How is depreciation defined in insurance?
The formula behind it
Replacement cost value minus depreciation equals actual cash value. Insurers commonly calculate depreciation with an age and life method: the item's age divided by its expected life, times its replacement cost, adjusted for condition and often capped at a maximum percentage.
Recoverable vs non-recoverable
- Recoverable depreciation: held back at first and paid once you repair or replace the property, under replacement cost coverage.
- Non-recoverable depreciation: never paid, as under ACV coverage or an ACV roof endorsement.
What gets depreciated
- Roofs: by material and age, and often the biggest depreciation on a storm claim.
- Other building items: siding, paint, carpet and flooring, each with its own expected life.
- Contents: furniture, electronics and clothing.
- Labor and fees: treatment varies by carrier and state, and some items, like permits, are often not depreciated.
Insurance depreciation is not tax depreciation
Tax depreciation is a deduction for business or rental property spread over years under tax rules. Insurance depreciation is a valuation tool used at claim time. Same word, two different systems.
Why it matters to you
Depreciation explains why the first claim check is smaller than the estimate's total. It is also one of the more negotiable parts of a claim, because the age, expected life and condition used are judgment calls. Read recoverable depreciation and ACV vs RCV for how it plays out on roofs.