What Is Recoverable Depreciation in a Home Insurance Policy?

Reviewed by Ebony HowardReviewed by Ebony Howard

What Is Recoverable Depreciation?

Recoverable depreciation is the difference between actual cash value (ACV) and replacement cost of a possession. A recoverable depreciation clause in a homeowners insurance policy allows the homeowner to claim that difference.

Most ordinary household possessions lose value or depreciate over time. If you buy a couch for $2,000, it might lose 50% of its value over time. If it is destroyed by fire five years later, your insurance reimbursement might be only $1,000 unless your policy has a recoverable depreciation clause. If it does have that clause, you’ll get a total of $2,000, including the $1,000 in ACV plus the $1,000 in recoverable depreciation.

An insurance policy may identify replacement cost as replacement cost value (RCV).

Key Takeaways

• A recoverable depreciation clause in an insurance policy accounts for the deterioration in the value of insured possessions.
• If depreciation is recoverable in the policy, the owner may claim those costs and the cash value of the destroyed or damaged possessions.
• Together, cash value plus recoverable depreciation should equal the cost of replacing the item.
• Knowing whether your policy includes recoverable depreciation or specifies non-recoverable depreciation is important.
• If it is covered, the insurer will pay you two checks: the first for the actual cost value of the destroyed item and the second, after you replace it, for the recoverable depreciation.

Understanding Recoverable Depreciation

When a business invests in a major purchase of new equipment, the expense is recorded over a period of years, reflecting the declining cash value of the equipment over its useful life. The accounting process of reducing the equipment’s value to adjust for its age is called depreciation.

If you take out a mortgage to buy a home, your mortgage lender will require you to take out a homeowners insurance policy, which assigns the house and its contents a dollar value. Most possessions decline in value over time due to normal wear and tear. The amount of value that is lost each year represents depreciation.

The value of the items after accounting for depreciation—or their age—is called the depreciated cash value or actual cash value. If your home is damaged and you file an insurance claim, you might get paid the actual cash value of the claim. In other words, you might get paid less than the cost to replace the damaged items since you got paid based on a depreciated value.

However, if the homeowners policy has a clause allowing for recoverable depreciation, it would allow you to recoup or recover the amount of depreciation.

How to Calculate Recoverable Depreciation

Assume that a homeowner purchases a high-end refrigerator for $3,000. The refrigerator has a useful life of 10 years. The annual depreciation allowed per year is the total cost divided by the expected lifespan. In this case:

Depreciation = $3,000 / 10 = $300 per year

Actual Cash Value Repayment

If the refrigerator is damaged and the homeowner must file an insurance claim, the homeowner will be reimbursed for the actual cash value (ACV) of the damaged or destroyed property.

The ACV is calculated by taking the asset’s replacement cost, which is the cost to replace the asset at its pre-loss condition, and subtracting the depreciation. Assume that the homeowner’s refrigerator is destroyed after four years. The ACV of the refrigerator, in this case, is as follows:

Refrigerator ACV = $3,000 – ($300 x 4) = $1,800

Recoverable Depreciation Payment

If the insurance policy has a recoverable depreciation clause, the homeowner can claim the depreciation of the refrigerator in addition to its ACV. In this case, the recoverable depreciation is $1,200 ($3,000 replacement cost – $1,800 actual cash value).

It is important for a policy owner to confirm whether depreciation is recoverable or non-recoverable. In some cases, depreciation that is initially recoverable may become non-recoverable if certain policy clauses are not met or honored, such as a requirement for repair or replacement by a set deadline.

Remember that your policy may include an out-of-pocket deductible that you must pay, which will subtract from the total amount you receive.

Recoverable Depreciation With a Deductible

Many policies have a deductible that must be taken into account. This is the point at which the difference between having recoverable depreciation or non-recoverable depreciation can make a large difference in a claim.

Important

Homeowners insurance with recoverable depreciation will cost more in monthly premiums. However, if you only get paid the actual cash value, which is discounted for age, your insurance payout might be far less than the replacement cost to repair your home at current prices.

Example of Recoverable Depreciation

Assume that a home furnace costs $5,000 and has a useful life of five years. The insurance policy’s deductible is $1,700. The appliance is destroyed after two years, and a claim is filed. This is the calculation:

• Allowable depreciation = $5,000 / 5 = $1,000 per year
• Appliance ACV = $5,000 – ($1,000 x 2) = $3,000
• Net claim = ACV less deductible = $3,000 – $1,700 = $1,300

Without recoverable depreciation, the total claim is $1,300. With recoverable depreciation, the claim is adjusted upwards to include the depreciation amount:

Net claim with recoverable depreciation = $1,300 + $2,000 = $3,300

The claim with recoverable depreciation is more than two and a half times the amount without recoverable depreciation.

How to Submit a Claim for Recoverable Depreciation

If your policy has a recoverable depreciation clause, your insurance payment will arrive in two checks. The first will cover the actual cash value of the insured item. To claim the recoverable depreciation cost, you must first replace the item and submit the receipts and paperwork to your insurer.

Generally, to recover the cost of depreciation, you must repair or replace the damaged item, submit the invoices and receipts with the claim, and provide copies of the original claim forms.

Every insurance company has its own procedures for such claims, so a chat with a representative will be needed.

Keep in mind that if you replace the original asset with a less expensive one, the insurance company is likely to base the payment amount on the replacement cost of the new item, not the cost of the destroyed item.

If your policy has recoverable depreciation and your marble countertop is destroyed, you must replace it with a marble countertop of equal quality. You can’t put in a cheap replacement and pocket the difference. That’s why you must submit receipts proving the purchase to get the recoverable depreciation reimbursement.

What Does Total Recoverable Depreciation Mean?

Total recoverable depreciation, or replacement cost value, is the actual retail cost of replacing an item.

Actual cost value (ACV) is the price that would have been received if the item had been sold the day before it was damaged or destroyed.

Most household possessions depreciate over time. A dishwasher purchased today for $800 might be worth $400 if sold “as is” in five years.

An insurance policy that covers only actual cost value (ACV) will reimburse you only for the current value of your insured item. If the policy has a recoverable depreciation clause, you’ll get a second check for the difference between the item’s depreciated value and the cost of a replacement.

Who Gets the Recoverable Depreciation Check?

The policyholder will get the recoverable depreciation check. If contractors or retailers are involved, the policyholder is responsible for paying them.

What Is Non-Recoverable Depreciation?

Non-recoverable depreciation is the actual current cost value of an item and reflects the loss in its value as it is used over time. If your homeowners insurance policy covers only non-recoverable depreciation, you will be reimbursed only for the item’s current value, not its replacement cost, which will, in most cases, be higher.

How Do I Get Recoverable Depreciation Back From Insurance?

The first step is to make sure your insurance has a recoverable depreciation clause. If it does not, you’ll be reimbursed only for the actual cash value (ACV) of the items you insured. That ACV will reflect the item’s current value, not the price you paid for it.

If you do have a recoverable depreciation clause, your insurer should send you two separate payments. The first will cover the item’s ACV.

You may then have to purchase a replacement and submit the invoice to your insurer to get a second check for the difference between the ACV and the replacement cost.

In the case of a major project, such as the reconstruction of a house damaged by fire, you may receive the second check after submitting a copy of a contractor’s itemized contract. In that case, you won’t have to wait until the work is completed to submit the claim for recoverable depreciation costs.

Above all, be sure to keep the receipts for all of your insured belongings. The process will go smoothly only if you can clearly identify the destroyed item and the item you purchased to replace it with.

What Is Recoverable Depreciation in Terms of a Roof Replacement?

A roof may be expected to last for 20 years, 30 years, or even 50 years, depending on the material used. That means your insurer will use various formulas to depreciate a roof over time. An asphalt-shingle composition roof may depreciate 5% per year, reflecting its 20-year useful life expectancy. A slate or tile roof might depreciate much more slowly, given its 50-year life expectancy.

What this means to you as an insurance customer is that you would have to pay a greater percentage of the cost out-of-pocket for the short-lived roof if it is destroyed five years after its construction and you don’t have a recoverable depreciation clause.

How Do You Fight Insurance Depreciation?

If you feel that the amount offered to you to resolve an insurance claim is unfair, be prepared to prove it with sound arguments and documentation and submit it to the company.

But first, read the fine print in your insurance contract carefully, preferably before you have any need to file a claim, so that you know as much as possible about the company’s methodology for determining reimbursement.

If you do not receive a satisfactory response, you can complain to your state’s insurance department. Every state has different laws and regulations.

How Do You Negotiate a Diminished Value Claim?

The diminished value claim is peculiar to auto insurance. It compensates a vehicle owner for the decreased worth of a vehicle that has been repaired following an accident.

That is, if offered for resale, the vehicle may be worth less than it would be if it had never been in an accident.

The rules related to diminished value claims vary from state to state. In most states, the driver making the claim must have not been at fault for the accident. In general, the person making the claim must submit documentation proving the diminished value of the vehicle.

The Bottom Line

Recoverable depreciation is the difference or gap between the actual cash value of a covered claim and its replacement cost value. The amount that you get reimbursed for repairing your home might be reduced to adjust for its age, called the depreciated—or actual—cash value. The amount of money it costs to repair your home in current dollars is the replacement cost value. The recoverable depreciation is the amount of the current replacement value in today’s dollars minus the actual cash value depreciated for age.

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