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You are here: Home . bulletins . 2000 . b-0014-0
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COMMISSIONER'S BULLETIN # B-0014-00

February 24, 2000


To: ALL INSURANCE COMPANIES, CORPORATIONS, EXCHANGES, MUTUALS, RECIPROCALS, ASSOCIATIONS, COUNTY MUTUALS, LLOYD´s, OR OTHER INSURERS WRITING AUTOMOBILE INSURANCE IN THE STATE OF TEXAS


Re: DEDUCTION BY AN INSURER ON FIRST PARTY CLAIMS FOR BETTERMENT OR DEPRECIATION

The purpose of this bulletin is to remind admitted insurers writing private passenger automobile insurance in the State of Texas of legal requirements concerning deduction for betterment or depreciation on first party claims. This issue often arises when an automobile is repaired and the damaged parts are replaced with parts that have a longer useful life than the remaining useful life of the parts prior to damage.

The standard Texas policy for private passenger automobiles, adopted by the Department under Texas Insurance Code Article 5.06, provides that an automobile insurer´s contractual liability for first party claims for a loss to a covered vehicle under Collision or Other Than Collision (Comprehensive) Coverage is the lesser of the following three options, less any applicable deductible:

  1. Actual cash value of the stolen or damaged property;
  2. Amount necessary to repair or replace the property with other of like kind and quality; or
  3. Amount stated in the declarations of the policy.

Option (1), to pay the actual cash value, applies when the insurer elects to declare the covered automobile a total loss. Option (2), to repair or replace, obligates the insurer to pay the total cost necessary to repair or replace property with parts of like kind and quality, minus any applicable deductible.

When an automobile is repaired, some insurers questioned whether they could deduct for betterment or depreciation. Some insurers took the position that because the automobile is made better by the use of the replacement parts, they should not be required to pay the total amount of the replacement parts, less any applicable deductible. These insurers contended that they should be required to pay only the amount equal to the value of the damaged parts before the damage occurred, less any applicable deductible.

The Third Court of Appeals addressed betterment in Great Texas County Mutual Insurance Co. v. Lewis, 979 SW2d 72, issued on November 5, 1998. In that case, the court did not allow the insurer to deduct for betterment or depreciation. In accordance with this decision, when an insurer elects to use option (2), above, to repair or replace the property with other of like kind and quality, the insurer should not deduct for betterment or depreciation.

Insurers are expected to ensure that their claims adjusting practices are in accordance with the law as interpreted by the court. Questions regarding this bulletin should be directed to the undersigned at (512) 322-3430.

David Durden
Associate Commissioner
Property & Casualty Program



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