How Does Recoverable Depreciation Impact My Home Insurance Claim?

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In home insurance, recoverable depreciation refers to the dollar amount difference between your property's actual cash value and its replacement value. Insurance companies usually pay homeowners insurance claims in two parts—actual cash value, then recoverable depreciation—to dissuade fraud and to limit excess claim payouts. After you've made a home insurance claim and repaired or replaced the damaged property, your insurer will pay you a check for the recoverable depreciation amount. Recoverable depreciation only applies to homeowners insurance policies that have replacement cost value coverage.

What is Recoverable Depreciation?

Depreciation is the dollar amount part of your home or personal property has decreased in value since you bought it, through a combination of age, condition and obsolescence. For example, if you purchased a new oven for $1,000 four years ago, and it's now worth $600, it has depreciated by $400.

And recoverable depreciation is any depreciation amount that you can recover, or receive, from your insurance company after you make a claim.

For homeowners who have replacement cost value (RCV) coverage on their home insurance policy, any claim they make will generally be paid by the insurer in two parts. The first check is for the actual cash value (ACV), or depreciated value, of the item. Then, once you have repaired or replaced the item, your home insurance company will give you a check for the recoverable depreciation. Insurance companies split their payments this way for a few reasons: Most importantly, it discourages fraud and encourages you to spend the money on actually repairing your home, as you'll receive a more generous payout if you use the cash for its intended purpose.

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Actual Cash Value vs. Replacement Cost in Homeowners Insurance

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How is Recoverable Depreciation Calculated?

The exact method to calculates total recoverable depreciation depends on your insurer's policies and what the damaged item is. But the most common way is for your insurance company to consider an item's useful lifetime, and reduce the item's value by the same fraction of that lifetime each year until its value is zero. The amount it's worth at any given time is called its actual cash value. The difference in price between an item's actual cash value and its replacement cost is its recoverable depreciation.

Graph illustrating how depreciation affects actual cash value of a roof over 20 years

For example, imagine you bought a new roof for $10,000 8 years ago, and the roof was expected to last twenty years. If it's completely destroyed in a storm and needs to be replaced (assuming the replacement cost has stayed constant), the actual cash value would be $6,000. Accordingly, the recoverable depreciation would be $4,000—the difference between the $10,000 replacement cost and the actual cash value.

Nonrecoverable Depreciation

It's possible that you'll have some amount of nonrecoverable depreciation when you're making your insurance claim. Homeowners are most likely to encounter nonrecoverable depreciation when you have an actual cash value policy, which only pays the depreciated amount of your property if it is damaged or stolen. In this case, nonrecoverable depreciation is the same as the total depreciation.

However, even if you have a replacement cost policy, there may be some items, like carpets or awnings, which are only covered to ACV. In this case, you may have a mix of recoverable and nonrecoverable depreciation. For example, if you have an RCV policy, and your deck and the awning covering it are both damaged in a storm, the deck may be covered up to its full replacement cost, while the awning might only be covered to its actual cash value. Check the details of your policy or consult with your insurance agent, to understand if you have any items that are subject to nonrecoverable depreciation.

How to Claim Recoverable Depreciation

To claim recoverable depreciation from your insurance company, start by initiating a claim with your insurance company. An insurance adjuster will determine the replacement cost, recoverable and nonrecoverable depreciation, and ACV of the property that was lost or damaged, and send you a check for the ACV. The insurance company typically subtracts your insurance deductible from the ACV settlement.

Then, you use your own money to replace or repair the item in question. If you're purchasing a new version of the item, simply go to a store and buy it. If you're working with a repairperson or construction company, go through the bidding and repair process. Make sure to keep your receipts to show to your insurer.

Example of How Recoverable Depreciation is Paid for a Damaged Roof
Replacement cost$10,000
Subtract depreciation (8 years old / 20 year expected lifespan = 40%)-$4,000
Actual cash value$6,000
Subtract eductible-$500
Net claim (first payment)$5,500
Add recoverable depreciation (second payment)+$4,000
Total claim amount$9,500

Keep in mind that if you happen to come in under-budget for your claim, it's very difficult to keep extra claim money. Your insurance company will ask to see how much the repair cost, and you'll also only receive enough to pay for the item you actually received. In other words, if you find and buy an oven for $200 less than your replacement cost coverage limit, your insurance company gets to keep the money—not you.

Once you've submitted the paperwork to your insurer proving the work has been done, your insurance company will issue you a check reimbursing you for the recoverable depreciation.

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