How does depreciation work on an insurance claim?
Short answer. On an insurance claim, the adjuster prices the damage at today's replacement cost, then subtracts depreciation for age and wear to get the actual cash value. You receive that value minus your deductible first, and on a replacement cost policy the depreciation is paid later once the repair is finished.
Step by step
- Inspection and estimate. The adjuster lists each damaged item and prices it new. That total is the replacement cost value (RCV).
- Depreciation applied. Each line gets a depreciation amount based on age, expected life, and condition. RCV minus depreciation is the actual cash value (ACV).
- First payment. ACV minus your deductible. If you have a mortgage, the lender is often named on the check.
- Repairs. You hire the contractor and the work gets done. Hidden damage found during the job goes to the insurer as a supplement.
- Final payment. You send the final invoice. If your policy pays replacement cost, the insurer releases the held-back depreciation, up to what was actually spent.
An example
An estimate totals $12,000 RCV with $3,600 depreciation, so ACV is $8,400. With a $1,000 deductible, the first check is $7,400. During tear-off the crew finds rotted decking, and a $600 supplement is approved. When the job is finished and invoiced, the insurer releases the $3,600 and pays the supplement. Altogether the insurer pays $11,600 of the $12,600 job, and you pay the $1,000 deductible.
Where it works differently
- If your roof is on an actual cash value endorsement or a payment schedule, the roof depreciation is never released.
- Contents are usually depreciated the same way and released as you replace the items, if your policy covers them at replacement cost.
Related: recoverable depreciation on a roof, roof supplements, and ACV vs RCV.