Depreciation and Insurance Claims

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.

Lifetime - how long a thing lasts . . .

Salvage value - what it's worth, now that it is useless . . .

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.

Remember:

• First: A calculation of depreciation depends on lifetime and how that depreciation is calculated - most claims use a straight-line method. Choosing the lifetime incorrectly, or not accounting properly for quality or condition, can impact your damage claim. This is why it is important to carefully review your insurer's adjustment, ask questions of your adjuster, and in some cases to seek the advice of a competent insurance loss professional or counsel.
• Second: Calculating depreciation is one way to determine the current value of something. In uncommon situations, the current value of some things would not be reflected by a common depreciation calculation. Examples are: antiques, high quality furniture in comparison to bargain brands, or items with extremely long useful lifetimes (cemetery headstones or high quality flatware).
• Third: Usually, insurers make an allowance for these issues by limiting the amount of depreciation they calculate. For example: an insurer and adjuster may choose to limit depreciation -- for example, to 50 percent -- even though their policy does not explicitly tell them to. Different insurers and adjusters may have different rules and practices.

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.

• Depreciation is a reduction in value from the original or replacement cost - a reduction based on age, condition, and expected lifetime
• Generally, the policy reduces the loss by that depreciation, and the insured is paid a total less depreciation
• If you have replacement cost coverage, the insurer may only pay the reduced, depreciated value, until you actually replace the item.

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: