What is recoverable depreciation in home insurance?

When you receive a home insurance claim payment, the insurer may withhold recoverable depreciation until you replace the damaged or stolen belongings in your claim.

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Pat HowardManaging Editor & Licensed Home Insurance ExpertPat Howard is a managing editor and licensed home insurance expert at Policygenius, where he specializes in homeowners insurance. His work and expertise has been featured in MarketWatch, Real Simple, Fox Business, VentureBeat, This Old House, Investopedia, Fatherly, Lifehacker, Better Homes & Garden, Property Casualty 360, and elsewhere.

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Jennifer GimbelJennifer GimbelSenior Managing Editor & Home Insurance ExpertJennifer Gimbel is a senior managing editor and home insurance expert at Policygenius, where she oversees our homeowners insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

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At long last, you receive a claim check from your home insurance company — only it’s thousands of dollars less than what you were promised. This may lead you to believe that your insurance company shorted you to avoid paying the full amount. But the more likely explanation is that your insurer deducted recoverable depreciation from your first claim check. 

This is common in the home insurance loss settlement process, as insurers typically send out claim checks in two installments: one for an amount equal to the actual cash value of the damaged or stolen property in your claim, and one for an amount equal to the recoverable depreciation of the property. Insurers split up the payments this way to deter insurance fraud and to prevent overpayment. 

In this guide, we’ll explain what exactly recoverable depreciation is and how to ensure that you’re getting all of the claim money you’re owed.

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What is recoverable depreciation?

Depreciation is the difference between your property’s actual cash value (ACV) — or how much the property is worth today based on its age and condition — and its replacement cost value (RCV), or what it would cost to replace it with something new at today’s prices. An item's replacement cost is typically more than its actual cash value.

When you file a replacement cost home insurance claim, the insurance company usually withholds a portion of the total replacement cost payout from your first check. The first check represents the actual cash value of the property you’re repairing or replacing, while the withheld amount is the recoverable depreciation of the damaged property. 

Once you use up all of the funds from the actual cash value payment, you can then recover the depreciation amount from your insurer should you have additional property to fix or replace. 

Learn more >> Actual cash value vs. replacement cost homeowners insurance

What does recoverable depreciation mean?

Recoverable depreciation is the difference between an item’s replacement cost value and its actual cash value. When paying out a replacement cost home insurance claim, the insurance company will typically pay the actual cash value of the item followed by recoverable depreciation once everything has been repaired or replaced.

Is there a time limit for recoverable depreciation?

The amount of time you have to recover depreciation will vary depending on your state’s specific insurance regulations. But in most cases, you have up to six months after the date of the loss to request recoverable depreciation.

Does the contractor get the recoverable depreciation?

For claims under the dwelling coverage portion of a home insurance policy, many insurers will pay the contractor or repairs company directly rather than the policyholder who filed the claim.

What is non-recoverable depreciation?

If your insurance claim payments are made on a “non-recoverable depreciation” basis, that means that your property is insured at its actual cash value. In other words, you won’t be able to recover depreciation from your insurance company after you repair or replace your property.

Conversely, if your claim payments are made on a recoverable depreciation basis, that means your property is insured at its replacement cost and you should be able to recover the full value of replacing it (minus your deductible) when you file a claim. 

By default, a standard home insurance policy comes with replacement cost dwelling coverage and actual cash value personal property coverage. However, most insurers will give you the option to upgrade to replacement cost personal property coverage for a small additional premium. 

To see how claim reimbursements are calculated for your home and personal property, check the “loss settlements” section on your homeowners insurance policy.

Learn more >> What does home insurance cover? 

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How recoverable depreciation is calculated on home insurance claims

Every insurance company has its own way of estimating property replacement cost, the actual cash value of the property at the time of the loss, and the depreciation gap between those two amounts. When calculating how much an item has depreciated, for example, some insurers may put more weight on how obsolete it is compared to newer versions, while others may put more weight on the physical condition of the damaged or stolen item.

But likely the most heavily weighted factor in any company’s calculation of recoverable depreciation is the lifespan, or useful life, of the insured property or asset. 

Recoverable depreciation claim example

Say you purchased a $2,000 laptop with a lifespan of five years, but it was stolen from your apartment after only three years. To determine the laptop’s ACV, the insurance company would first need to figure out its annual depreciation amount, which is the replacement cost of the laptop divided by its expected lifespan.

Here’s how the insurance company may calculate the laptop’s depreciation and actual cash value on your claim:

  • Annual depreciation = $2,000 (replacement cost) / 5 years (lifespan) = $400

  • Total depreciation = $400 (annual depreciation) x 3 years (age at time of loss) = $1,200

  • Actual cash value = $2,000 (replacement cost) - $1,200 (total depreciation) = $800

You also need to factor in your home insurance deductible, which is the amount you’re responsible for paying out of pocket on each claim. Say the insurance policy covering the laptop has a $500 deductible. 

Here’s how much your insurance company would pay out for an actual cash value versus a replacement cost value claim:

  • Net actual cash value claim = $800 (ACV) - $500 (deductible) = $300

  • Net replacement cost claim = $300 (net ACV) + $1,200 (recoverable depreciation) = $1,500

As shown above, you don’t get as much back from your insurance company if your property is only covered for its actual cash value, while a policy with replacement cost payouts (ACV plus recoverable depreciation) provides significantly higher claim payments.

Who keeps the recoverable depreciation check & how do I get it back?

If you received your home insurance claim check in the mail only to notice a significant amount of money missing from it, you’re likely wondering where it is and how you can get it back. Here’s everything you need to know about the recoverable depreciation disbursal process.

Your insurer keeps the recoverable depreciation check temporarily

When you file a claim, the insurance company typically pays out the actual cash value of your property first — even when the property is covered at its replacement cost. The insurer generally withholds the recoverable depreciation check until you repair or replace the property cited in your claim. At this stage, it’s important to keep all of your receipts to show your insurance company later on, as they may require proof that the claim money was spent correctly.

You can request recoverable depreciation once you’ve spent the ACV check

After you replace everything or pay the contractor or repairs company for their services, you can then request the recoverable depreciation funds from your insurer. This amount may be sent to you, your mortgage lender, or the repairs company. Exactly who gets the home insurance claim money could vary depending on the type and size of the claim as well as the loss settlement language on the policy. 

Genius tip: If you purchased sale items with the first check, your recoverable depreciation payout may be lower

One important thing to keep in mind is if the items you replace end up costing less to replace than what you initially paid for them, the insurance company may not pay you the difference when you collect your recoverable depreciation check. 

Going back to the laptop example in the last section: Say you purchase a new but comparable laptop for $1,400 — around $600 cheaper than the original $2,000 you paid for the now stolen laptop. 

Once you provide your insurance company with the receipt, they may only send you enough recoverable depreciation funds to cover the $1,400 purchase ($900 after the deductible), which is around $600 less than what they’d send you ($1,500) if your payout was based on the original $2,000 purchase.

What is “less recoverable depreciation”?

When paying out a replacement cost home insurance claim, insurers will often state that the first check is for the agreed upon settlement amount less recoverable depreciation. In other words, the first payment is for the actual cash value, or the depreciated value, of the items in question. “Recoverable” means you may be able to receive this amount from your insurer later on.

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We don't sell your information to third parties.

Author

Pat Howard is a managing editor and licensed home insurance expert at Policygenius, where he specializes in homeowners insurance. His work and expertise has been featured in MarketWatch, Real Simple, Fox Business, VentureBeat, This Old House, Investopedia, Fatherly, Lifehacker, Better Homes & Garden, Property Casualty 360, and elsewhere.

Editor

Jennifer Gimbel is a senior managing editor and home insurance expert at Policygenius, where she oversees our homeowners insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

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