Understanding depreciation when you have an insurance claim

Understanding depreciation when you have an insurance claim

Having homeowners' insurance can be a financial lifesaver, especially if you need to file a claim for a covered loss — such as roof damage caused by a serious storm. But that claim payout you’re awaiting could be lower than expected. That’s because your carrier may factor in depreciation.

In this article, TheZebra helps you understand how depreciation works and is calculated, the differences between actual cash value and replacement cost, when depreciation becomes permanent and best practices for filing a claim.

What Depreciation Means When it Comes to Home Insurance

Your homeowners' insurance company defines depreciation as the reduction in value of a covered home item based on its age, condition and normal wear and tear at the time of loss.

“Depreciation is not a penalty or something insurers invented to shortchange policyholders. It’s simply a way to recognize that most building materials and household items do not hold their original value forever,” said Geoffrey Conrad, insurance claims expert and founder/lead instructor with Conrad Insurance Education.

If, for instance, your 10-year-old roof is damaged by a covered storm, it won’t have the same value as a brand-new roof — even if both are damaged by the same storm.

Actual Cash Value vs Replacement Cost

Homeowners insurance policies cover your property in one of two ways: via actual cash value (ACV) or replacement cost value (RCV). The difference between the two lies in how depreciation is handled, which directly affects how a claim is paid.

“ACV is the item’s replacement cost minus depreciation. RCV covers the cost to replace or repair the item with a new one of like kind and quality, without subtracting depreciation,” said Janet Ruiz, director of strategic communications for the Insurance Information Institute.

Let’s say your roof was worth $20,000 before the damage; if your carrier determines that the depreciation amounts to $8,000, your ACV will amount to $12,000 (not including your deductible).

“In this example, if you file a claim for your $20,000 roof, the difference of $8,000 will be money you will have to pay from your own pocket,” said Jordan Blake, director of communications and operations for Shoreline Public Adjusters, LLC.

But if you have RCV coverage, your insurer will eventually reimburse you for the full $20,000 (minus your deductible).

What is Recoverable Depreciation?

Recoverable depreciation is the portion your carrier may withhold on an RCV policy that may be paid back after repairs are completed.

“If you have replacement cost coverage, your insurer will pay you the actual cash value first. Then, when you finish the repairs and provide the receipts or a completion certificate, you can ask for the depreciation that was withheld and get the whole replacement cost reimbursed to you,” Blake said.

Step-by-Step Claim Payout Example

Here’s how your roof damage claim might be paid out with an ACV policy:

• Replacement cost estimate: $20,000
• Non-recoverable depreciation: $8,000
• Your deductible: $2,000
• $20,000 - $8,000 - $2,000 = $10,000

Your final claim payout would be $10,000 after subtracting for depreciation and paying your deductible. That means your total out-of-pocket costs would be $10,000.

With an RCV policy, the same math would apply, but with a key difference. Assume you hire a roofing contractor who replaces your roof for $20,000. After you submit proof of completion to your insurance company, the claim is reopened, and your carrier reimburses you $8,000 for the recoverable depreciation. Hence, your out-of-pocket responsibility would be only $2,000 (your deductible).

When Depreciation is Not Recoverable

However, there are several common scenarios where depreciation is permanently withheld. Of course, if you have an ACV policy, it is permanently withheld, “But depreciation can also be lost on an RCV policy if you choose not to complete the repairs or replacement, in which case the insurer has no obligation to release the withheld depreciation,” said Conrad. “Also, most policies require repairs to be completed within a specific timeframe — often 180 days or one year from the date of loss, unless an extension is approved. If that deadline passes without completed and documented repairs, the right to recover depreciation can expire.”

Depreciation can also be eliminated or reduced if the cost of your repairs is lower than the original replacement estimate. If you complete the work for less than the estimated replacement cost, depreciation is only released up to the amount actually spent.

“And depreciation might not be fully recovered if your repairs do not meet the policy requirement for like-kind and quality,” Conrad said. “Using lower-grade materials or reducing the scope of work can result in a lower final payout, even if the repairs are completed.”

How Insurance Companies Calculate Depreciation

Insurance companies have their own depreciation schedules that consider factors like age, expected useful life and condition, but often the schedules and formulas are kept secret.

“Many carriers rely on special software equipped with built-in schedules,” Blake said. “But these are only approximations given by a carrier’s adjuster. You can dispute or try to negotiate that figure if you can furnish proof via maintenance records or an appraisal report.”

The condition of an item, be it a roof or a laptop, can also affect the depreciation calculation.

Depreciation Can Shape Your Payout More Than You Expect

Before filing a claim, remember to always factor in depreciation and the extent to which it is recoverable, and carefully review policy terms as well. Additionally, ask your insurance agent questions about anything you don’t understand on your policy, especially when it comes to depreciation, actual cash value and replacement cost value.

Home Items with Big Depreciation

Items that encounter heavy wear or have shorter life expectancies tend to depreciate the most.

“These include roofs, HVAC systems, water heaters, flooring, and certain appliances,” Ruiz said. “Their daily use and exposure to weather, moisture and other stress accelerate the decline in value.”

Tips for Homeowners Filing a Claim

Want to improve your odds of a higher claim payout and lower out-of-pocket costs? The experts recommend the following:

• Check if your policy covers ACV or RCV, and consider upgrading to the latter.
• Keep good records. “Receipts, prior inspection reports, maintenance records and even photos or videos taken before the loss can help support more accurate depreciation calculations,” Conrad said.
• Ask your adjuster how depreciation was calculated, what portion is recoverable and what steps are needed to recover it.
• Pay close attention to and meet repair deadlines.
• Select repair materials carefully. “Downgrading materials or reducing the scope of work can limit or eliminate the amount of depreciation paid back,” Conrad said.
• Ask your adjuster to provide their depreciation method in writing, and dispute or negotiate this figure if you feel it’s unfair.

Depreciation in Home Claims: FAQs

Can a homeowner recover depreciation?

Yes, if you have a replacement cost value type policy, complete the repairs or replacement before your carrier’s deadline and submit proper documentation of completion.

Why is roof depreciation so high?

Roofs are continuously exposed to the elements, UV radiation and temperature changes, leading to accelerated aging and wear. The useful life of a roof declines more quickly than many other structural components.

Can depreciation be disputed?

Yes, if you can provide proof of better-than-assumed condition, recent maintenance or higher-quality materials. Ask for a written explanation of how the depreciation figure was determined, and request that an appraisal be done.

How is the lifespan and value of personal property determined?

Insurers use specifically designed estimating software that pulls in data from reputable sources, such as the NAHB, retailers, home inspectors, contractors and the like. It's widely used across the industry and is highly reliable for calculating costs and depreciation rates.

This story was produced by TheZebra and reviewed and distributed by Stacker.