Your home insurance gives you financial protection if your home or belongings are damaged or destroyed, but there are different kinds of protection available. If you have a replacement cost policy, you’re covered for the actual replacement cost of your home or personal property. However, you may not get the full replacement cost in your first claim check. If you get a lower amount, it’s likely that recoverable depreciation has been taken out of your payment. But what is recoverable depreciation, and how can you get that money into your pocket? Bankrate explains the process below.


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What is recoverable depreciation?

In insurance, depreciation refers to the loss of value in an item over time. Generally, you will hear the term recoverable depreciation if you have a home insurance policy with replacement cost value (RCV) coverage. This is in contrast to an actual cash value (ACV) policy, by which you are only covered for the depreciated value of your home or belongings. With an ACV policy, depreciation is not recoverable; you will only get the depreciated value of your home or property after a claim. But if you have RCV coverage, you may be able to recoup the value by which any destroyed or damaged items have depreciated in the years since you purchased them. This amount is called recoverable depreciation.

In most cases, insurance depreciation is based on:

  • The age of the item
  • How well it has held up over the years
  • How obsolete it is based on newer versions

Consider a TV as an example. Imagine you purchased the TV five years ago for $500. In that time, the TV has depreciated — lost value — and is now worth maybe $100 due to its age and use. If you have an ACV policy, you would only get up to a $100 payout — the depreciated value of the TV — after it is damaged and destroyed (not factoring in that you would also have to pay your home insurance deductible). If you have an RCV policy, on the other hand, you may be able to get the full replacement value of the TV so that you can buy a new one for yourself. You may still only get $100 as an initial claims check, but you could recover the additional $400 — the gap between the depreciated value and the replacement cost value — by purchasing a new TV and showing your insurer proof. The $400 is the recoverable depreciation.

Non-recoverable depreciation

If you have an ACV policy, you will most likely not receive enough money in your insurance claim settlement to purchase items of the same quality as those you lost. You will either need to purchase cheaper items or use your own money on top of the settlement to purchase items of similar quality.

It may be helpful to read your policy documents carefully even if you have an RCV policy. There can be many variations in what home insurance covers and it’s important to know what your policy does and doesn’t include. For example, you might have RCV on your personal property but ACV on your roof, especially if your roof is older. If you’re unsure what kind of coverage you have, talk to your agent.

How recoverable depreciation is calculated

Because depreciation largely hinges on an item’s value and value can be subjective, you might be wondering how insurance providers arrive at the total recoverable depreciation amount for any given claim. In most cases, they turn to an item’s useful life.

Say you buy a refrigerator in 2016 for $1,500, and that the fridge’s useful life is estimated to be 14 years. By dividing its lifespan (14 years) by the total cost ($1,500), home insurance companies can arrive at a data-based insurance recoverable depreciation estimate. In this example, for each year of the fridge’s life, it would depreciate by roughly $107. This calculation may vary by provider and circumstances, as well as your specific policy details.

How recoverable depreciation affects a home insurance claim

With both ACV and RCV policies, the first part of the home insurance claim process is the same: a covered peril causes the loss of or damage to your personal belongings or the property, you call your agent or file your claim online, and a claims adjuster assesses the depreciated value of the item or property.

If you have an ACV policy, once the adjuster’s assessment has been accepted by the company, you will receive a check for that depreciated value. If you have valuable personal property that depreciates rapidly, such as many computers, for example, you may face out-of-pocket costs to replace them after a loss.

If you have RCV insurance, however, recoverable depreciation will likely be calculated for nearly every item you own after a covered loss — as it was with ACV policy items. But then there’s a further step. Pay special attention here, because you’ll need to supply documents to your insurer to access your recoverable depreciation.

As a quick recap, here are the steps you can expect with an RCV policy:

  1. The covered loss occurs: Following a house fire, water damage or burglary, for example, the first step (typically after emergency services have become involved) is to call your insurance provider and start your claim process.
  2. Your insurance provider calculates ACV: A claims adjuster will usually visit the premises and assess damages and the ACV of the compromised belongings, even if you have an RCV policy. You will then receive a claims check for the ACV of any destroyed or stolen items, minus the amount of your deductible.
  3. You replace the items or repair the damage: Using the ACV check you received, you’ll purchase new items of similar make and quality or repair the damage to your home, even if your check doesn’t cover the full cost. To recover the depreciation, you will then usually need to prove you have replaced the item or fixed the damage to your house within a certain timeframe and with specific documents (e.g., receipts). Confirm with your agent what is required under your policy.
  4. Your insurance provider pays out the recoverable depreciation: Once you have proven that you replaced the destroyed or stolen items (or repaired the damage to your home) with new items and show your insurance provider how much you paid for them, you are then typically issued a second check for the recoverable depreciation amount.

How to claim depreciation

Most insurance providers have very specific steps about how to claim the recoverable depreciation check. If a deadline applies, be sure to submit any required documentation in time.

One important thing to note here: if you find a great deal on an item on sale, you should not expect to pocket the savings. Circling back to our refrigerator example, say you find a comparable replacement model on sale for $1,200 rather than the original price of $1,500.

When you submit the receipt to your insurer, they will likely pay you enough to cover the $1,200 purchase amount, not the full $1,500 original value of the fridge. Remember too that you’ll have to pay your deductible if you file a claim for home or personal property damage.

Expanding on the fridge example further, here’s how the numbers could play out:

Incident Amount
Fridge value at the time of purchase in 2016 (i.e., its replacement cost) $1,500
Useful life 14 years
Depreciation per year $107 ($1,500 ÷ 14)
The fridge gets destroyed in a covered loss in 2021
Total recoverable depreciation $535 ($107 x five years of use)
Actual cash value at the time of the covered loss $965 ($1,500 – $535)
Policy deductible $500
First claim check amount $465 ($965 ACV – $500 deductible)
New fridge purchase cost $1,500
Second claim check (recoverable depreciation) amount $535
Total claim amount $1,000 (fridge total, minus $500 deductible)

Why do insurance companies use recoverable depreciation in claims?

Why do insurers make you go through all of these extra steps rather than cutting you a single check minus your deductible? It would seem at first that this would make it easier for both the insurer and the policyholder. There are a couple of reasons why insurers use recoverable depreciation, however:

  • It helps prevent insurance fraud. For example, you would not be able to pocket the $1,000 check (which would be the full amount you’d get for a $1,500 fridge minus the $500 deductible) for the damaged or destroyed fridge, while at the same time getting a free one from your in-laws who happened to be getting rid of theirs.
  • It helps insurers avoid paying more than is necessary. If you found your new replacement fridge for a lesser amount, your second claim check will only bring your total claim amount up to the cost of that amount (minus your deductible). Balancing costs like this helps insurers keep their claims reserves — the amount of money set aside to pay losses — at a healthy level.
  • It ensures you do actually replace the items that were destroyed. For example, if you decided you no longer need a fridge, you would just receive the value of the depreciated item and not the second amount because you did not actually replace it.

Ultimately, recoverable depreciation requires some extra steps, but can be worth it for items that may lose value quickly over time. To get your second claim check, you will likely need to do some diligent recordkeeping to prove to your insurance company the amount you paid for your replacement items. Review your policy and your insurance provider’s processes for recoverable depreciation so you can be ready after a covered loss.