“GCOP (general contractor overhead and profit) and sales tax are considered ‘replacement costs because they are factored into policy limits and contractors’ bids. Because GCOP, sales tax, repair costs, and property value together represent the total replacement cost value, it follows naturally that GCOP, sales tax, repair costs, and property value ought to be depreciated together to reach the ACV payment.” Tolar v. Allstate Texas Lloyds, 772 F. Supp.2d 825, 831 (N.D. Texas 2011).
The quote above does not mandate that these items ‘must’ have a finding of depreciation attached to them. It does, however, stand for the proposition that once a finding of depreciation is accessed in the award, depreciation will be subtracted from the RCV to calculate ACV.
Confusion arises when considering two subtle distinctions: 1) the effect of applying ‘across the board’ depreciation’ in appraisal award estimates versus considering and attaching an independent value of depreciation, if any, for each and every line item); and 2) understanding the difference between the accepted rule that insurers may not deduct, or withhold, GCOP and sales tax from ACV payments versus insurers may depreciate GCOP and sales tax.
Deducting or withholding GCOP and sales tax (which is prohibited) is a practice where the carrier attempts to withhold the payment of these costs when paying ACV in addition to the application of depreciation.
It is conceivable that appraisers who apply an ‘across the board’ depreciation value may be overstating depreciation to items not necessarily prone to depreciation. While an appraisal award only reflects a single value for depreciation, that single value is the weighted average of depreciation for the line items agreed to by the panel. To have a weighted average, the appraisers must first have asserted different values, if any, of depreciation for line items. Foregoing this step precludes anything but an across the board application of depreciation. Either approach (across the board or line item depreciation) comes down to whether you believe all of your line item expenses are equally subject to depreciation, if any.
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