Excessive Depreciation: How Insurance Companies Shortchange Your Claim and What You Can Do

Depreciation is the single largest deduction on most insurance claim payments, and it is also the area where insurance companies make the most “mistakes” — almost always in their favor. Whether it is applying a blanket percentage to an entire estimate, depreciating labor that cannot lose value, or ignoring the actual condition of the property, excessive depreciation quietly strips thousands of dollars from claim payments. Most policyholders never question it because they don’t know the rules.

This article covers the specific rules — from California statutes and regulations, case law, policy language, and industry standards — that limit how depreciation can be applied. If your insurance company is depreciating your claim aggressively, chances are they are violating at least one of these rules.

What Depreciation Is Supposed to Be

Under California Insurance Code § 2051, actual cash value (ACV) is defined as the cost to repair, rebuild, or replace the damaged property, less “a fair and reasonable deduction for physical depreciation based upon its condition at the time of the loss.” That statutory language contains two critical limitations that insurers routinely ignore:

1. The deduction must be fair and reasonable— not whatever number produces the lowest payment.
2. It must be based on physical depreciation— meaning actual physical deterioration, not abstract age-based formulas.

When an insurer slaps a 40% depreciation rate across an entire estimate without examining the condition of each component, they are not following the law. They are applying a shortcut that benefits them at the policyholder’s expense.

Tax Depreciation Is Not Insurance Depreciation

One common source of confusion — especially on commercial and rental-property claims — is the difference between tax depreciation and insurance depreciation. They are not the same thing, and one does not control the other.

• Tax depreciationis an accounting allocation for federal income tax purposes, driven by IRS rules (the MACRS cost-recovery system for most business property). It is based on a property’s original cost basis and statutory recovery periods — not on the property’s physical condition. A fully depreciated asset on the tax books may still be in perfect working order in the real world.
• Insurance depreciationis a valuation concept for determining actual cash value under the policy and California Insurance Code § 2051. It is based on physical condition at the time of loss, not on accounting books. An asset that is fully depreciated on a tax return can still carry very little insurance depreciation if it was well-maintained and fully functional.

Adjusters occasionally reach for a CPA-prepared depreciation schedule to support a large deduction on a claim. That is not how ACV is supposed to be calculated under California law. The policyholder’s accountant may have very good reasons for the tax schedule they chose, but those reasons do not bind the insurance valuation. The statutory standard is physical depreciation based on condition — full stop.

Rule #1: Depreciation Must Be Based on Condition, Not Age

This is perhaps the most important and most frequently violated rule. Under California law, depreciation must reflect the actual physical conditionof the property at the time of the loss — not simply how old it is.

The California Court of Appeal addressed this directly in Doan v. State Farm General Ins. Co.The court held that depreciation must be based on the condition of the property, not merely its age. A 20-year-old roof that was well-maintained, had no leaks, and was functioning properly should not be depreciated the same as a 20-year-old roof that was falling apart. California Code of Regulations, Title 10, Section 2695.9(f) reinforces this principle by requiring that the insurer’s valuation consider the “condition” of the damaged property.

In practice, most insurers do the opposite. They use straight-line depreciation formulas based entirely on age: divide 100% by the estimated useful life, multiply by the age of the item, and that’s the depreciation. This mechanical approach is fast, easy, and consistently produces higher depreciation than a genuine condition-based analysis would. It is also not what the law requires.

Rule #2: Labor Cannot Be Depreciated

You cannot buy “used labor.” A roofer charges the same hourly rate whether the shingles being removed are 5 years old or 25 years old. A painter’s time doesn’t cost less because the wall is old. Labor is a service performed at current market rates, and it does not physically deteriorate over time.

A growing body of case law across multiple states — including Shelter Mutual Insurance Co. v. Goodner (Arkansas), Hicks v. State Farm (Kentucky), and Redlin v. Grinnell Mutual(Oklahoma) — has held that depreciating labor is improper. In California, the regulatory requirement that depreciation be based on the “condition” of the property supports the same conclusion: labor has no “condition” because it is not a physical object.

Despite this, many carriers still apply depreciation to the entire estimate — materials and labor together — using a single blanket percentage. When labor represents 40–50% of a repair estimate, depreciating it can cost the policyholder thousands of dollars. For a deeper discussion, see our article on labor depreciation.

Rule #3: Items That Don’t Wear Out During the Life of the Home Should Not Be Depreciated (or Should Be Depreciated Minimally)

Not everything in a home deteriorates at the same rate. Some components are designed to last the entire life of the structure and, under normal conditions, never need replacement. Depreciating these items at the same rate as components with shorter useful lives is unreasonable and unsupported by the actual condition of the property.

Examples of long-life components that should receive little or no depreciation:

• Concrete foundations and slabs— Concrete has an effective useful life that can exceed 100 years. Depreciating a concrete slab at 2% per year because the house is 20 years old is not reasonable.
• Copper plumbing— Copper water supply lines last 50–70+ years under normal conditions. In a 20-year-old home, copper plumbing is barely middle-aged.
• Structural framing— Wood framing, steel beams, and structural components are designed for the life of the building. Unless there is rot, termite damage, or structural failure, the framing in a 25-year-old house is functionally identical to new framing.
• Brick, stone, and masonry— These materials last indefinitely under normal conditions.
• Electrical wiring (copper)— Copper wiring itself does not deteriorate meaningfully over the life of a home, although panels, breakers, and outlets may.
• Cast iron and clay sewer lines— These can last 75–100+ years.

The insurer should be depreciating each component based on its own useful life and actual condition — not applying a blanket rate derived from the age of the roof or the most visible exterior components. A home is made up of hundreds of different components with vastly different lifespans, and a proper depreciation analysis must account for that.

Rule #4: Undamaged Areas Replaced for Matching Should Not Be Depreciated

This may be the most important depreciation rule that almost nobody knows about — not insurance adjusters, not contractors, and not most Public Adjusters.

Under California Code of Regulations, Title 10, Section 2695.9(d), when repaired or replaced items do not match adjacent undamaged areas in quality, color, or size, the insurer must pay for whatever is necessary to achieve a reasonable and uniform appearance. This is the matching requirement. What most people miss is the depreciation implication.

Consider this example: a tree falls on the front slope of a roof. The insurance company agrees that the front slope shingles need to be replaced. They also agree that the back slope shingles need to be replaced to achieve a matching appearance, because new shingles on the front won’t match the weathered shingles on the back.

Here is the part that matters: the back slope shingles are not damaged.They are being replaced solely to achieve a uniform appearance. Because those shingles are undamaged, there is no basis for applying depreciation to them. The depreciation deduction under § 2051 is for “physical depreciation based upon [the property’s] condition at the time of loss.” The back slope shingles were in fine condition — they were performing exactly as intended. The only reason they’re being replaced is cosmetic uniformity. There is no “damage” to depreciate.

This rule applies to any situation where undamaged materials are being replaced to achieve matching: siding, flooring, paint, countertops, cabinets — anything. If the undamaged portion is being replaced only because it won’t match the new repair, depreciation should not be applied to the undamaged portion. The practical impact can be significant. On a $30,000 roof replacement where the back slope represents half the cost and the insurer is applying 30% depreciation across the board, correcting this one issue alone could recover $4,500.

Rule #5: Overhead, Profit, Permits, and General Conditions Should Not Be Depreciated

Beyond labor and materials, a repair estimate includes other cost categories that reflect current costs and have no physical existence that can deteriorate:

• Contractor overhead and profit— These are percentages added to the job cost to cover the contractor’s business expenses and margin. They are current costs, not physical items that age.
• Building permits— A permit costs what it costs today. It has no “used” equivalent.
• Debris removal and haul-off— The cost of removing damaged material and disposing of it is a current service cost.
• Equipment rental— Dumpsters, scaffolding, lifts, and other rental equipment are current costs.

When an insurer applies a blanket depreciation percentage to an entire estimate, all of these items get depreciated along with the materials. This is improper. Only physical materials that have actually deteriorated should be subject to depreciation.

The same logic applies to consumable materialsused during construction — items that are used up during the repair process and have no pre-loss equivalent in the home. Examples include masking paper and tape used to protect surfaces, plastic sheeting for dust containment, a temporary portable toilet placed in the yard for workers, cleaning solvents, sandpaper, caulking, and similar supplies. These items did not exist in the home before the loss. They are not replacing anything that wore out. There is no “used” version of masking tape. Depreciating consumables is no different from depreciating labor — it produces a deduction for deterioration that never occurred.

The Blanket Depreciation Problem

The most common form of excessive depreciation is also the laziest: the insurer picks a single depreciation percentage and applies it to the entire estimate. This is sometimes called “blanket” or “flat-rate” depreciation, and it violates virtually every rule discussed in this article.

A proper depreciation analysis considers each component individually:

Why Excessive Depreciation Matters — Even on Replacement Cost Policies

Some people assume that depreciation doesn’t matter on a replacement cost policy because the policyholder can recover the depreciation later by completing repairs. While that is true in theory, it ignores several realities:

Not Everyone Wants to Repair

A policyholder has every legal and ethical right to take the ACV payment and not repair. They might decide to sell the property as-is. They might not be able to afford the out-of-pocket gap between the ACV payment and the repair cost. They might have other priorities. Whatever the reason, choosing not to repair is a perfectly legitimate decision. For these policyholders, excessive depreciation directly reduces their final recovery with no opportunity to get it back.

The Holdback Creates a Cash Flow Problem

Even for policyholders who intend to repair, excessive depreciation means a smaller initial ACV payment. That means less money upfront to hire a contractor and begin repairs. Some policyholders cannot afford to start repairs without adequate initial funding, creating a catch-22: they need the holdback to fund the repairs, but they need to complete the repairs to get the holdback.

There Are Deadlines and Hoops

Recovering the depreciation holdback is not automatic. The policyholder must complete (or in some policies, incur) the repairs within a specified time period, then submit documentation to prove it. Under California Insurance Code § 2051.5(b), the statutory minimum is 12 months from the date the ACV payment is made — but the policy may provide a longer period. If the policyholder misses the deadline or fails to submit adequate documentation, the holdback is forfeited.

Extensions of Time to Recover Depreciation

California has expanded the time policyholders have to rebuild and collect the holdback, particularly after declared disasters. Under § 2051.5, the insurer must grant a reasonable extension if the insured, acting in good faith and with reasonable diligence, encounters a delay in rebuilding that is beyond the insured’s control — including delays caused by contractor shortages, permit backlogs, or community-wide rebuilding efforts. For losses related to a state of emergency, California law generally provides a minimum rebuild period of at least 36 months (and, for some disaster events, longer windows enacted by the Legislature). Mark the deadline in your calendar, but also document every delay you encounter so you can justify an extension if you need one.

If your insurer is refusing to grant a reasonable extension after a declared disaster, this is not legal advice, but it is frequently worth consulting an attorney — the extension statutes exist precisely because the Legislature recognized that 12 months is not realistic in a major-loss environment. Only an attorney can advise you on whether your facts support an extension claim under the statute as it applies to your loss.

For more details on the holdback recovery process, including the critical difference between policies that require completion of repairs versus those that require only incurring the expense, see our article on loss settlement provisions.

The Legal Authority: Statutes, Regulations, Case Law, and Standards

The rules against excessive depreciation come from multiple sources. Here is a summary of the key authorities in California:

California Statutes

• Insurance Code § 2051— Defines ACV as replacement cost less “a fair and reasonable deduction for physical depreciation based upon its condition at the time of the loss.” Establishes that depreciation must be fair, reasonable, and condition-based.
• Insurance Code § 2051.5— Governs replacement cost recovery, including the timeline for collecting the holdback and the insurer’s obligation to notify the policyholder of the holdback provisions.

California Regulations

• 10 CCR § 2695.9(f)— Requires that the insurer’s valuation of damaged property consider the property’s condition. Reinforces the condition-based depreciation requirement.
• 10 CCR § 2695.9(d)— The matching regulation. Requires payment for achieving a reasonable uniform appearance when replaced items do not match adjacent undamaged areas. The depreciation implication is that undamaged items replaced solely for matching purposes have not deteriorated and should not be depreciated.

Key Case Law

• Doan v. State Farm General Ins. Co.— California appellate court held that depreciation must be based on condition, not merely age. The insurer cannot use a mechanical formula without considering the actual state of the property.
• Cheeks v. California FAIR Plan Ass’n— Addressed depreciation methodology and the insurer’s obligations under California law.
• Shelter Mut. Ins. Co. v. Goodner(Arkansas) — Leading case holding that labor cannot be depreciated.
• Hicks v. State Farm(Kentucky) — Held that labor depreciation is improper because labor does not have a “used” equivalent.

Industry Standards and Policy Language

Beyond statutes and case law, the insurance policy itself limits depreciation. The standard replacement cost loss settlement provision states that the insurer will pay the cost to repair or replace with materials of “like kind and quality” — not with depreciated materials. The policy contemplates that depreciation is a timing mechanism (the holdback), not a permanent reduction in value. Additionally, industry estimating standards — including Xactimate’s own documentation — distinguish between depreciable and non-depreciable line items. When the insurer’s own estimating software provides for zero depreciation on labor and general conditions, the carrier has a difficult time justifying their decision to depreciate those items anyway.

How to Fight Excessive Depreciation

1. Demand an itemized depreciation schedule.The insurer must show you how depreciation was calculated for each component of the estimate — not just a total. If they applied a blanket rate, demand they break it down. Many excessive depreciation schemes cannot survive this scrutiny.
2. Challenge labor depreciation. Identify every labor line item in the estimate and demand that depreciation be removed from each one. Cite the relevant case law and the California regulatory language requiring condition-based depreciation.
3. Identify long-life components. Review the estimate for items like concrete, framing, copper plumbing, and masonry. If these are being depreciated at the same rate as shorter-life items, challenge each one with a reasonable useful-life analysis.
4. Separate damaged from undamaged matching areas.If the estimate includes items being replaced for matching, demand separate line items with zero depreciation on the undamaged portions. Cite 10 CCR § 2695.9(d).
5. Document actual condition. Photographs of the property before the loss (if available), maintenance records, and contractor assessments of the pre-loss condition all support a lower depreciation rate. Under Doan, condition is what matters, and evidence of good condition directly undermines the insurer’s depreciation.
6. Put it in writing. All depreciation challenges should be made in a formal written letter citing the specific legal authority, the specific line items being challenged, and the corrected depreciation amount.

Key Takeaway

Excessive depreciation is one of the most common and least-challenged ways insurance companies reduce claim payments. The rules are clear: depreciation must be based on condition, not age. Labor cannot be depreciated. Long-life components should receive minimal depreciation. Undamaged areas replaced for matching should not be depreciated at all. Overhead, profit, permits, and other current costs are not depreciable. And the insurer must provide an itemized justification for every depreciation deduction.

CDI Has Found Insurers Guilty of Excessive Depreciation

The California Department of Insurance has formally documented excessive depreciation practices through market conduct examinations. In November 2023, the CDI issued a Stipulation and Order against the California FAIR Plan Association following a market conduct exam covering October 2020 through September 2023. The examination found that the FAIR Plan had improperly applied depreciation to items not normally subject to repair or replacement during their useful life — exactly the kind of excessive depreciation described throughout this article.

The CDI also found problems with how the FAIR Plan handled personal property depreciation: when policyholders submitted inventories but left condition fields blank, items were defaulted to “average” condition unless their age indicated they were new. New and perishable items were not depreciated. As part of the corrective action, the FAIR Plan hired internal claim examiners, quality auditors, and trainers, and implemented monthly quality assurance audits of both independent adjuster and internal staff file handling.

Most policyholders never challenge depreciation because they don’t know these rules exist. Now you do. If your insurer has applied excessive depreciation to your claim, challenge it in writing, cite the specific legal authority, and demand a correction. If you need help, a licensed Public Adjuster can analyze the depreciation on your estimate, identify every violation, and negotiate a corrected amount on your behalf.

See also: ACV vs. RCV | Labor Depreciation | Matching | Loss Settlement Provisions