What Is Recoverable Depreciation?

Recoverable depreciation is the difference between the actual cash value of an insured item (ACV) and its replacement cost value (RCV).

When you file a claim for covered damage to insured property, insurance policies can only pay the actual cash value at that time. However, after the damaged property is repaired or replaced, some policies will also pay the difference between the replacement cost and the initial income. In these cases, this difference is recoverable depreciation.

Here's a more complete explanation of what recoverable depreciation is, how it works, and how it applies to you.

Definition and examples of recoverable depreciation

Recoverable depreciation is the gap between the actual cash value of a portion of the insured property and its replacement cost value. If your depreciation is recoverable, your insurer will reimburse you for this difference, after it shows that you replaced the insured property. If the difference is not recoverable, only the ACV of your property will be reimbursed.

You are generally eligible for recoverable depreciation if you have an RCV policy. To better understand recoverable depreciation, here is a more detailed analysis of ACV and RCV.

Actual cost value vs. replacement cost value

Your LCA is the cost of replacing your insured property less deductions for depreciation.1 Depreciation is the loss of value of an item due to age and normal wear and tear. This means that if you have an LCA policy, insurers will reimburse you for the depreciated amount of the covered item less your deductible.

But if you have an RCV policy, your insurer would pay the amount necessary to replace your lost or damaged property with a replacement of the same type. This equates to the money you need to buy the same or similar item again, also without your deductible.

How does recoverable depreciation work?

In policies with RCV, the insurers first reimburse the ACV of the damaged items. After replacing or repairing lost or damaged property, send the receipt to your insurance company. It then reimburses you for the difference between your initial ACV payment and what you actually paid to replace the item. This additional reimbursement is your recoverable depreciation.

This is a realistic example of recoverable depreciation in practice.

Recoverable depreciation: an example

Suppose you buy a $ 2,500 computer and after two years it is stolen from your home. Fortunately, the theft is covered by the homeowner or renter's insurance policy. The amount you would receive from your claim depends on whether your depreciation is recoverable.

Suppose your insurance company assumes that personal computers have a useful life of five years, so a $ 2,500 computer would depreciate to $ 500 per year with linear depreciation. Since two years passed before the theft, you would have $ 1,000 ($ 500 x 2 years) of accumulated depreciation. This means that the computer would have an ACV of $ 1,500 once your application is approved.

Let's also assume that you have a $ 500 deductible on these types of claims. If your policy specifies ACV, your total payment would be $ 1,000 ($ 1,500 ACV - $ 500 deductible). If you later paid $ 2,600 to replace your computer with an identical or similar model, you would pay the difference out of pocket.

If your policy covered RCV, you will receive the same $ 1,000 ($ 1,500 ACV - $ 500 deductible) after initial approval of your claim. Later, when you show the insurance company that you replaced your computer at a cost of $ 2,600, you will receive your second check with the balance: $ 1,100 ($ 2,600 RCV - $ 1,500 ACV).

In this example, the replacement cost was $ 2,600, but the insured property had a value of $ 2,500. This difference may arise due to inflation. You may want to consider an RCV policy that includes an adjustment for inflation.

What does recoverable depreciation mean to you?

If you need to file a claim for stolen or destroyed property, your refund is generally higher if your policy allows for recoverable depreciation. This is because, due to depreciation, the difference between the ACV and RCV of a property increases the longer you own it.

Of course, there is no free lunch. RCV policies generally have higher premiums than ACV policies. This means you will have to choose one: higher premiums and better coverage, or cheaper premiums and less coverage.

The type of policy that makes the most sense for you depends on your budget, the type of property in question, and your tolerance for risk.

Do I need a recoverable depreciation?

While you don't technically need to buy a recoverable depreciation plan, it's often a good idea for a property you can't live without. For example, you may want to pay an increase in your RCV premiums for your home insurance policies.

You can choose to get an RCV policy for your home and an ACV policy for your personal belongings, or vice versa if you prefer. It is not mandatory to have the same coverage for both.

Even if you live in a place where the chances of a natural disaster destroying your home and personal belongings are low, the cost of replacing them can make the risk intolerable.

If you don't have a homeowners policy with recoverable depreciation and the worst happens, you will have to pay the difference between the replacement cost and the out-of-pocket insurance product. For a home or all of your possessions, this gap can represent a significant amount of money.

Enjoy Watching This Video About Insurances

Source: Homestead Roofing, Inc

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