When buying home insurance or filing a claim, you may encounter the terms replacement value (RCV) or actual cash value (ACV). If your home insurance includes replacement value coverage, it will reimburse you for the actual replacement value of your home or personal property after a covered claim, depending on your coverage type and policy limits. However, you may not receive the full replacement value in your first claim check. If you receive a lower amount, it could be because recoverable depreciation was deducted from your payout. Below, Bankrate explains the nuances of RCV, ACV, and recoverable depreciation in home insurance.
What is depreciation?
In insurance, depreciation refers to the loss of value of an item over time. Typically, if you have home insurance with replacement value coverage, you will hear the term recoverable depreciation. This is in contrast to actual cash value insurance, which only covers the depreciated value of your home and possessions. With ACV insurance, depreciation is not recoverable. only After you make a claim, you can get the amount of the depreciation on your home or property. However, if you have RCV coverage, you may be able to recover the value of broken or damaged items that depreciated in the years after you bought them. This amount is called recoverable depreciation.
In most cases, insurance depreciation is based on:
- Item Age
- How well has it held up over the years?
- How outdated it is based on the new version
Let’s take a television as an example. You bought a television five years ago for $500. During that time, the TV has depreciated, losing value due to age and use, and is now worth only about $100. The TV is damaged in a house fire, which is covered by insurance. However, because of inflation, it would cost $700 to replace the TV with a similar new model at today’s prices.
If you have ACV insurance, you will only be paid up to $300 (the current replacement cost minus the TV’s depreciation) after your TV is damaged or destroyed (not taking into account that you’ll also have to pay your home insurance deductible), whereas if you have RCV insurance, you will be paid up to $700 and potentially be able to buy a comparable new version at the current market price.
You may only receive $300 as your initial insurance check, but by purchasing a new TV and showing the insurance company your payment receipt for the replacement TV, you can recover an additional $400, which is the difference between the ACV and the RCV. This $400 is your recoverable depreciation.
What is unrecoverable depreciation?
If you have ACV insurance, your insurance payout will likely not be enough to purchase an item of the same quality as the one you lost. You will have to buy a cheaper item or use your own money in addition to the amount you paid to purchase an item of similar quality.
Even if you have RCV insurance, it can be helpful to read your policy carefully. There are many variations in home insurance coverages, so it’s important to know what is and isn’t included in your policy. For example, on a standard HO-3 policy, the dwelling coverage typically includes RCV, but the personal possessions coverage includes ACV. You’ll probably have to pay extra for RCV coverage on your personal possessions.
How to calculate depreciation
Depreciation depends primarily on the value of the item, and value can be subjective. So, you may wonder how insurance companies calculate the total amount of depreciation recoverable for a particular claim. In most cases, insurance companies look at the useful life of the item.
For example, say you purchased a refrigerator in 2016 for $1,500, and the refrigerator is estimated to have a useful life of 14 years. By dividing the useful life (14 years) by the total cost ($1,500), your home insurance company can calculate your data-driven insured depreciation allowance. In this example, for every year of the refrigerator’s useful life, it will depreciate by approximately $107. This calculation may vary depending on your provider, situation, type of item, and the details of your specific policy.
learn more: Will my homeowner’s insurance premiums increase after a claim?
How Depreciation Affects Home Insurance Claims
For both ACV and RCV coverage types, the first part of the home insurance claims process is the same: a covered peril damages or destroys the property’s structure or personal property (or both). From there, you call an agent or submit a claim online, and a claims adjuster assesses the depreciated value of the items or property.
When personal property coverage is paid on an ACV basis, once the adjuster’s valuation is accepted by the company, you will receive a check for the replacement value minus the depreciated value. If you have valuable personal property that depreciates quickly, such as a large number of computers, you may incur out-of-pocket costs to replace them after a loss occurs.
Where personal property coverage is paid on an RCV basis, following a covered loss, recoverable depreciation amounts may be calculated for all damaged items as would be the case for items covered under ACV insurance, except that further steps are taken to determine the current market value of a similar new version of each item.
As a quick summary, here are the steps you can expect with RCV coverage:
- A covered loss occurs when: If loss occurs due to a covered peril, the first step (usually after emergency services have been involved) is to call your insurance agent to begin the claims process.
- Insurance companies calculate the ACV. A loss adjuster will typically visit your property and assess the damages and the ACV of your belongings that were destroyed (even if you have RCV insurance). You will then receive a claim check for the ACV of the items that were destroyed or stolen, minus your deductible.
- Replace the item or repair the damage. Use the ACV check you receive to purchase new items of similar make and quality or to repair damage to your home, even if the check doesn’t cover the full amount. To recoup depreciation, you usually must prove with specific documentation (such as a sales receipt) that you replaced the item or repaired the damage to your home within a certain time period. Check with your agent or claims agent to see what your insurance requires.
- The insurance company pays the recoverable depreciation. Once you prove that you replaced any damaged or stolen items with new items (or repaired any damage to your home) and show the insurance company the cost of doing so, you will usually be issued a second insurance diminished value check.
How can I reclaim my depreciation?
Most insurance companies have very specific procedures for how they will recoup depreciation when you file a claim. If there is a deadline, be sure to submit the required documentation in a timely manner.
An important thing to note here is that even if you find a great deal on an item on sale, you shouldn’t expect to pocket the savings.
Returning to our refrigerator example, let’s say you find a comparable replacement model on sale for $1,200 instead of the original price of $1,500. If you provide your insurance company with the receipt, they’ll likely pay you enough to cover the $1,200 purchase price, rather than the full original $1,500 price of the refrigerator. Also, remember that you’ll have to pay a deductible if you file a claim for damages to your home or personal property.
To expand on our refrigerator example, here are the numbers:
| Incident | amount |
|---|---|
| The value of your refrigerator when you purchased it in 2018 (i.e., its replacement cost) | $1,500 |
| Service life | 14 years |
| Annual depreciation | $107 ($1,500 ÷ 14) |
| The refrigerator is destroyed in a covered loss in 2023 | |
| Total recoverable depreciation | $535 ($107 x 5 years) |
| Actual cash value at the time of the covered loss | $965 ($1,500 – $535) |
| Insurance deductible | $500 |
| First billing check amount | $465 (ACV $965 – Deductible $500) |
| The cost of buying a new refrigerator | $1,500 |
| Second billing check (depreciation) amount | $535 |
| Total amount billed | $1,000 (total value of refrigerator minus $500 deductible) |
Why do insurance companies use recoverable depreciation?
Why would an insurance company make you go through all of these extra steps instead of just giving you one check minus your deductible? At first glance, it seems like it would be easier for both the insurance company and the policyholder. There are several reasons why insurance companies use recoverable depreciation:
- This helps prevent insurance fraud: for example, you can’t pocket a $1,000 check for a damaged or destroyed refrigerator (the full amount you would receive for a $1,500 refrigerator, minus your $500 deductible) and, at the same time, get a free refrigerator from your parents-in-law, who happened to be looking to get rid of theirs.
- This helps insurance companies avoid paying out more than they have to: if you find a new refrigerator replacement for less, your second claim check will only bring your total claim up to that amount (minus your deductible). Balancing costs in this way allows insurance companies to keep their loss reserves (money set aside to pay for losses) at a healthy level.
- This ensures that you actually replace any destroyed items. For example, if you decide you no longer need your refrigerator, you only receive the depreciated value of the item and not the second amount, since you didn’t actually replace it.
Ultimately, depreciation recovery requires a few extra steps, but it may be worth it for items that depreciate rapidly over time. You’ll likely need to provide a sales receipt proving what you paid for the replacement item to receive a second claim check. It’s a good idea to review your policy and your insurance company’s depreciation recovery procedures in case you experience a covered loss.
