You may not notice, but many items in your home – from toilets and TVs to decorations and dishwashers, they lose value over time. If you are paying a high premium to your home insurance with replacement cost (RCV) coverage, it is reasonable to expect to refund the full cost of replacing your belongings after a covered loss. However, once the initial claim check arrives it gets surprisingly low, as if it’s only true cash value (ACV) compensation. It can feel like bait and switching, but for a reason. Insurance companies often withhold reclaimable depreciation (difference between RCV and ACV) until they provide evidence of repair or replacement of damaged items or properties. Understanding how to recover depreciation of claims under homeowner policies can help you get a qualifying, full payment.
What is recoverable depreciation?
In insurance, depreciation refers to the loss of the value of an item over time. Generally, if you have a home insurance for the replacement cost, you will hear the term collectible depreciation. This contrasts with the actual cash value policy, which is only covered for the depreciation value of your home or belongings. Depreciation cannot be recovered under an ACV policy. you will only After the claim, you will receive the depreciable value of your home or property. However, if you have RCV coverage, you may be able to recover the value of depreciated or damaged items within a few years of purchase. This amount is called recoverable depreciation.
In most cases, insurance depreciation is based on:
- Item age
- How well it has endured over the years
- How outdated it is to be based on a new version
What is irrecoverable depreciation?
If you have an ACV policy, you are likely not receiving enough money from the insurance claim settlement to purchase items of the same quality as what you lost. You’ll need to buy cheaper items or dip them in your pocket and buy a new one.
Even if you have an RCV policy, it may be helpful to read the policy document carefully. There are many variations of what your home insurance covers. And it’s important to know what your insurance is doing and doesn’t include. For example, standard HO-3 policies typically include an RCV for residential coverage, while ACV is personal property coverage. You will need to pay an additional fee for RCV coverage of your personal belongings (if you want it).
How to calculate recoverable depreciation
Depreciation mainly depends on the value of the item, and the value becomes subjective. As a result, you may wonder how insurance providers will reach total recoverable depreciation for a particular claim. Most often, they look to the useful life of the item.
Let’s say you bought a refrigerator in 2016 for $1,500. The refrigerator is estimated to last 14 years. By dividing the lifespan (14 years) by the total cost ($1,500), the home insurance company can reach a database insurance recovery estimate.
In this example, for each year of the fridge life, it is depreciated about $107. This calculation may vary depending on provider, status, item type, and specific policy details.
learn more: Does your homeowner’s insurance rise after a claim?
How does recoveryable depreciation affect household claims?
If you have both ACV and RCV coverage types, the first part of the home claims process is the same. Covered danger will damage or destroy the structure of the property and/or personal property. From there, you may call your agent or file your claim online, and the claim adjuster evaluates the depreciable value of the item or property.
If the scope of your personal property is paid on an ACV basis, once the adjuster valuation is accepted by the company, we will receive a check of alternative costs minus the depreciable value. If you have valuable personal assets that depreciate quickly, such as many computers, you may face out-of-pocket costs to replace them after you lose.
If the scope of your personal property is paid on an RCV basis, as with ACV policy items, recoverable depreciation may be calculated for all destroyed items after the covered loss. However, there is further action to determine what the current market value of a similar new version of each item is.
In a simple summary, here is the expected steps for coverage of an RCV:
- Covered losses occur: Following the covered danger that causes damage, the first step (usually after emergency services are involved) is to call your insurance agent and start the claims process.
- Insurance providers calculate ACV. Claims adjusters usually visit the facility and evaluate damage to infringed property and ACV, even if they have an RCV policy. You will then receive an ACV billing check for destroyed or stolen items minus the deductible amount.
- Replace the item or repair the damage. Use the ACV check you receive to buy new items of similar manufacturers and quality, or repair damage to your home, even if the check doesn’t cover the full cost. To recover depreciation, you usually need to prove that you have replaced the item or correct damage to your home within a certain time frame and with certain documents (such as sales receipts). You can ask your agent what is required under your policy or request a representative.
- Your insurance provider will pay a recoverable depreciation: After proof that you have replaced a destroyed or stolen item (or repaired a damage to your home), you will usually be issued a second insurance depreciation check if you show how much you paid the new item to the insurance company.
How can I recover my recoverable depreciation?
Most insurance providers have very specific steps to recover the depreciation of your claim. If deadlines apply, be sure to submit the required documents within the time limit.
One important thing to note here is that if you find a lot of things with items for sale, don’t expect to pocket your savings.
Back to the fridge example: Suppose you find an equivalent replacement model that’s sold for $1,200 instead of the original price of $1,500. Submitting your receipt to the insurance company could potentially pay enough to cover the $1,200 purchase amount, rather than the original value of the $1,500 in the fridge. Also, remember that if you file a claim for property damage to your family or individual, you will need to pay the deduction.
Here’s a further expansion of the refrigerator example:
| Incident | amount |
|---|---|
| The value of the refrigerator at the time of purchase in 2018 (i.e. the cost of replacing it) | $1,500 |
| Useful life | 14 years |
| Annual depreciation | $107 ($1,500 ÷ 14) |
| 2023 covered loss destroys fridge | |
| Total recovery depreciation | $535 ($107 x 5 years used) |
| Actual cash value at the time of covered loss | $965 ($1,500 – $535) |
| Policy deduction possible | $500 |
| First complaint check amount | $465 ($965 ACV – $500 deductible) |
| Cost to buy a new refrigerator | $1,500 |
| Second Claim Check (Recoverable Depreciation) amount | $535 |
| Total billing amount | $1,000 (Fridge total, minus $500 deduction possible) |
Why do insurance companies use recoupable depreciation?
Why do insurers have them take all these extra steps rather than removing deductibles except for one check? This is likely to make it easier for both insurers and policyholders. There are several reasons why insurance companies use recoverable depreciation.
- It helps prevent insurance fraud. For example, you cannot put a $1,000 check in your pocket (it’s the full amount of $1,500 refrigerator minus the $500 deduction for a damaged or destroyed refrigerator).
- Insurance companies can help you avoid paying more than you need. If you have fewer new replacement fridges, the second billing check will increase your total bill to the cost of that amount (deductible). By balancing these costs, insurers can maintain financially healthy levels of claim reserves (save them to pay the losses).
- This will replace the items that have actually been destroyed. For example, if you decide that your fridge is no longer needed, you simply receive the value of your depreciated item, not the second amount, because you didn’t actually replace it.
Ultimately, resilient depreciation requires additional steps, but may be valuable for items that lose value quickly over time. To receive a second claim check, you will need to submit a sales receipt proof of the amount paid for the replacement. Check out the insurance and insurance provider process for recoverable depreciation.
