Depreciation is the loss in value most property undergoes as it ages or experiences normal wear and tear. Methods for calculating depreciation can vary by insurance provider.
When you buy home insurance, you need to decide if you want to insure your property for its replacement cost value (RCV) or its actual cash value (ACV). Choosing a replacement cost policy means your insurance provider reimburses you the amount it would cost to replace your damaged items with new, similar items. An actual cash value policy only pays for the item's depreciated value.
Each insurance provider has its own way of determining depreciation. However, most consider an item’s replacement cost value and its life expectancy, or how long the owner can expect to get use out of the property. Every year that passes, the item loses a percentage of its value.
Here’s an example that may make that clearer: Let’s say you buy a laptop for $1,000, and you have actual cash value coverage for it. The insurance industry assumes it has a life expectancy of five years. That means every year, the laptop loses 20 percent of its value. If it’s stolen after only a year, your insurer may subtract the 20 percent and send you a check for just $800.
Remember, certain items don’t depreciate, like fine art, jewelry, and antiques. Some, like cars and computers, depreciate faster than others. Ask your insurer for a copy of its depreciation guide so you have an idea of what it thinks your property is worth.
Depreciation is also important to understand when it’s time to file a claim. Even if your home insurance is written on a replacement cost basis, you initially only receive the actual cash value of the damaged item. To get the rest of the payout, you typically need to:
Keep in mind your insurance company usually pays the difference between the actual cash value and what it cost you to replace the item. For example, let’s say your spend $900 to replace the stolen laptop. Your insurer has already covered the actual cash value of $800, so the recoverable depreciation is only $100.
Imagine your insurance company’s claim adjuster decides that stolen laptop is in such horrible condition that it isn’t even worth $800 and assigns a depreciated value of just $200. With an actual cash value policy, you wouldn’t be able to replace it with your claim payout alone.
Getting the depreciation correct is essential for getting an appropriate payout. Here are some ways to make sure your items are properly appraised:
Essentially, you need to do a home inventory. That way you can dispute the valuation if you feel it’s inaccurate. Prepare your records and photos before trouble hits and store them online or in a safe deposit box.
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