What is Recoverable Depreciation in Home Insurance?
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In home insurance, recoverable depreciation is the difference between your property's actual cash value and replacement value.
Home insurance companies usually pay replacement cost claims in two parts: actual cash value and then recoverable depreciation. This is to limit fraud and excessive payouts. After you've repaired or replaced the property, your company will write you a check for the recoverable depreciation amount.
What is recoverable depreciation?
Depreciation is how much the value of your home or personal property has decreased since you bought it. Depreciation is caused by a combination of:
- Age: How long ago something was purchased
- Condition: The amount of wear and tear or other damage
- Obsolescence: Whether newer models have been released
Example:
Four years ago, you bought a new oven for $1,000. If used ovens that are similar in age and quality currently sell for $600, your oven has depreciated by $400.
Based on this definition, recoverable depreciation is the portion of the depreciated amount you can get back from your insurance company when you make a claim on a policy with replacement cost coverage.
The company will generally pay claims in two parts.
- The first check will cover the item's actual cash value (ACV) or depreciated value.
- Once you repair or replace the item, your insurance company will send a check for the recoverable depreciation amount.
Insurance companies split their payments this way for a few reasons. Most important, it discourages fraud and gives you an incentive to spend the money on repairing your home as intended. Spending the first payment on unrelated costs means you'll forfeit the recoverable depreciation.
How is recoverable depreciation calculated?
The formula for calculating recoverable depreciation is unique to each policy and damaged item. The most common method estimates the item's useful lifetime and reduces its value by a fraction of that lifetime each year, down to zero.
How does depreciation affect a roof over 20 years?
Imagine paying $10,000 for a new roof with a life expectancy of 20 years. Each year, it would depreciate by one twentieth of its purchase value, or $500. If it's destroyed in a storm in year five, its actual cash value would be $7,500, and the recoverable depreciation would be $2,500.
Year | Actual cash value | Recoverable depreciation |
|---|---|---|
| 1 | $10,000 | $0 |
| 2 | $9,500 | $500 |
| 5 | $7,500 | $2,500 |
| 10 | $5,000 | $5,000 |
| 20 | $0 | $10,000 |
Example based on a roof expected to last 20 years with an initial value of $10,000
Nonrecoverable depreciation
It's possible to have some nonrecoverable depreciation when filing an insurance claim. This is most likely when you have an actual cash value policy, which only pays the depreciated value of damaged or stolen property. In this case, nonrecoverable depreciation is equal to total depreciation.
Even if you have a replacement cost policy, there may be exceptions for some items or causes of damage. Fragile items, such as carpets and awnings, may only be covered up to their actual cash value. If both your deck and the awning over it are damaged in a storm, you may get full replacement cost for the deck , but only the actual cash value of the awning.
Some claims are paid differently, depending on the source of damage. For example, a company might pay RCV for damage to a roof if a tree falls on it. But they may only pay ACV if the damage is caused directly by wind or hail.
The potential mixture of ACV and RCV coverage makes it important to verify the details of your policy. In many cases, you'll find categories subject to nonrecoverable depreciation.
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How is recoverable depreciation claimed?
Claiming recoverable depreciation begins with filing an insurance claim. An adjuster will calculate the RCV, ACV and depreciation of the lost or damaged property. Then the company will send you a check for the ACV amount, minus your insurance deductible.
Next, you'll pay to replace or repair the item. Whether you buy a replacement or take bids for repair work, make sure to keep all of your receipts to show the insurance company you used the money from the first check as intended. They may pay your repair person directly.
How recoverable depreciation is paid on a damaged roof | |
|---|---|
| Replacement cost | $10,000 |
| Subtract depreciation (8 years old and a 20-year lifespan = 40%) | −$4,000 |
| Actual cash value | $6,000 |
| Deductible | −$500 |
| Net claim (first payment) | $5,500 |
| Recoverable depreciation (second payment) | +$4,000 |
| Total claim amount | $9,500 |
Note that if you happen to come in under budget, it's very difficult to keep the extra money. Your insurance company will ask to see how much the repair cost, and you'll only receive enough to pay for the replacement item or repairs.
In other words, if you find and buy a new 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 company, proving the work or purchase has been completed, your insurance company will issue you a check for the recoverable depreciation.
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