Depreciation And Home Insurance: What You Need To Know

When it comes to major home insurance claims, carriers will use depreciation as a means to determine exactly how much money to pay out for each item. So, whether you want to replace your foundation, oven, or entire home, here’s more about what kind of formulas are used to arrive at the amount on the check.

The Concept of Depreciation

Time has a way of causing nearly anything to adjust in value, and this concept can work in either direction. If you bought an Elvis lunchbox in 1957 and kept it in pristine condition, it's going to be worth more in 1992. However, most things will decline in value over time — including the materials for the home and the things inside it. So, even if your home has actually appreciated during the time you owned it, an insurance company may still claim it has depreciated due to the general wear and tear of time.

What Is Actual Cash Value (ACV)?

Every carrier has its own formulas when it comes to calculating how much they owe. But it's not unusual to see the amounts defined by the item's ACV. At the time an object was destroyed, the insurance carrier will subtract the total depreciation from the original cost of the item to arrive at ACV. This means that if you paid $4,000 for a washer/dryer set that was designed to last for 15 years, they might calculate depreciation at about $267 per year ($4000 divided by 15 years). So, the ACV after three years would be about $3,200 to replace the washer/dryer if it was destroyed.

What Is Recoverable Depreciation?

Some insurance policies are built with a recoverable depreciation clause, allowing homeowners to claim the amount of the depreciation. The terms of this can be tricky and may not apply to all items. Homeowners may be expected to comply with certain rules — such as making repairs to their home before certain dates — in order to be eligible for this. However, having the ability to claim depreciation can be a lifesaver if you need to repair or even replace the entire property.

Depreciation can cause homeowners headaches once they're in the midst of a claim. But understanding how values are determined beforehand can give you some leverage. Make sure you understand the terms of the policy, so you know what to expect during the claims process.

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