What is Recoverable Depreciation on an Insurance Claim?
You may have seen the term “recoverable depreciation” when dealing with an insurance claim. It’s an important concept to understand.
Depreciation is the method of evaluating the cost of an asset over its useful lifetime. Typically, the contents of your home depreciate in value as they get older.
If you have a replacement cost policy, your insurer is agreeing to cover the cost of replacing the covered item – like your house and everything in your house. When your policy covers replacement costs, it means some or all of your depreciation can be claimed. This is known as recoverable depreciation.
How Does Depreciation Work?
You may already be familiar with depreciation. In homeowners insurance, depreciation can make an enormous difference in the value of your home.
The value of your home and its contents decline over time. Some items – like your home – decline in value because of normal wear-and-tear. You may have paid $15,000 for a new roof ten years ago. However, that roof is only worth around $4,000 today because of depreciation. Similarly, the new 65” TV you purchased for $2,000 five years ago may only be worth $500 today because of depreciation.
Insurers calculate depreciation based on the expected useful lifespan of an item:
- Let’s say you purchase a new refrigerator for $2,000.
- The expected lifespan of the refrigerator is 10 years, and the insurer establishes the refrigerator has a useful life of 10 years.
- Based on this information, the annual depreciation allowed per year is the total cost of the refrigerator divided by the total expected lifespan (useful life), which works out to:
- $2,000 the initial cost and value of the refrigerator when brand new) divided by 10 years (the expected useful lifespan of the refrigerator) = depreciation of $200 per year
Confused about depreciation and how it works? A state-licensed public adjuster can help.
Replacement Cost vs. Actual Cash Value Policies
When buying homeowners insurance, you choose between replacement cost and actual cash value policies.
Replacement cost policies cover the cost of replacing your items with similar items today. You receive compensation for the value of the items you lost along with the depreciation of those items over time.
Actual cash value policies deduct depreciation from your compensation. You receive the actual cash value (ACV) of the item.
Replacement cost policies are more expensive because you receive greater compensation after a loss. You might receive $2,000 for your $2,000 refrigerator, for example, instead of the value of your refrigerator minus depreciation.
Actual cash value policies are cheaper but provide you with less compensation after a loss. You would receive $1,400 for your refrigerator, for example, because of the depreciation of that refrigerator over time.
How Insurance Companies Calculate Actual Cash Value
Actual cash value is a measure of the cash value of the asset at the time it was damaged or destroyed.
To calculate ACV, the insurer calculates the replacement cost of the item (what it would cost to replace the item), then subtracts depreciation of that item.
In the example above with the refrigerator, here’s how the insurer would calculate ACV if the refrigerator was destroyed after three years
Refrigerator ACV = $2,000 – ($200 x 3) = $1,400
The insurer determines the actual cash value of the refrigerator is $1,400, so they pay you $1,400 to compensate you for the loss of the refrigerator. You do not receive the full $2,000 for the refrigerator because your refrigerator wasn’t worth that much at the time of the loss. The refrigerator depreciated in value over 3 years of use.
Insurance Policies Can Have Recoverable Depreciation Clauses
We’ve explained depreciation. Now, it’s time to talk about recoverable depreciation.
You can have a recoverable depreciation clause in your insurance policy. This clause allows the homeowner to claim the depreciation of certain assets along with their actual cash value.
In the example above, you may be able to claim the depreciation of the refrigerator, or $600. This is the amount of value depreciated from the refrigerator over a 3 year period. Without a recoverable depreciation clause, this value is lost. With a recoverable depreciation clause, you could receive additional compensation for this depreciation.
Rules and Restrictions of a Recoverable Depreciation Clause
Recoverable depreciation clauses may seem like a good idea. After all, you’re getting more money in your pocket after a loss.
However, most recoverable depreciation clauses have rules and restrictions.
First, many recoverable depreciation clauses come with rules requiring certain repairs or replacements to be completed within a certain deadline. If you fail to make repairs or replacements prior to the loss of the item, then your recoverable depreciation clause may be void. This is very important as you may think you are being underpaid but the difference may just be the recoverable depreciation that is due once you have made the repairs/replacement.
It’s also important to think about your deductible. This is the amount you pay before receiving compensation from your insurer after a loss. Recoverable depreciation can make a significant impact when deciding whether or not it’s worth filing a claim.
- Let’s say you have a $1,500 deductible, and your insurer is offering you $1,400 for your 3 year old oven (at its actual cash value). It’s not worth filing a claim because your deductible is greater than the amount of compensation you receive. However, if you have a recoverable depreciation clause in your insurance policy, then your insurer reimburses you $2,000 ($1,400 plus the $600 depreciated value over 3 years), which means it is worth filing a claim.
Conclusion
Recoverable depreciation can add significant value to your insurance claim.
In many cases, the items in your home – from kitchen appliances to electronics to roofing – have depreciated 50% or more in value since you purchased them. That means you could receive twice as much for your insurance claim, adding thousands in value.
Check your insurance policy for a recoverable depreciation clause. Or, talk to your insurer about how much it would cost to add a recoverable depreciation cause to your policy. Pay attention to any rules and restrictions that make it difficult to claim recoverable depreciation – and don’t forget about your deductible.
Overwhelmed? Confused? Talk to a public adjuster for a no-cost consultation. ClaimsMate’s public adjusters negotiate with insurers on behalf of policyholders to ensure maximum compensation.
Stephanie is a property insurance claim expert with over 20 years of experience working as an insurance adjuster, expert witness, appraiser and umpire. She is passionate about sharing her expertise, knowledge, tips and training to help both property owners and Public Adjusters in their pursuit of effectively managing claims and recovering the claim settlement they deserve after a loss.
