While you are likely pretty familiar with the concept of depreciation, you may not know how it impacts your insurance claim. Homeowners insurance companies generally pay claims in two phases. First, they pay the actual cash value, i.e., what your property is worth as it sits today, probably a bit worn and used and not worth exactly what you paid for it years ago. After you take a few steps to show your insurance company the item is being repaired or replaced, then you can request a second payment for recoverable depreciation that you may be owed under your policy. We want to make sure you are aware of these two different types of payments and how you can be sure you are being paid everything your insurance company owes you according to your policy if you have replacement cost coverage.
What Is Recoverable Depreciation?
Recoverable depreciation is the difference between your property's actual cash value, as it sits today, and what it would cost you to replace it, which is usually a bit more. The insurance company calculates recoverable depreciation using a formula, based on the age and condition of your property, that determines what percentage of the value the item depreciates each year. For example, if you purchased a flat-screen TV last year for $500, it may have depreciated in value perhaps by 10%, making its actual cash value now only $450. This is the amount the insurance company will pay you initially. However, if you go out and buy a new TV to replace your old one and it costs you $500, you may be able to recover that $50 difference by submitting your receipt to your insurance company and asking that they pay you the recoverable depreciation. You can imagine, $50 here and $50 there for all of your damaged property could easily start to add up, which is why you should be diligent to provide the necessary documentation and ask for your recoverable depreciation.
How Do I Recover It?
Every policy is different—which is why we always stress how important it is that you read and understand your policy—but if your policy provides replacement cost coverage, it will typically state in the “loss settlement” section of your policy that recoverable depreciation will be paid once the item is replaced or the cost to repair will be paid as work is performed and expenses are incurred. For items that you replace, it is easy to simply submit your receipt to the insurance company in order to be paid your recoverable depreciation. For items that you need to repair, however, this can be harder because you may not have sufficient funds on hand to cover the cost to repair. Think, repair of your roof or significant structural damage. Be sure to review the estimate your insurance company prepares very closely and demand immediately that they pay you whatever amount they calculated as your actual cash value so you can start using those funds to begin repairs. Note, insurance companies often refer to replacement cost value as “RCV” and actual cash value as “ACV.” Here is an example of an insurance company's estimate, noting the recoverable depreciation, the actual cash value, the deductible, and calculation of the amount owed on the claim:
This would likely result in a payment to the policyholder in the amount of $7,470.63, with an additional $2,410.74 that the policyholder could seek to recover after providing the insurance company with the necessary receipts, invoices, etc. showing the items that were depreciated were replaced or repaired.
What Is Non-Recoverable Depreciation?
If you have actual cash value coverage only, the depreciation of your property will not be recoverable. You should look to the “loss settlement” provision of your policy to determine what type of coverage you have. If you have replacement cost coverage, there may still be some depreciation that will not be recoverable under your policy. This is usually a small amount and most often applies to fragile items like carpets or awnings. Some depreciation may also not be recovered if it was caused by a certain peril, as opposed to another, for instance hail damage versus a tree getting blown over onto your roof. If you see an amount for “non-recoverable depreciation” in the estimate the insurance company has prepared, ask your adjuster how this amount was calculated so you can be sure your insurance company is not over-extending this amount and shorting you some recoverable depreciation to which you are entitled.
Always Submit Receipts and Invoices to Your Insurance Company
The best way to ensure you recover as much possible under your policy, including recoverable depreciation, is to submit all receipts to your insurance company for:
- Items you had to replace;
- Measures you took to secure and protect your property (e., tarps for the roof, debris removal, etc.);
- Supplies you purchased and repairs that you paid for or even performed yourself; and
- And any additional living expenses you incur as a result of damage to your property (e., if you are displaced and have to stay at a hotel or lease an apartment and eat more frequently in restaurants), including mileage if you have to drive a further distance because your home is damaged.
The duty is on you to be diligent in protecting and documenting your claim. Far too often we see insurance companies denying, or underpaying, claims by pointing to the policyholder's failure to fulfill their obligations and provide the necessary documents and paperwork to support their claim. Don't let this happen to you.
If you are dealing with an insurance company now that is giving you the run-around or claiming you failed in some way to fulfill your obligations under the policy, contact us for a free, no-cost, no-obligation insurance claim review. It is very likely there are steps you should be taking right now to protect your right to recover in full, and it is also likely you do not know what they are. Why go it alone, without an experienced professional guiding you, when you have local, established, experienced attorneys here to help? Any insurance question you have, we are prepared to answer, at no cost to you. Contact us.