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When you purchase a home, condo or renter’s insurance policy, you’ll have the option to select “replacement cost coverage,” which pays to replace damaged or stolen property with new, like-for-like items. Part of this process involves what is called “recoverable depreciation.”
Recoverable depreciation refers to the gap between the depreciated value of an item and how much it costs to replace a damaged or stolen item with a new, similar item. For example, if the depreciated value of a stolen TV is $900, but the cost of a new, similar model is $2,000, the recoverable depreciation is $1,100.
How is recoverable depreciation calculated?
When you make an insurance claim under ‘replacement cost coverage’, your insurance company will first calculate the actual cash value (ACV) of the damaged/damaged item.
Actual cash compensation
If your item is damaged due to a problem covered by your policy (such as fire) or stolen, your insurance company will assign an insurance adjuster to determine your item’s ACV. This takes into account depreciation, including the age, life expectancy and wear and tear of the item.
For example, if you bought a laptop for $2,000 three years ago and it gets stolen, your homeowners insurance adjuster might determine that the general life expectancy of a laptop is five years. Since the laptop was three years old (60% of expected life), it was depreciated by $1,200 (60% of $2,000 = $1,200). An ACV payment would be $800 ($2,000 – $1,200 depreciated value = $800 ACV).
Your insurance deductible will also apply to a claim. So in this scenario, let’s say you have a $500 discount. Your insurance check for the ACV of your stolen laptop will be $300 ($800 ACV – $500 insurance deductible = $300).
Recoverable Depreciation Insurance Payment
If your homeowners insurance policy does not have replacement cost coverage, you will only receive an insurance check for the ACV (minus your deductible).
If your policy has replacement cost cover, your insurer will first issue an initial payment for the item’s ACV so that you can begin repairing or replacing your item. A second payment will be issued for recoverable depreciation.
After you receive an ACV insurance payment and have your item repaired or replaced, you submit your receipt to the insurance company for the new item. You then receive a recoverable depreciation insurance payment.
If you do not repair or replace an item, you will not receive a second check for recoverable depreciation. In this case, you will only receive a check for the item’s ACV.
For example, let’s say you had a fire that destroyed a chair, but you decided not to buy a new chair. Your insurance payout will only be the actual cash value of the original chair.
How to make a recoverable depreciation claim
If you need to make a recoverable depreciation claim, here’s what to do:
- Notify your insurance company as soon as possible of the damage.
- Gather all relevant documents such as police reports (for claims of theft), receipts and photographs.
- Submit your claim form, along with any supporting documents, to the insurance company.
- Wait for the insurance company to process your claim.
- Get your first payment for the actual cash value of the item.
- Repair or replace your item.
- Submit the receipt to the insurer.
- Receive your second payment for recoverable depreciation.
It’s okay to negotiate the value of your recoverable depreciation check if you disagree with your insurance company’s assessment. You can also request a breakdown of line item prices instead of a lump sum if you want to see how they’ve rated each item.
Trevor Chapman, a spokesman for Farmers Insurance, says Farmers sees many recoverable depreciation claims for expensive items such as appliances, home furnishings and televisions.
Who receives a recoverable depreciation insurance check?
The recoverable depreciation payment may be issued to you, the rights holder or the repair company, depending on the nature of the claim.
For example, if your home is damaged, your mortgage company may be listed on the insurance check because they have a legal interest in your home. But if you are replacing an appliance or a piece of furniture, the payment will only be issued to you.
What factors affect the recoverable depreciation payment?
The actual cost of the replacement item is less than the value of your original item
Let’s say you paid $1,500 for a TV that was damaged, but the replacement TV you bought only cost $1,000. In this case, the recoverable depreciation payment will be calculated based on the $1,000 TV. You won’t pocket the difference.
You have decided not to replace or repair an item
If you choose not to repair or replace the item, you will not receive a refundable depreciation check. You will only receive a check for the actual cash value of the item.
You have submitted a claim for a non-depreciable item
If you submitted a claim for an item that has no value—such as some jewelry—you will not receive a second check.
You missed the claim deadline
Some states give you a set period of time to file a claim for recoverable depreciation. This period of time can be six months or a year, depending on where you live. For example, in Florida, you must file a claim for recoverable depreciation within six months of paying the ACV or a final court order declaring your right to replacement costs (whichever is later).
What is unrecoverable depreciation?
Non-recoverable depreciation refers to any items that you cannot claim under replacement cost cover. So if you have a home insurance policy that only pays the actual cash value, for example, all of your claims will count as “unrecoverable depreciation.”
Do I need recoverable depreciation insurance?
Everyone’s financial situation is different, but think about it this way: If your personal belongings were damaged, would you have enough money to easily cover the full replacement cost (minus the ACV insurance check you would receive)?
If not, replacement cost coverage helps you fill the gap. Replacement cost coverage is more expensive, but is generally the best option.
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