What Is Recoverable Depreciation in Home Insurance?
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Recoverable depreciation refers to the difference between the actual cash value of an item and the amount it would cost to replace it with a comparable new item. If you have a home insurance policy that allows you to recover depreciation, you will likely receive two payments: one for the actual cash value and another for the recoverable depreciation after something you own is destroyed by a covered peril.
Keep reading to learn how recoverable depreciation works and how you can claim it through your homeowners insurance policy.
How Does Recoverable Depreciation Work?
If an item covered by your homeowners insurance is lost or destroyed, a recoverable depreciation payment accounts for the value that the item has lost since you purchased it. In general, the actual cash value (ACV) of an item will be less than what you paid for it due to factors like wear and tear, age and newer models that make the original item obsolete.
If your personal property is stolen or broken by a covered peril, your insurance company should pay you the ACV of the lost items regardless of the kind of policy you have. However, if your policy includes replacement cost coverage, then you should receive a second payment that covers the difference between the ACV of your belongings and what it costs to replace them.
Keep in mind that not all policies come with replacement cost coverage. According to John Espenschied, the owner of Insurance Brokers Group in St. Louis, Missouri, it is an optional add-on that will raise the price of your homeowners insurance.
“The cost of replacement coverage can range from 10% to 20% of your total home insurance premium,” Espenscheid told SmartFinancial in an email.
Why Would an Insurance Company Use Recoverable Depreciation in a Claim?
Insurance companies often pay out recoverable depreciation separately from the ACV payment in order to prevent insurance fraud and save themselves money. Your insurance provider may require you to show proof that you have repaired or replaced your damaged belongings using the ACV payment before giving you the recoverable depreciation. This ensures that you are spending the money provided by your insurer on the repairs or replacements it was intended for.
For example, if a house fire destroys a laptop that had depreciated by $400 but you buy a new laptop for $200 less than what you paid for the previous laptop, your total recoverable depreciation payment would be $200 rather than $400.
How Is Recoverable Depreciation Calculated?
Insurance companies calculate recoverable depreciation by considering how much you paid for an item and how long it is expected to continue functioning. For example, the average refrigerator lasts for 12 years. As a result, if you pay $1,200 for a fridge, it should depreciate by $100 every year.
In addition, the size of your payout after any insurance claim will depend on your deductible, which is the minimum amount of money you agree to pay toward covered losses before your insurance carrier will start chipping in.
Continuing with our earlier example, if you have owned your fridge for three years, it will have depreciated by $300 and its ACV will be $900. If someone steals your fridge, you could make a claim on your personal property insurance, pay a $500 deductible and receive a $400 ACV payment. Then, after buying a new $1,200 fridge, you could submit the receipt to your insurer and receive a $300 reimbursement for the recoverable depreciation.
Many home insurance policies only insure your personal belongings at their ACV, meaning all depreciation is by definition non-recoverable if you have such a policy. Even if you are willing to pay the higher cost for homeowners insurance with replacement cost value (RCV) coverage, you still may not be able to recover the depreciated value for all of your possessions.
For example, depending on your circumstances, some insurers may only pay out the ACV for your roof, detached structures like fences and awnings or collectibles and other valuables regardless of the type of policy you have. Be sure to check the details of your policy to see which items are eligible for RCV coverage.
“In the case of a roof, most insurance companies will provide replacement cost coverage unless the roof is more than ten years old,” Espenschied said. “After ten years, an insurer may reduce the coverage to actual cash value (ACV), which takes into account the age and condition of the roof.”
How To Claim Recoverable Depreciation
In order to receive a recoverable depreciation payment, you will first need to make sure that your policy includes a recoverable depreciation clause since it is not included in a standard policy and costs extra. Once you have verified that your policy provides RCV coverage, then you can take the following steps to file a homeowners insurance claim:
- Call 911 and have the responding officers fill out a police report if your property was damaged or lost amid a crime like theft or vandalism.
- Call your insurance company to inform them about your claim and schedule an appointment with an insurance adjuster.
- Carefully document your losses and damages.
- Make emergency repairs if necessary to prevent further damage to your home or belongings.
- Contact your mortgage lender to let them know about your insurance claim.
- Gather documents, photographs, inventories and other materials that can support your claim and present this evidence to your adjuster.
If your claim is approved, your insurance provider will send you a payment for the ACV of your lost items. Afterward, you will need to use this money to repair or replace the items. Keep in mind that you may need to pay some of these costs out of pocket since the ACV of any given item generally won’t be enough to replace it with a brand-new item.
Once you have submitted these, your insurer will assess your repairs or replacements and may reimburse you for the recoverable depreciation of your lost items.
How Long Do I Have To Claim Recoverable Depreciation?
The amount of time you have to file a claim for recoverable depreciation will depend on your insurance company. In general, you will have between six months and a year after you lose your belongings to let your insurer know you intend to recover their depreciation.
However, it may be best to file your recoverable depreciation claim sooner rather than later. You will likely need to prove your property was damaged by one of the named perils covered by your policy in order to make a successful claim. As a result, it’s important to document evidence of the peril that damaged your possessions as quickly as possible.
Keep in mind that home insurance policies typically only insure your personal property against the following perils:
|Fire or lightning||Theft|
|Windstorm or hail||Volcanic eruptions|
|Riot or civil commotion||Weight of ice, sleet or snow|
|Damage by aircraft||Water/steam discharge from home systems and appliances|
|Damage by vehicle||Sudden/accidental tearing, cracking, burning or bulging of home systems|
|Smoke||Freezing of home systems|
|Vandalism or malicious mischief||Sudden/accidental power surges|