If you’ve found yourself on this page, you’re probably either about to sign an insurance policy, or perhaps you already have.
If either of those are the case, you should know about recoverable depreciation and what it means for both you and your insured assets. It’s essential that you have a baseline understanding of recoverable depreciation before you begin the process of filing an insurance claim, because you’ll need this information to do so!
Whether you’re a homeowner, a business owner, or both- knowing about recoverable depreciation is extremely useful information for you.
Looking Closer at Depreciation:
Before we discuss how recoverable depreciation works further, you need to fully grasp depreciation and how it works in regard to your insurance policies. Then, you also need to know how the industry defines Actual Cash Value, as compared to a similar term of Replacement Cash Value. These terms often have not only colloquial definitions- but insurance contextual definitions as well.
You might have a basic understanding of the concept of depreciation. The common understanding of this term is that some assets slowly lose their value over time, becoming less valuable with basic wear and tear. You are actually able to put a number to that concept- and every year there is a dollar value of depreciation that your assets have acquired! From this, there are a number of things you can do- such as write it off on your taxes and more.
However, in the insurance industry, depreciation is not quite the same. In your insurance policy, it refers to how the value of an asset is distributed throughout it’s useful lifespan.
This is important to your claim because when you sign an insurance policy, you’re signing a contract detailing insurance coverage of your property and assets. Often, the contents at that property can also be covered, which will require that there is a value assigned to every asset covered in the policy.
What Makes Depreciation Recoverable?
We’ve just finished discussing normal depreciation- but what about recoverable depreciation?
Oftentimes, RCV (replacement cost value) insurance policies have recoverable depreciation clauses, which give you the option to claim the depreciation of previously identified assets in addition to the calculated actual cash value.
ACV (actual cash value) policies do not offer recoverable depreciation.
Recoverable depreciation clauses give you an added layer of protection to your insured assets!
As with all things that might benefit you in an insurance policy, there are a few restrictions and rules regarding these recoverable depreciation clauses. (This is why it’s usually smart to work with a professional like a public adjuster when drafting these policies to begin with.)
Rules might include something like having to have all your repairs done within a certain timeframe. Regulations on the clause are different on a case by case, so always work with your public adjuster to make sure you’re in the know and acting in accordance!
Be sure to keep all paperwork and receipts related to a claim – the insurance company WILL ask for it.
Remember: The singular thing that determines whether depreciation (the difference between replacement cost and current cash value) is recoverable or not, is whether the policy specifies ACV or RCV.
With ACV policies, the depreciation is NOT refundable at all. In an ACV policy, what’s paid out by the insurance company is RCV minus depreciation.
If it’s RCV, the depreciation is recoverable.
With ACV coverage, the age and current condition of assets will determine what you’ll receive in the case of a claim! (With RVC coverage, the value and condition is not fully paid until after replacement.)
Recoverable depreciation & the filing process in a nutshell
Upon signing an insurance policy, you’re entering into an agreement with an insurance agency that they’ll compensate you for damage to a specific asset should it occur, based on the terms they set in the contract. Common insurance policies are for homes, vehicles, businesses, and any other valuable asset that could possibly have costly damage done to it.
So, say that the unthinkable has happened, and now you have to file a claim. Insurance policies have two ways of valuing the property covered in a claim: RCV (Replacement cost value), and ACV (Actual cash value.)
Replacement Cost Value is somewhat self-explanatory on the surface – this is determined by how much it costs to replace something that was damaged beyond repair.
In the example of replacing an asset like furniture, let’s say you paid $1600 for an 8ft pool table 4 years ago at the local billiards store. Today, you could sell that table for $800 on Facebook. For personal property, there’s not really a “useful life” value like there is for other assets (like roofing,) so you go off an approximate current used cash market value instead. However, suppose you went to replace that table by buying a new one and they didn’t have the same exact model- but instead a table the same size- now going for $3200.
Then, $3200 would be the RCV value. Not the $1600 you paid for the original- but the $3200 it would cost to buy the same thing today. In addition to that, you also have the removal and setup fee that can be included in the value. (Could be $300 today for what you previously paid $200 for.)
So if your house is flooded, and that table is under 2 feet of water, it’s ruined according to insurance standards.
Side note: Flood water is “Category 3” – assumed to be contaminated by biohazards from the ground. All water coming into a house during a storm, whether seeping surface water (flooding) or blown into higher areas (not flooding, even if it accumulates in the building in a pool of water), is considered to be contaminated Category 3 water. Porous materials are considered contaminated and need to be replaced, as a rule. That’s why people throw out dressers and grand pianos and seemingly good furniture on the curb after a hurricane!
The depreciation of this table is determined from the table itself: $800 (the difference between what you paid and what you could resell it for today.) However, the Actual Cash Value of that claim would be current value plus setup fees: $800 + $300 = $1100.
For Replacement Cost Value, it would be the current new cost plus setup: $3200 + $300 = $3500. There’s a big difference between these payouts, no?
What determines whether the insurance company pays you ACV or RCV is determined by your policy. If there’s confusion, it’s helpful to work with a public adjuster who can help you determine your actual coverage.
Roofing and other construction materials’ values are determined a little differently. Shingles, for example, typically last 25 or 30 years depending on the type. The roofing material is usually depreciated based on that life. A roof never goes to zero value thanks to usefulness and labor costs – it’s always got some useful value above zero. To account for this, the ethical practice is not to depreciate materials below 50%. Even if a 25 year roof is 50 years old, it’s not worth zero. Plus, the labor to reinstall a roof is one-third to half of the cost of the roof (materials are only a third, roughly).
When determining depreciation, insurance companies and adjusters often use estimating software that has the lifespan of materials in its price list. So If you tell it something is 30 years old, it will calculate depreciation.
On an ACV policy, all depreciation is non-recoverable, unfortunately. On an RCV policy, all depreciation on items is recoverable depreciation. (That’s what you want! Remember, the wording of the policy describes how a claim will pay out in the event of a loss- so be sure to talk to your public adjuster about these details.)
Keep in mind, policies still always have a deductible. There is usually a flat rate, but not always. Sometimes, certain coverages have a lower deductible than others- such as a car, where maybe the deductible is $1000 for collision but only $250 for glass replacement.
In addition to or instead of the flat deductible, there might be an endorsement for named storm or tornado coverage. Those often will have a different deductible that applies, often a percentage of total coverage. If you have $250,000 Dwelling coverage for example, and a 2% named storm deductible, your deductible for a hurricane is $5,000. This is usually the only deductible paid.
The deductible is supposed to be an out of pocket cost to the homeowner or business, and it is illegal in most cases to get around this. While you can’t get around paying your deductible, this is generally the only money you’ll need out of your own pocket for insurance work, if you have an RCV policy and don’t ask for upgrades. And many contractors can finance your deductible (not waive it, though).
The insurance company pays a claim in three steps.
- Initial Payment
- First, they create an estimate – the total is the RCV of the claim.
- They apply depreciation to each item where applicable, and subtract that depreciation from the RCV. This is the ACV of the claim.
- Then they subtract the deductible from the ACV. This is the amount of the first check.
- When something was missed (such as in the case of a contractor’s cost of repair), the insurance company cuts a check for the additional supplemented amount.
- There can be multiple supplements and they may happen at any stage in the process.
- Many supplements need to be approved before the work is done. Sometimes the carrier will want to re-inspect or see proof that the additional work or materials are required.
- Recoverable Depreciation
- Upon completion of the work, the carrier releases a check for the recoverable depreciation calculated in 1.2 above.
- This is only on an RCV policy, and it’s to help ensure the work gets done.
- If certain items are not done (e.g. there’s a roof and siding damage, and only the roof is completed, only the depreciation on the roof would be paid).
- The recoverable depreciation is only paid up to the actual cost of the work done. If Jim Bob Roofing does everything for the amount of the ACV check, the carrier will not pay any of the recoverable depreciation.
This is a simple way to illustrate this process of claiming your insurance funds including a recoverable depreciation clause.
If you’ve experienced a loss or property damage, or are dealing with the aftermath of a natural disaster, and you know you have replacement cost coverage and a recoverable depreciation clause in your insurance contract, then these are some important steps to take towards making an insurance claim and getting your well-deserved payout.
Stay in touch with your public adjuster, who will really be your saving grace through this sometimes stressful and confusing process! Filing a recoverable depreciation claim can feel overwhelming, but you aren’t alone, and it isn’t too hard to do it if you have the right help.
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