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No depreciation in home's insurance? Look again

Paying attention to some fine print after filing an insurance claim could mean hundreds or even thousands more dollars in your pocket -- if you bother to file the required paperwork.

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That's because many insurance companies are now expanding the use of a clause found in most homeowners policies and are holding back a portion of the insurance proceeds you might receive in the name of "recoverable depreciation."

Depreciation is the difference between the cost required to actually repair or replace something and its value before it was destroyed. While that amount may be withheld from you initially, it becomes "recoverable" once you file the required paperwork and ask that it be refunded to you.

In the past, industry observers say, whether an insurer invoked this policy clause often depended on what type of policy you held.

Not anymore.

"It used to be that if you had a replacement cost policy and your home's 20-year roof was blown off in a storm, the insurance company would just write a check for the whole cost of a new roof minus the deductible. That is, until this year," says J.D. Howard, founder and executive director of the Arizona-based Insurance Consumer Advocate Network. "Since claims have begun to go up and get more expensive, insurers are now depreciating policies more and more."

What's more, in the past when insurers did decide to depreciate a replacement-cost claim, they often applied the depreciation to either the structural damage portion of the claim or the personal property portion -- rarely both.

But in the wake of increasingly costly natural disasters -- from the Gulf Coast hurricanes to flooding in the Northeast and wildfires in the Southwest -- many insurance companies are now applying depreciation to both portions of the claim and essentially adding an extra step on the claims process.

Policy particulars
The two most common policy types are replacement cost and actual cash value. Recoverable depreciation is only an issue if you have a replacement-cost policy -- one in which the insurance company agrees to pay whatever it costs to replace what you lose, in the event of a tragedy.

If you lose a 24-inch television in a fire, the company agrees to pay to replace it with a similar 24-inch television -- less your deductible.

With an actual cash-value policy, the insurance company agrees to pay whatever it believes your property was worth at the time of the loss. In other words, your depreciated value -- less your deductible.

So, let's assume that 24-inch television was five years old and had an expected life span of 10 years. With an actual cash-value policy, the insurance company would pay you 50 percent of what it would cost to replace it. With a replacement-cost policy you'd receive the entire amount for a brand new, similar model without regard to depreciation or what it's actually worth on the date of loss.

Next: "Why the insurers do it"
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