Depreciation is a measure of age and condition.
It may be stated as a value (in dollars), or a percentage, or a number of years. However expressed, "depreciation" is used to determine the difference between its cost, and what it might be worth, now. Commonly, for insurance claims, the calculation determines the difference between current replacement cost and current value.
Why is this important? Because, in the end, an insurance policy may only pay you current value or depreciated value for a damaged thing, as part of a residential or commercial property claim, a claim from an automobile wreck, or from a contents claim after a hurricane, fire or flood.
Most common things wear out over time -- that amount of time is that thing's lifetime. For simplicity, insurers, adjusters and accountants may pick a number of years, an average or common value for classes of things. For example, 50 years for the brick on the side of a house, 4 years for the paint on your walls, 25 years for the sheetrock under the paint, 9 years for household furniture. These numbers, the value for a lifetime, are based on experience for common items, and different insurers and adjuster may use different values. Remember that high quality items generally last longer, and different insurers may use different numbers.
While it may not be useful to you, almost all things tend to have some salvage value. People do buy and sell used brick, or furniture. Some things, of course, have a salvage value of zero, such as paint -- when it's no longer useful, you cover it up or throw it away.
Why might salvage value be important? Most laws and insurance policies allow the insurer pay you for a damaged thing, and choose to keep it. If it does, the insurer might sell it; other times they might offer to sell it back to you, for a fraction of the salvage value.
If you have "replacement cost" insurance, and your insurer pays 100% of that cost right away, then it won't matter.
However, some "replacement cost" policies won't pay full replacement cost until you actually replace the damaged thing. In this case, the insurer first pays the current value, which may be described as "actual cash value", "ACV", or depreciated value; this ACV is based on an estimate of replacement cost. The insurer pays you the actual replacement cost when you present proof of replacement (e.g., your invoices or receipts). Remember: the full payment is based on the actual cost of replacement; not the estimated replacement cost used to calculate actual cash value.
If you don't have a "replacement cost" policy, you are paid the current value, or depreciated value.
Whether or not you have replacement cost coverage in your insurance policy, the adjuster may calculate depreciation so that he may calculate the "actual cash value" stated in the policy.
In this example, the thing was damaged when it was 1 year old, and currently costs 120 dollars to replace (including tax and delivery), and is in average condition. The adjuster might look up the lifetime and annual depreciation percentage from a table provided by the insurer:
|Age at time of loss (Years)||Total Replacement Cost||Expected Lifetime (Years)||Condition (E, Avg, P)||Depreciation Percent||Calculated Depreciation||Total Less Depreciation|
|1 ÷ 4||(25% of 120)||(120-30)|
For more information on how to prepare for an insurance claim, or assistance in the adjustment of insurance claims, please contact John Ruskin at the address or phone number, below.
JohnRuskin (at) ComplianceOfficer (dot) Com
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