heading

The general trend among states that have squarely addressed the issue has been toward prohibiting labor depreciation. Over the past decade, the list of jurisdictions whose courts or regulators have rejected the practice has grown. The recurring rationale in those decisions is that labor is a service, not a physical object, and depreciation is a measure of physical wear that does not apply to services. (Outcomes in individual cases continue to depend on policy language, state-specific statutory and regulatory frameworks, and the procedural posture of the dispute.)

Several factors appear to be driving this trend:

• Increased policyholder awareness: As information about labor depreciation has become more widely available, more policyholders are questioning the practice and bringing challenges through the courts and regulatory process.
• Class action litigation: Labor depreciation has been the subject of class action litigation against various carriers in multiple jurisdictions, which has drawn additional regulatory and public attention to the practice.
• Regulatory scrutiny: State insurance departments are increasingly examining labor depreciation as part of their oversight of claims handling practices. As more states issue guidance or rules prohibiting the practice, carriers face growing pressure to change their approach nationwide.
• The logic is simply against it:Courts that examine the question carefully consistently reach the same conclusion. The argument against labor depreciation is not a close call. It is a straightforward application of the definition of depreciation to a category — services — that the definition does not cover.

For policyholders and their representatives in states that have not yet definitively addressed the question, the national trend provides powerful ammunition. When you challenge labor depreciation in California or any other state that has not issued a definitive ruling, you are not making a novel or untested argument. You are aligning with the clear direction of the law and asking your state to reach the same conclusion that a growing majority of states have already reached.

What the Policy Language Actually Says

A careful reading of most homeowners insurance policies reinforces the argument against labor depreciation. The standard ISO HO-3 policy form, used by many carriers, defines the loss settlement condition as follows: for covered property losses, the insurer will pay the “actual cash value at the time of loss” but not more than the amount necessary to repair or replace the damaged property.

The policies typically do not define “actual cash value,” leaving the definition to state law and judicial interpretation. They do not state that depreciation should be applied to labor. They do not state that labor and materials should be treated as an inseparable unit. They simply refer to the ACV of the damaged property, which under California law means replacement cost less physical depreciation based on condition.

The absence of policy language specifically addressing labor depreciation cuts in favor of the policyholder. Insurance policies are contracts of adhesion, drafted by the insurer and presented to the policyholder on a take-it-or-leave-it basis. Under well-established rules of contract interpretation, ambiguities in insurance policies are construed against the insurer and in favor of coverage. If the policy does not clearly state that labor is subject to depreciation, the ambiguity should be resolved in the policyholder's favor by excluding labor from the depreciation calculation.

Common Carrier Responses and How to Address Them

When policyholders or their representatives challenge labor depreciation, carriers typically respond with several predictable arguments. Here is how to address each one.

“Our Policy Allows Us to Depreciate the Entire Replacement Cost”

This response avoids the question. The issue is not whether the policy mentions labor depreciation. The issue is whether the concept of depreciation can logically and legally apply to a service. The policy allows depreciation of property. Labor is not property. A general authorization to apply depreciation does not mean depreciation can be applied to components that are not capable of depreciating.

“We Apply Depreciation Uniformly Across the Estimate”

Uniformity does not equal accuracy. Applying depreciation uniformly — as a blanket percentage across all line items without distinguishing between labor and materials — is precisely the problem. Different components depreciate at different rates (or not at all), and applying a single percentage to everything ignores the actual condition and nature of each component. California law requires that depreciation be based on the condition of the specific property, not applied as a one-size-fits-all formula.

“No California Court Has Prohibited Labor Depreciation”

No court ruling is needed. The California Department of Insurance prohibited the practice by regulation through 10 CCR § 2695.9(f)(1): “Except for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment.” That regulatory text is direct, and the statutory ACV framework at Cal. Ins. Code § 2051(b) provides the depreciation backbone. When the regulation already prohibits the practice, the absence of additional appellate authority is irrelevant.

“The Depreciation Rate We Used Is Reasonable”

This response confuses the rate with the category. The challenge is not that the depreciation percentage is too high — though it often is, as detailed in our article on depreciation schedules and useful life. The challenge is that depreciation of any percentage should not be applied to labor at all. Whether the carrier depreciates labor at 10 percent or 50 percent, the fundamental problem is the same: you cannot depreciate something that does not physically deteriorate, regardless of the rate.

Putting It All Together: The Complete Challenge

When challenging labor depreciation on a California claim, the strongest approach combines multiple lines of argument:

• Regulatory:10 CCR § 2695.9(f)(1) directly prohibits the practice: “Except for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment.” This is a regulatory prohibition, not an interpretive argument.
• Statutory backdrop:Cal. Ins. Code § 2051(b) (as restructured by AB 188 (Stats. 2019, ch. 59), eff. Jan. 1, 2020) supplies the ACV framework against which the regulation operates: replacement cost less a fair and reasonable deduction for physical depreciation, applied only to components subject to repair and replacement during useful life.
• Regulatory:10 CCR § 2695.9(f)(1) provides a parallel prohibition: “the expense of labor necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment.” See California Fair Claims Settlement Practices Regulations.
• Logical:Labor costs the same regardless of the age of the materials being replaced. No marketplace exists for “depreciated” labor. The policyholder cannot purchase labor at a reduced rate corresponding to the carrier's depreciation deduction.
• Industry practice:Xactimate, the insurance industry's own estimating tool, separates labor and materials on every line item, demonstrating they are distinct cost categories that can be — and should be — depreciated independently.
• National authority: A growing majority of states that have addressed the question have prohibited labor depreciation. The national trend is clear and accelerating.
• Contract interpretation: The policy does not specifically authorize labor depreciation. Ambiguities in insurance contracts are construed against the insurer and in favor of coverage.
• Dollar impact: Quantify the specific amount of improper labor depreciation on the claim and present the corrected ACV figure.

Presenting this challenge in a clear, written format — with specific dollar figures, statutory citations, and reference to the national case law — makes it significantly harder for the carrier to dismiss. Many adjusters have never been challenged on labor depreciation and may not even realize the practice is prohibited in a growing number of states. Educating the adjuster while making the formal demand can be an effective strategy.

A Note for Attorneys

For attorneys handling first-party property insurance disputes in California, the labor depreciation issue is well-defined by regulation. 10 CCR § 2695.9(f)(1) expressly prohibits depreciating labor on a covered-property valuation (against the statutory ACV framework at Cal. Ins. Code § 2051(b)), and carriers have limited room to argue a contrary “reasonable interpretation” of the unambiguous statutory text (recognizing the narrow “intrinsic labor in manufactured materials” carve-out discussed earlier in this article). The dollar amounts at stake on a single claim often run $5,000 to $15,000 or more, and on a class basis the exposure can be much larger.

Labor depreciation can serve as an independent basis for a bad faith claim when the carrier applies it in the face of clear statutory and regulatory text. It can also be incorporated into broader claims involving excessive depreciation, unreasonable delay, or other unfair claims practices.

The class action landscape is also worth monitoring. Labor depreciation class actions have been filed against major carriers in multiple states, with significant settlements. California, with its protective statutory framework and large insurance market, is a natural venue for this type of action if a carrier can be shown to systematically depreciate labor across its book of business.

Conclusion: Labor Does Not Wear Out

The labor depreciation debate ultimately comes down to a simple question: can a service physically deteriorate? The answer is no. A roofer's labor does not erode in the sun. A plumber's work does not corrode in the pipes. An electrician's service does not degrade in the walls. The materials may deteriorate, but the labor that installed them was consumed at the time of installation and ceased to exist as anything that could wear, age, or decline.

Among states that have carefully examined this question, the answer has consistently been that labor is not properly subject to depreciation. In California, the Department of Insurance addressed the question through 10 CCR § 2695.9(f)(1), which operates against the statutory ACV framework at Cal. Ins. Code § 2051(b). Labor depreciation in California is not just a bad practice; it is a violation of the Fair Claims Settlement Practices Regulations.

If your insurance company has depreciated labor on your claim, do not accept it without challenge. Request the depreciation schedule. Examine the ESX file. Calculate the dollar impact. And make the challenge in writing, with the verbatim statutory and regulatory text quoted — labor does not wear out, the California legislature has said so, and the carrier is required to follow that rule.

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.