Actual Cash Value and Depreciation in Texas Home Insurance Claims

Thu, 17 Sep 2026 00:20:34 +0000

Working out actual cash value is technical. You start with the full cost to repair or replace the damaged property, then subtract depreciation for age, condition, and wear, component by component. Insurance companies do this every day with estimating software and trained adjusters. Most homeowners have never done it once.

My view is simple: calculating actual cash value is the insurer's job, and a homeowner should not lose benefits for failing to do the adjuster's math. This article explains how Texas law actually handles this. It covers how replacement cost and actual cash value payments work in Texas homeowners policies, the "holdback" and the deadline for completing repairs, who has to prove the amount of the loss, and how depreciation is applied, including the unsettled question of whether labor can be depreciated.

Replacement cost and actual cash value in Texas homeowners policies

Texas homeowners policies generally pay losses in one of two ways. The Texas Department of Insurance (TDI) explains that replacement cost coverage "pays to repair or rebuild your home based on current costs," while actual cash value (ACV) coverage pays "less based on the age and condition of your home (depreciation)." TDI's own example shows how much this matters. Under ACV coverage, a $10,000 roof replacement on a 20-year-old roof can produce a $0 payment after the deductible.

For years, Texas insurers used standard forms prescribed by TDI: the HO-A, HO-B, and HO-C. According to a 2018 TDI report, insurers began filing and using their own forms in 2003, although some still use the promulgated forms. That means you need to read your own policy. Two TDI forms show the basic difference:

HO-A. The TDI-prescribed Homeowners Form A pays no more than the smallest of the actual cash value "determined with proper deduction for depreciation," the cost to repair or replace "with proper deduction for depreciation," or the policy limit. It is an ACV form.
HO-B. The HO-B provides replacement cost coverage for the dwelling, but, as a 1998 TDI Commissioner's Bulletin quotes it, "We will pay only the actual cash value of the damaged building structure(s) until repair or replacement is completed."

Many company-drafted forms follow the same pattern. They pay ACV first and pay the rest of the replacement cost only after the work is done.

The holdback: how the two-check system works

TDI's consumer guide describes the process plainly: "Most companies pay homeowners claims with two checks." The first check "is for the estimated cost of repairs, minus depreciation and your deductible." The company issues the second check "after it receives the contractor's bill for the finished job, as long as the repairs or replacements are completed within 365 days of the date of loss."

The depreciation withheld from the first check is often called "recoverable depreciation" or the "holdback." A federal court in Dallas described the same structure in Tolar v. Allstate Texas Lloyd's Co., 772 F. Supp. 2d 825 (N.D. Tex. 2011): the insurer first pays the lesser ACV amount and then, once the repair or replacement is complete, pays the difference.

Texas's prompt-payment statute also speaks to payments that depend on something the policyholder must do. Under Texas Insurance Code § 542.057(b), when payment of a claim "is conditioned on the performance of an act by the claimant," the insurer must pay no later than the fifth business day after the act is performed. In my view, finishing the repairs is that kind of act. I have not found a Texas appellate decision applying § 542.057(b) specifically to recoverable depreciation, so treat that as my reading of the statute.

Deadlines to finish repairs

The deadline to recover the holdback depends on your policy, so read it closely.

Many homeowners policies. TDI's consumer guide refers to a 365-day window measured from the date of loss. Some policies let you ask in writing for more time. If yours does, make the request before the deadline and keep a copy.
Other forms. Company forms, especially commercial ones, may use different periods and notice rules. In Kahlig Enterprises, Inc. v. Affiliated FM Insurance Co., No. 23-50144 (5th Cir. Apr. 10, 2024), a commercial policy required repairs within two years. The Fifth Circuit, applying Texas law, held that the insured had the burden to prove the repairs were made on time because the provision was a measure of valuing the loss, not a limitation of liability. On that record, the court also rejected the insured's argument that the insurer's delays excused the late repairs.
TWIA policies. Windstorm claims under a Texas Windstorm Insurance Association policy follow a statute. You generally must file a TWIA claim within one year after the damage occurs (Tex. Ins. Code § 2210.573(a)). Under § 2210.5741, a claimant with replacement cost coverage requests the replacement cost payment by submitting documentation of the cost and completion of repairs no later than the 545th day after receiving TWIA's notice accepting the claim in full or in part. TWIA must send written notice of the amount it will pay within 30 days after receiving that documentation and must pay within 10 days after that notice. A claimant who disputes the amount may demand appraisal of the replacement cost amount within 30 days, even if not all repairs are complete.

Do not let the repair deadline pass while you argue about the first payment. A dispute over ACV does not automatically stop the clock on replacement cost.

Who has to prove the amount of loss?

This is where Texas law needs the most careful explanation.

The insurer's duties. Texas puts real claim-handling duties on insurers. Within 15 days after notice of a claim, the insurer must acknowledge it, begin its investigation, and request everything it reasonably believes it will need from the claimant (§ 542.055). It must accept or reject the claim in writing within 15 business days after receiving the items it required, or explain why it needs more time and decide within 45 days of that notice (§ 542.056). It must pay within five business days after accepting (§ 542.057). If it delays payment beyond the applicable period, or more than 60 days where no other period applies, statutory interest is owed (§ 542.058; § 542.060). These deadlines are extended 15 days after a weather-related catastrophe or major natural disaster as defined by the commissioner (§ 542.059(b)). It is also an unfair settlement practice to refuse to pay a claim without a reasonable investigation, or to fail to promptly give a reasonable explanation for a denial or a compromise offer (§ 541.060(a)(3), (7)).

Nothing in those statutes requires a homeowner to prepare depreciation schedules or an itemized ACV estimate before questioning a payment. I have not found a Texas appellate decision that imposes that requirement as a condition of disputing an ACV payment.

The policyholder's burden in court. Texas law also places the burden of proof on the policyholder in several important ways, and I would not be doing my job if I skipped that part.

An insured "has the initial burden of establishing coverage under the terms of the policy." JAW The Pointe, L.L.C. v. Lexington Insurance Co., 460 S.W.3d 597, 603 (Tex. 2015) (as quoted in a 2022 Houston court of appeals opinion). The insurer bears the burden on exclusions and other avoidances (Tex. Ins. Code § 554.002).
When covered and excluded causes combine, the insured "must present some evidence affording the jury a reasonable basis on which to allocate the damage." Lyons v. Millers Casualty Insurance Co. of Texas, 866 S.W.2d 597, 601 (Tex. 1993) (as quoted in a 2023 federal decision).
Before filing most property-damage suits, the policyholder must send a notice stating "the specific amount alleged to be owed by the insurer on the claim" (§ 542A.003(b)(2)). Attorney's fees can later be reduced, or eliminated, based on how the judgment compares to that amount (§ 542A.007).
If the policy pays replacement cost only after repairs, and the repairs have not been done, the contract amount in dispute will usually be ACV. As a practical matter, that means the policyholder should be ready to prove ACV, usually through a qualified estimator or other witness.

So in Texas, the insurer must investigate, calculate, explain, and pay on time. But once a dispute reaches the courthouse, the homeowner who wants more money has to prove it. Texas courts have not settled every detail of what that proof must look like for ACV. Plan for it early instead of finding out on the eve of trial.

How depreciation is applied, and the labor question

Texas courts have described ACV in more than one way. Some decisions treat it as market value. See St. Paul Lloyd's Insurance Co. v. Huang, 808 S.W.2d 524 (Tex. App.—Houston [14th Dist.] 1991). Others describe it as "repair or replacement costs less depreciation." See Tolar, 772 F. Supp. 2d at 830. Many modern policies define ACV themselves, and when they do, that definition usually controls.

Overhead, profit, and sales tax. In Commissioner's Bulletin B-0045-98 (June 12, 1998), TDI told insurers that, under the HO-B, deducting contractors' overhead and profit and sales tax in determining actual cash value under a replacement cost policy "is improper," and that ACV "is the replacement cost with proper deduction for depreciation." The bulletin is old and cites statutes that have since been recodified. In Tolar, a later federal court considered an Allstate form that defined ACV and held that overhead, profit, and sales tax could be depreciated along with the rest of the replacement cost. The result may depend on the policy form and its wording.

Labor. Can an insurer depreciate the labor portion of a repair estimate, or only materials? I have found no Texas Supreme Court or Texas court of appeals decision that answers this question, so Texas law is unsettled. The most direct authority is a federal trial court. In Sims v. Allstate Fire & Casualty Insurance Co., No. 5:22-cv-00580 (W.D. Tex. Jan. 11, 2023), the court held that the undefined term "actual cash value" in the homeowners policies at issue was ambiguous and construed it in the policyholders' favor, meaning it "does not include depreciation of anticipated labor costs." The court described the question as one of first impression in Texas and relied on Fifth Circuit authority applying Mississippi law. In a September 2, 2025 order in the same case, the court held that an appraisal panel lacked authority to decide that legal question. That case is still pending. A trial-court ruling does not bind other courts, and a policy that expressly defines ACV to include labor depreciation may be treated differently.

Practical steps for Texas homeowners

Get the insurer's estimate with depreciation shown line by line. You are entitled to a reasonable explanation of what was paid and why.
Check what was depreciated. Look at whether labor, overhead and profit, or sales tax were depreciated, and compare that with how your policy defines ACV.
Find your repair deadline and put it on your calendar. If you need more time and your policy allows an extension, ask in writing before the deadline.
Document the finished work. Keep contracts, invoices, proof of payment, and photos, and send them to the insurer promptly.
Get help with the numbers. You are not required to be an estimator, but if the dispute goes to court you will need evidence of what you are owed. A qualified estimator can help.
Know what appraisal can and cannot do. Appraisal can set the amount of loss. Legal questions, such as whether a policy allows labor depreciation, are for the courts.

Key takeaways

Most Texas replacement cost policies pay ACV first and hold back depreciation until repairs are complete. ACV-only forms like the HO-A never pay the holdback.
TDI's consumer guide describes a 365-day repair window from the date of loss, but your policy controls. TWIA claims have a statutory 545-day window measured from TWIA's acceptance notice.
Texas insurers must investigate, explain, and pay within statutory deadlines. No Texas statute requires a homeowner to calculate depreciation before disputing a payment.
In litigation, the policyholder bears the burden to prove covered damages, including allocating damage between covered and excluded causes, and should be ready to prove ACV when repairs are not complete.
Whether labor may be depreciated is unsettled in Texas. A federal trial court has said no under an undefined ACV term, but no Texas appellate court has decided the question.

If you have questions about an actual cash value payment, recoverable depreciation, or a repair deadline on a Texas property insurance claim, contact The Claim Attorney for a free case review.

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