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When you purchase a home, apartment, or renter’s insurance policy, you will have the option to choose “replacement cost coverage,” which pays to replace damaged or stolen property with new, similar items. Part of this process includes what’s called “recoverable depreciation.”
Recoverable depreciation refers to the gap between an item’s depreciable value and the cost of replacing a damaged or stolen item with a new, similar item. For example, if a stolen TV has a depreciation value of $900, but a new, similar model costs $2,000, the recoverable depreciation is $1,100.
How Is Recoverable Depreciation Calculated?
When you make an insurance claim under “replacement cost coverage”, your insurance company will first calculate the actual cash value (ACV) of the damaged/destroyed product.
Real cash value refund
If your item is damaged or stolen due to a problem covered by your policy (such as a fire), your insurance company will assign an insurance adjuster to determine the ACV of your item. This takes into account depreciation, including the item’s age, life expectancy, and wear and tear.
For example, if you bought a laptop for $2000 three years ago and the laptop was stolen, your homeowners insurance adjuster might determine that the overall lifespan of a laptop is five years. Because the laptop is three years old (60% of its expected life), it has lost $1,200 (60% of $2,000 = $1,200). An ACV payment would be $800 ($2,000 – $1,200 depreciation value = $800 ACV).
The deductible from your insurance will also apply to a claim. So in this scenario, let’s say you have a $500 deduction. Your insurance check for ACV of your stolen laptop would be $300 ($800 ACV – $500 insurance deductible = $300).
Recoverable amortization insurance payment
If your homeowners insurance policy doesn’t have replacement cost coverage, you’ll only get an insurance check for ACV (minus your exemption).
If your policy has replacement cost coverage, your insurer will first pay for the item’s ACV so you can begin repairing or replacing your item. A second payment will be made for recoverable depreciation.
After you receive an ACV insurance payment and have your item repaired or replaced, you submit your receipt for the new item to the insurance company. You will then receive a recoverable depreciation insurance payment.
If you do not repair or replace an item, you will not receive a second check for recoverable depreciation. In this case, you will only receive a check for the item’s ACV.
For example, let’s say there was a fire that destroyed a chair, but you decided not to buy a new chair. Your insurance payment will only be the actual cash value of the original seat.
How to Make a Claim for Recoverable Depreciation
If you need to claim a recoverable depreciation, here’s what to do:
- Report the damage to your insurance company as soon as possible.
- Gather all relevant documents such as police reports (for alleged theft), receipts and photographs.
- Submit your claim form with the supporting documents to the insurance company.
- Wait for the insurance company to process your claim.
- Get your first payment for the actual cash value of the item.
- Repair or replace your item.
- Submit the receipt to the insurer.
- Receive your second payment for recoverable depreciation.
If you disagree with your insurance company’s assessment, you can negotiate the value of your recoverable depreciation check. You can also request a line item breakdown of values instead of a lump sum if you want to see how they rate each item.
Trevor Chapman, spokesperson for Farmers Insurance, says Farmers sees a lot of recoverable depreciation claims for expensive items such as appliances, home goods and TVs.
Who Gets a Recoverable Amortization Insurance Check?
The indemnified depreciation payment may be awarded to you, the foreclosure or the repair company, depending on the nature of the claim.
For example, if your home is damaged, your mortgage company may be listed on the insurance check because it has a legitimate interest in your home. However, if you are replacing an appliance or furniture, the payment will be made only to you.
What Factors Affect the Recoverable Depreciation Payment?
The actual cost of the replacement item is less than the value of your original item
Let’s say you paid $1,500 for a TV that broke down, but the new TV you bought only cost $1,000. In this case, your recoverable depreciation payment will be calculated based on the TV of $1,000. You won’t be able to pocket the difference.
You decide not to replace or repair an item
If you choose not to repair or replace the item, you will not receive a revocable depreciation check. You will only receive a check for the actual cash value of the item.
You have made a claim for a product with no depreciation
You will not receive a second check if you have made a claim for an item that has no value, such as some jewellery.
You missed the application deadline
Some states give you a certain amount of time to claim recoverable depreciation. This period can be six months or a year, depending on where you live. For example, in Florida, you must claim recoverable depreciation within six months of your ACV payment or in a final court order declaring your entitlement to replacement cost, whichever is later.
What is Irrecoverable Depreciation?
Non-recoverable depreciation refers to items that you cannot claim under replacement cost. So, for example, if you have home insurance that only pays real cash value, all your claims count as “irrecoverable depreciation.”
Do I Need Recoverable Depreciation Insurance?
Everyone’s finances are different, but think about it this way: If your personal belongings were damaged, would you have enough money to easily cover the full cost of the replacement (minus the ACV insurance check you would get)?
If not, having replacement cost coverage helps fill the gap. Replacement cost coverage is more expensive but often a better option.
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