What Is Recoverable Depreciation in Insurance?

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  • What Is Recoverable Depreciation in Insurance?

After your insurance company reimburses you for items and other covered property on a claim, you may be able to recoup more than your initial payout if you have a replacement cost policy.

Keep reading to learn more about recoverable depreciation and how to get depreciation back from your insurance.

What Is Recoverable Depreciation in Insurance?

In homeowners insurance, recoverable depreciation is the dollar amount difference between the actual cash value and the replacement cost of covered items. Depending on your coverage, many providers will pay the actual cash value of an object first during a claim, then reimburse you for the recoverable depreciation for that item later.

In a standard homeowners insurance policy, your provider typically reimburses you for the replacement cost of several features of your property when damaged by a covered peril, given certain stipulations. Replacement cost is a way for insurers to value insured property. Replacement cost coverage means your provider won’t factor in depreciation when reimbursing you during a claim, and it can apply to several aspects of your coverage. 

For instance, if you have $200,000 of dwelling coverage, and your house gets totally destroyed by a hurricane, your insurer should rebuild your house of similar quality for roughly $200,000. 

Carriers usually value homes at their replacement cost. Many people also have replacement cost coverage on personal property, which is more optional. Nearly every belonging in your house loses value over time. Your television becomes dated, carpet wears, appliances reach their lifespan until they stop working, and so on.

Older items aren’t as valuable as newer ones because technology improves over time, and things become worn with use as they age. Even if a policy contains replacement cost coverage, insurance companies account for the depreciation of your items during claims by reimbursing you for the actual cash value (ACV) of the item first to prevent fraud and excess payouts. Then, once repairs are complete or the item is replaced, the insurer will give you the rest of the money totaling the replacement cost.

How insurers calculate ACV will vary by company, but it’s derived from a combination of an item’s age and usable lifespan. Generally, the older an object or feature is, the less it’s worth. For instance, let’s say you get an expensive leather sofa for $5,000, and it’s supposed to last for 40 years. Your carrier may believe it depreciates $125 per year ($5,000 / 40 years).

You file an insurance claim for fire damage 10 years after you get the couch. Ten years of depreciation totals $1,250 ($125 x 10 years), so your provider determines that the ACV of your couch is $3,750 ($5,000 – $1,250). 

Thus, your insurer gives you $3,750 for the sofa when settling the claim, not including a potential deductible.

How Recoverable Depreciation Works

Recoverable depreciation is the difference between the actual cash value payment and the item’s replacement cost. If you can file for recoverable depreciation, you’re eligible for a second payout to recoup the difference between the ACV and the replacement cost minus your deductible.

If you have replacement cost coverage, your provider typically won’t pay you the full replacement cost upfront. They will give you the ACV amount, and then they’ll reimburse you for the remaining item value after you buy it. You must “recover” the depreciation by providing receipts or other documentation to your carrier showing that you replaced the lost item.

Carrying over our couch example from earlier, we determined that your insurer should pay you $3,750 for your couch after ten years due to depreciation. With replacement cost coverage, you can file for the recoverable depreciation of your couch after you get another one. You’d be eligible to recoup the $1,250 lost from your provider. You don’t always get the full amount lost, though, because of your deductible.

Homeowners insurance policies have deductibles. A deductible is an amount you must pay out of pocket before filing a claim. It prevents policyholders from filing claims for every small incident of damage. Unfortunately, you can’t get your deductible back. 

You also must spend the money on a replacement item to get recoverable depreciation back. For instance, if you got the $3,750 for your couch using the same example but bought a new home studio with the money, you won’t be able to recover the $1,250.

Who Gets the Recoverable Depreciation Check?

Your insurance company should make your recoverable depreciation check out to you, the policyholder and homeowner. You likely won’t get the check until after you prove to your carrier that you replaced the claimed item.

Unlike repair checks that may get made out to your lender, your insurance company should send recoverable depreciation checks to you. Recoverable depreciation checks are disbursed later in the claims process after proving that you replaced the items in question.

Your provider wouldn’t include potential money for recoverable depreciation in a payment to your mortgage lender to start repairs at the beginning of the claims process.

Additionally, you may need to put some money from recoverable depreciation towards contractors and other repair bills if your claims payments don’t completely cover the cost.

How to Get Depreciation Back From Insurance

Generally, to get depreciation back from your insurance company, you need to file a claim, replace or repair the claimed item, then give your insurer the receipt for the newly replaced item to recover the depreciation. Specific steps may vary according to your provider’s rules and regulations.

Most companies will have a specific procedure in place you’ll need to follow to receive your recoverable depreciation. This might involve a specific deadline, like requesting depreciation no later than 180 or 365 days after a covered loss.

It also will likely require providing receipts or other specified documents. Consult your agent or provider with questions beforehand, so you’re not caught off-guard during the process.

Generally, the steps below should offer an outline of how to get depreciation back from your insurance carrier.

  1. File a claim. You’ll need to file a claim to receive recoverable depreciation for an item. It must be a covered loss, meaning a covered peril must cause damage. The damage will also need to exceed your deductible.
  2. Insurer calculates loss. Your insurer will likely inspect the loss, which usually consists of an adjuster visiting your property. The adjuster will calculate the ACV and replacement cost of damaged items.
  3. You receive the initial payment. To kickstart your repairs, your provider will distribute initial payments. This will include funds for the ACV of your lost items.
  4. Replace the damaged items. Using the ACV check, replace your damaged items with new items of similar kind and quality. 
  5. Provide your insurance company with proof of replaced items. Your insurer will likely require proof that you spent the ACV money on replacing the expected things. You should present receipts, signed repair contracts, or other documentation your carrier deems necessary.
  6. Receive recoverable depreciation check. After your insurer verifies that you bought new items, they should reimburse you with your recoverable depreciation to cover the total cost of replacement, minus potential deductibles. 

What Is Non-recoverable Depreciation?

You can encounter non-recoverable depreciation when certain items don’t depreciate clearly. Even with a replacement cost policy, your insurer will exclude some items from full-value coverage. This can sometimes include roofs.

Non-recoverable depreciation would be any depreciation you can’t claim as recoverable. If you don’t have a replacement cost policy, non-recoverable depreciation would be any depreciation. You won’t be able to be reimbursed for anything additional if you only have ACV coverage. Some dwelling fire policies and HO8 policies, which are plans for older or hard-to-insure homes, don’t contain any replacement value coverage.

Also, missing company deadlines or violating certain rules can turn potentially recoverable depreciation into non-recoverable depreciation. It’s important to act reasonably quickly and communicate with your carrier when dealing with a claim, so you don’t jeopardize your total recoverable depreciation.

In some cases, you can encounter non-recoverable depreciation even if you have replacement cost coverage. As we mentioned, insurers typically calculate depreciation using an item’s lifespan and age. For certain things, such calculations aren’t accurate. Some collectibles, like art, memorabilia, and other antiques, can’t be accurately accounted for due to sentimental value or scarcity. As a result, some plans will prohibit recoverable depreciation on these items.

Similarly, some personal property items have sub-limits in your policy. Guns, coins, jewelry, fine china, and more may be explicitly mentioned and capped in your policy by sub-limits. Be aware if these come into play in your recoverable depreciation claim. 

Recoverable Depreciation and Your Roof

Roofs are a highly scrutinized subject in property insurance, especially in southeastern states like Florida and Texas, where wind damage is highly prevalent. Some companies will have special regulations regarding recoverable depreciation and roofs.

The recoverable depreciation process still applies to roofs if you have replacement cost coverage. You get paid for initial repairs, and once your roof is fixed, you can get paid the recoverable depreciation difference. But, you need to follow your insurer’s regulations and scope of repair expectations. You may not be eligible for recoverable depreciation if you don’t follow your company’s instructions. Also, be wary of negligent or fraudulent contractors.

Some companies may have certain stipulations preventing recoverable depreciation for your roof altogether. For example, some insurers have rules where you can only be eligible for roof recoverable depreciation if certain perils damage your roof. You may also be subject to roof age limits.

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The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.