Can California Insurers Depreciate Overhead & Profit? No — Here's Why

You receive your actual cash value (ACV) payment and notice something strange. The insurer included overhead and profitin the replacement cost estimate — acknowledging that a general contractor is needed — but then applied a depreciation percentage to the O&P line item, reducing your payment by hundreds or thousands of dollars.

This practice is illegal in California. The statute that governs how insurers calculate actual cash value permits only one type of deduction: physical depreciation of structural components. Overhead and profit is neither physical nor a structural component. It cannot be depreciated under California law.

The Statute: California Insurance Code Section 2051(b)

California Insurance Code Section 2051(b) defines how actual cash value is calculated under an open policy:

“Under an open policy that requires payment of actual cash value, the measure of the actual cash value recovery … shall be the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury … A deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.”

Cal. Ins. Code § 2051(b) (as amended by Stats. 2019, Ch. 59, Sec. 1 (AB 188)). Read the statute.

The statute contains three critical limitations on what can be depreciated:

1. Physical depreciation only. The deduction must be for “physical depreciation” — not any other kind of reduction.
2. Based on condition. The depreciation must be “based upon its condition at the time of the injury” — the item must have a measurable physical state that can deteriorate.
3. Components of a structure only. Depreciation applies “only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.”

Overhead and profit fails all three tests. It is not “physical.” It has no “condition.” And it is not a “component of a structure.”

The Regulation: 10 CCR 2695.9(f)

California’s Fair Claims Settlement Practices Regulations reinforce the statutory framework. Title 10, California Code of Regulations, Section 2695.9(f) requires:

“Any adjustments for betterment or depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property.”

And subsection (f)(1) explicitly addresses service costs:

“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.”

10 CCR 2695.9(f) and (f)(1). Read the regulation.

Why the Labor Rule Applies to O&P

Section 2695.9(f)(1) explicitly names “labor” as non-depreciable. It does not explicitly name “overhead and profit.” Carriers have seized on this omission to argue that while labor cannot be depreciated, O&P can be.

This argument fails for a straightforward reason: the labor prohibition in (f)(1) is an application of the broader principle in (f), not an exception to it. The parent subsection already limits all depreciation to “property normally subject to repair and replacement during the useful life of the property.” O&P is not “property” at all — it is a contractor’s service fee. The regulation did not need to list O&P separately because the general principle already excludes it.

The analogy between labor and O&P is exact:

• Labor is the cost of a worker’s time to perform repairs. It does not physically deteriorate. A plumber’s hourly rate today is not “depreciated” by the age of your house.
• Overhead is the cost of running the contractor’s business — insurance, licensing, office expenses, vehicles, project management. These costs do not deteriorate. A contractor’s business insurance premium is not reduced because your roof is 15 years old.
• Profit is what the contractor earns for performing the work. A contractor’s profit margin does not decrease because your house was built in 2005.

All three are service costs necessary to accomplish the repair. None of them have a “condition” that can be measured. None of them “wear out.” None of them are “components of a structure.” Under Section 2051(b), none of them can be depreciated.

The Case Law

Cal. Fair Plan Ass’n v. Garnes (2017)

The California Court of Appeal, First Appellate District, confirmed that Section 2051(b) sets the formula for calculating ACV and limits deductions to “physical depreciation.” The Supreme Court denied review, effectively affirming. While this case addressed whether ACV can exceed fair market value for partial losses (it can), it establishes that Section 2051 is the controlling standard and that insurers cannot impose deductions beyond what the statute authorizes.

Cal. Fair Plan Ass’n v. Garnes, 11 Cal.App.5th 1276, 218 Cal.Rptr.3d 246 (Cal. App. 1st Dist. 2017). Read on FindLaw.

Pitkin v. State Farm General Insurance Co. (N.D. Cal. — Pending)

In this federal class action, U.S. District Judge William H. Orrick certified a class of approximately 200,000 California homeowners alleging that State Farm violated Section 2051(b) by depreciating sales tax when calculating ACV for personal property claims. Trial is scheduled for September 8, 2026.

Judge Orrick’s reasoning is directly relevant to O&P: California Insurance Code prohibits deductions aside from “physical depreciation,” and sales tax is not a physical component that deteriorates. The same logic applies with even greater force to O&P. If sales tax cannot be depreciated because it is not a “component of a structure normally subject to repair and replacement,” then O&P — also not a structural component — likewise cannot be depreciated.

Pitkin et al. v. State Farm General Ins. Co., Case No. 3:23-cv-00924-WHO (N.D. Cal.). Read on Justia.

Illinois: Sproull v. State Farm (2021)

While not California law, the Illinois Supreme Court’s reasoning in Sproull v. State Farm Fire & Casualty Co.is persuasive. The court held that “labor is a fixed cost that is not subject to wear and tear, deterioration, or obsolescence” and that “only the property structure and materials are subject to a reasonable deduction for depreciation.” State Farm subsequently settled for approximately $50.25 million, refunding 100% of non-material depreciation and a portion of O&P depreciation from ACV payments.

Sproull v. State Farm Fire & Cas. Co., 2021 IL 126446 (Ill. 2021). Read on FindLaw.

CDI Enforcement

The California Department of Insurance has enforced the depreciation limitations against carriers. In a March 2021 Market Conduct Examination of the California FAIR Plan Association, CDI found violations including “instances in which depreciation was taken on items not normally subject to repair or replacement during their useful life.” The FAIR Plan was required to review and correct past claims.

While no CDI bulletin explicitly states “insurers may not depreciate overhead and profit” using those exact words, the Department’s enforcement of the general depreciation principle — that only physical components subject to wear can be depreciated — covers O&P by implication. A contractor’s management fee is not an “item normally subject to repair or replacement during the useful life” of anything.

What to Do If Your O&P Was Depreciated

If your insurer’s ACV payment shows depreciation applied to the overhead and profit line:

1. Get the depreciation breakdown in writing. Under 10 CCR 2695.9(f), all depreciation adjustments must be “discernable, measurable, itemized, and specified as to dollar amount.” Ask your adjuster for a line-by-line depreciation schedule showing exactly what was depreciated and by how much.
2. Identify the O&P depreciation. Look for depreciation applied to “GC O&P,” “overhead,” “profit,” “contractor supervision,” or “general conditions.” In Xactimate, this may appear as depreciation applied to the entire estimate total (which includes O&P) rather than to individual material line items.
3. Cite the statute. In your response to the insurer, quote Section 2051(b) and explain that O&P is not a “component of a structure normally subject to repair and replacement.” Cite 10 CCR 2695.9(f)(1)’s prohibition on labor depreciation and explain that O&P is analytically identical to labor: a service cost, not a physical thing.
4. Calculate the dollar impact. If the carrier applied 30% depreciation to the entire estimate including $20,000 in O&P, that is $6,000 improperly withheld. Quantify the overcharge.
5. File a CDI complaint if the carrier refuses to correct it. Depreciating O&P violates the Fair Claims Settlement Practices Regulations.
6. Consult an attorney. If the dollar amount is significant, this may support a bad faith claim — particularly if the carrier’s practice is systematic rather than a one-off error.

A Note on Transparency

No published California appellate decision has held, in its exact words, “overhead and profit cannot be depreciated.” The prohibition is derived from the statutory and regulatory framework rather than from a case that squarely decided this question. The Pitkin case (pending trial September 2026) addresses the same legal principle in the context of sales tax depreciation and may produce the first federal ruling that explicitly confirms non-physical costs cannot be depreciated under California law.

That said, the statutory text is unambiguous. Section 2051(b) authorizes only “physical depreciation” of “components of a structure.” Overhead and profit is not physical and is not a component of a structure. The argument that it can be depreciated has no basis in the text of the law.

Related Articles

• Overhead & Profit: When Your Claim Should Include O&P
• The Three-Trade Rule: Why Your Insurance Company Owes O&P
• Selective O&P Denial: When Carriers Pay It on Some Trades But Not Others
• Labor Depreciation: Why California Bars It
• ACV vs. RCV: Actual vs. Replacement Cost Value
• California Fair Claims Settlement Practices Regulations