Most common things wear out over time -- that amount of time is that thing's lifetime.
For example: insurers and adjusters might use a lifetime of 100 years for the brick on the side of a house, 4 years for the paint on your interior walls, 50 years for the drywall under the paint. For simplicity, they may use an average or common value for classes of things: 9 years for household furniture, 5 years for kitchen utensils.
These numbers, the value for a lifetime, are based on experience for common items; remember that high quality items generally last longer than common items. Also, keep in mind that different insurers and adjusters may arrive at different values for estimating lifetime, depreciation and actual cash value , as well as estimates for replacement cost. An insured may benefit from the advice of a competent insurance professional, particularly in large commercial or residential losses.
Estimates for lifetime are used to evaluate depreciation. In one form of depreciation, the value of thing goes down equally over each year of its life. For example, if paint on the wall last 4 years before it is worthless, then it loses one-fourth of its value each year, or 25% of its value. If brick is estimated to last 50 years, then it loses 1/50th of its value each year, or two-percent per year. This method of evaluating depreciation and lifetime is known as "straight line depreciation", an equal amount each year.
On the other hand, if paint is estimated to last 7 years, then it loses 1/7th of its value each year.
Adjusters and insurance companies typically use tables which describe the lifetime for categories of things. For example, an insurance company may estimate that household furniture lasts 10 years before it wears out and is replaced. They also, typically, estimate depreciation based on the straight line method, described above.
For the furniture example, this would mean that the adjuster will estimate depreciation at 1/10 of furniture replacement cost, for each year that you owned the furniture, or in service.
The estimate for depreciation is what more directly affects your claim. For example, if a fire damages 5 year old furniture, furniture has a 10 year lifetime, and you are paid actual cash value for losses on your policy, you would be paid 5/10 or 50% of the current replacement cost. On the other hand, if the furniture lifttime lasts 20 years, and is 5 years old when damaged, it is only depreciated 25%, and you are paid 75% of the replacement cost.
The adjuster's estimate, presented with a check for an insurance claim, should document, for each line item, the estimated replacement cost, the depreciation and the actual cash value. An insured may benefit from the advice of a competent insurance professional, particularly in large commercial or residential losses. The estimating software might not print out the underlying lifetime used in the adjuster's calculation.
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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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