Recoverable depreciation: What you need to know

Homeowners insurance can protect your home from fires, crimes and other unexpected events. If you have a policy or are in the process of shopping for one, it’s important to understand the meaning of recoverable depreciation. Put simply, it’s the difference between an item’s actual cash value and what it would cost to replace it.

Here’s what you need to know about recoverable depreciation.

• What does recoverable depreciation mean?
• What is non-recoverable depreciation?
• Calculating recoverable depreciation
• How to file a claim for recoverable depreciation
• How do insurers pay recoverable depreciation?
• Do you or your lender receive the payment?
• How long do you have to claim recoverable depreciation?

What does recoverable depreciation mean?

Recoverable depreciation is the difference between an item’s replacement cost and its actual cash value (ACV). Replacement cost is the amount it would cost to repair or replace your item with a new one of similar value. Actual cash value is how much an item is worth today, factoring in depreciation.

Let’s say you bought a $5,000 couch three years ago. It has a useful life of five years, resulting in 20% depreciation each year. If the couch sustains damage in a hurricane, and you have an actual cash value policy, you don’t get $5,000. That’s because the insurance carrier considers that it depreciated 60%, or $3,000, over the three-year period you’ve owned it.

Today, the actual cash value of the couch would be $2,000 ($5,000 replacement cost minus $3,000 in depreciation). With ACV homeowners insurance, you could file a claim and get $2,000 (minus your deductible).

But if you have a replacement cost value (RCV) policy, the $3,000 difference between the replacement cost ($5,000) and actual cash value ($2,000) is likely recoverable. You’ll typically get the actual cash value in a check first. After purchasing a new couch, you can send your insurer your receipt as proof of its replacement and cost. Your insurance carrier will then send another check for the recoverable depreciation, which would be $3,000 in this situation. It’s essential that you keep and submit your receipt to prove you replaced the item.

What is non-recoverable depreciation?

Non-recoverable depreciation refers to depreciation that doesn’t qualify for reimbursement. This is typically because you have an actual cash value policy, though some RCV policies have exceptions for things like antique construction materials. So, if you own an old home, some depreciation may not be recoverable. These policies may also state that if the damage is the result of an excluded peril (an event that your insurance policy doesn’t cover), the depreciation may not be recoverable.

It’s a good idea to refer to your insurance policy and consult an insurance agent to understand whether non-recoverable depreciation affects you.

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Calculating recoverable depreciation

To calculate recoverable depreciation, first consider the useful life of the item. Then, divide the replacement cost by the number of years in the item’s lifespan. This way, you’ll know how much to deduct for depreciation each year.

Let’s go back to the example of the $5,000 couch with a useful life of five years. Here’s how the recoverable depreciation on this item would look over time:

How to file a claim for recoverable depreciation

To submit a home insurance claim for recoverable depreciation, follow these steps:

1. File your claim. Fill out and submit any claim forms your insurer requests. Once you do, a claims adjuster will likely inspect the damage. Then, if the insurance carrier approves your claim, you’ll get your first claim check for the actual cash value of the damaged item.
2. Save proof of purchases and repairs. Your insurer will ask for proof that you replaced your item or made repairs to it. Save any receipts or invoices to receive a second check for recoverable depreciation.
3. Submit a reimbursement request. Go through the reimbursement request process as outlined by your insurance provider. After you complete it, you’ll get a check for the amount of your recoverable depreciation.

How do insurers pay recoverable depreciation?

If you have replacement cost value coverage, you’ll likely receive two checks for a claim. First, your insurer will send a check for the actual cash value of the item. After you submit proof that you either replaced or repaired the item, your insurance carrier will send a second check for the recoverable depreciation.

Do you or your lender receive the payment?

If you have a mortgage, your lender will likely receive the checks from your insurer. If you own your home and don’t have a mortgage lender, you’ll receive the payments directly.

How long do you have to claim recoverable depreciation?

The amount of time you have to claim recoverable depreciation depends on where you live, your insurance carrier and the policy you have. But often this will be within six months or 180 days of the loss. Check your insurance policy or contact your insurance agent to find out the timeline that applies to you.