When you buy homeowners insurance, you have options which affect how much financial protection you receive, which affects what you will pay. For a more affordable policy, you may choose an actual cash value (ACV) policy, which factors depreciation into your claim payouts. But if you want to get a reimbursement to help replace your stuff with new items at today’s prices, you may prefer a replacement cost value (RCV) policy.
While RCV will bring up the cost of your homeowners insurance, it can go a long way toward helping you maintain your quality of life after a covered loss. However, because many insurance companies break RCV claims payouts into two pieces: ACV and recoverable depreciation, your reimbursement may not happen all at once up front.
What is recoverable depreciation?
Generally, you will hear the term recoverable depreciation if you have a home insurance policy with RCV coverage. With an ACV policy, depreciation is not recoverable. 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.
In most cases, 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. You would not be able to sell the TV that you bought in 2015 for the purchase price you paid. Instead, its years of use and the multiple newer TV models released over the years drive down its price or depreciates the value over time. If it developed a crack in the corner, for example, the value drops even further. Say the replacement cost for the TV you purchased in 2015 is $600, your insurance provider may decide that its actual cost value is only worth $250 today after subtracting depreciation.
If you have an ACV policy, you would then expect a $250 claim check (minus your deductible) for that TV, if it gets destroyed by a peril covered by your policy or stolen (since theft is covered by home insurance policies).
If you have an RCV policy, on the other hand, you would still likely get an initial claim payout of $250 (minus your deductible). However, the total recoverable depreciation amount of $350 is the amount you may receive after following the necessary steps. Usually, this involves buying your new TV and submitting a receipt showing your insurer that you paid $600 as the replacement cost for a comparable TV. This would then result in your insurer releasing the depreciation, meaning you would get a second claim check in the $350 amount.
With an ACV policy, the difference is primarily that the depreciated value over time is non-recoverable. That means you are left to either settle for a lower-quality item fully covered by your claim (with deductible subtracted), or pay the difference for a comparable replacement model out of your own pocket.
This said, even homeowners with RCV policies could face non-recoverable depreciation. Some policies apply recoverable depreciation roof coverage only when the roof gets damaged in a fire, while that depreciation is non-recoverable if the roof was destroyed in a windstorm, for example. Read your policy details or speak with an agent to learn where non-recoverable depreciation might affect you.
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 with a useful life of 14 years for $1,500. By dividing its lifespan (14) by that total (1,500), companies can arrive at a data-based insurance recoverable depreciation estimate. 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
If you have an ACV policy, your belongings’ depreciation is generally non-recoverable. If you have valuable personal property that could rapidly depreciate in value over time, you could be facing higher out-of-pocket costs to replace them in the event of a loss.
If you have RCV insurance, recoverable depreciation will likely be calculated for nearly every item you own after a covered loss. Pay special attention here, as recovering that amount usually requires you to submit receipts or invoices to your insurance provider by a specific time.
As a quick recap, here are the steps you can expect with an RCV policy:
- 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.
- Your insurance provider calculates ACV: A claims adjuster will usually visit the premises and assess damages and the ACV of the compromised belongings. You will then receive a claims check for the ACV of any destroyed or stolen items, minus the amount of your deductible.
- You replace the items: Using the ACV check you received, purchasing new items of similar make and quality is your next step — perhaps floating the difference in ACV and RCV amounts for the time being. To recover the depreciation, you will then usually need to prove you have replaced the item within a certain timeframe and with specific documents (e.g., receipts). Confirm with your agent what is required under your policy.
- Your insurance provider pays out the recoverable depreciation: Once you have proved that you replaced the destroyed or stolen items 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 second 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 pay you enough to cover the $1,200 purchase amount, not the full $1,500 original value of the fridge.
Expanding on the fridge example further, here’s how the numbers could play out:
|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|
|Actual cash value at the time of the covered loss||$965 ($1,500 – $535)|
|First claim check amount||$465 ($965 – deductible)|
|New fridge purchase cost||$1,500|
|Second claim check (recoverable depreciation) amount||$535|
|Total claim amount||$1,000 (fridge total, minus deductible)|
Why do insurers make you go through all of these extra steps rather than cutting you a single check minus your deductible? For starters, this helps them prevent or avoid insurance fraud. For example, you would not be able to pocket a $1,500 check for a fridge when your in-laws were getting rid of one and gave you a replacement fridge for free.
Secondly, it prevents insurers from overpaying. 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).
Third, it also 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.