How does recoverable depreciation work on an insurance claim?
Your insurer may pay recoverable depreciation to you during a claim to cover the money you spend on repairing damage to your property. This happens when you have replacement cost coverage where your reimbursement is based on the amount it costs to replace or rebuild your property to its preloss condition using currently available materials that are of a similar like, kind, and quality.
To put it more simply, you’ll be reimbursed at today’s price without deducting for depreciation.
However, your claim reimbursement most likely begins with an initial payment for the actual cash value (ACV) of the damaged property. ACV is the value of the damaged or destroyed item at the time of the loss and includes a calculation for depreciation. You can use this initial payment for repairs to your property.
After that initial payment, you may receive additional payments after you’ve repaired or replaced your property that cover your property’s depreciation. These additional payments are your recoverable depreciation. The amount of recoverable depreciation is based on the amount actually spent and up to e the amount withheld.
The key is providing your insurance company with proof that you’ve either. Once you’ve provided documentation, the actual cash value plus recoverable depreciation should equal the cost of replacing the item minus your deductible.
Recoverable depreciation example
Let’s walk through an example to see how this might work in real life. Say you bought a couch for $2,500. It’s a lovely couch, but wear and tear causes it to depreciate every year.
Six years after you purchased it, your couch is unfortunately destroyed by a covered peril, like a fire. You file a claim with your insurer, pay your $500 deductible, and get busy looking for a replacement couch. You buy a similar one for $3,000 and send the receipt to your insurance company.
Here’s what your insurance reimbursement looks like if your policy includes language that allows you to get recoverable depreciation.
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ACV at the time of loss
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$1,500 (60% of the initial price)
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Policy deductible
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$500
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Replacement couch cost
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$3,000
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Initial reimbursement
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$1,000 (ACV - policy deductible)
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Recoverable depreciation
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$1,500 (Replacement cost - ACV - deductible)
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Total claim payout
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$2,500
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As the policyholder, you want to confirm whether depreciation is recoverable or nonrecoverable. You also need to clarify if there are conditions you must meet in order to recover depreciation. In some cases, depreciation that is initially recoverable may become nonrecoverable if certain policy clauses are not honored, such as a requirement for repair or replacement by a set deadline.
What is recoverable depreciation on a roof claim?
A roof may be expected to last for 20, 30, or even 50 years, depending on the type of roofing materials used and the weather conditions it’s subjected to. For each type of roof, your insurance company will likely use a formula to calculate the depreciation over time.
For example, an architectural shingle roof in a mild climate may have a presumed life span of 30 years and might depreciate 5% each year. A slate roof, however, may have a 50-year life expectancy and depreciate more slowly.
So let’s say you paid $10,000 for a new roof with a life expectancy of 20 years. Each year it depreciates by 5%, or $500, and it’s totally destroyed when it’s only five years old. That means its ACV at the time of the loss is $7,500. But in this case, you’re able to contract with a roofer who can replace your roof with similar materials at the same price you paid for the original roof.
Depending on the insurance company, here’s how a claim for this roof might be paid out:
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ACV at time of loss
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$7,500
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Policy deductible
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$500
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Replacement cost
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$10,000
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Initial reimbursement
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$7,000 (ACV - policy deductible)
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Recoverable depreciation
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$2,500 (Replacement cost - ACV - deductible)
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Total claim payout
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$9,500
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Having a recoverable depreciation clause in your home insurance policy minimizes the amount you may have to pay out of pocket for depreciation.
Who keeps the recoverable depreciation check?
After the repairs have been made or the damaged items have been replaced, the homeowner usually receives the recoverable depreciation check. In most cases, the homeowner uses the reimbursements to pay the contractors or retailers involved.
The process may vary based on your policy language, your insurance company, and the type of claim you have. For example, recoverable depreciation checks for roof claims often go to the roofer after the repairs have been made in full.
