How does insurance calculate depreciation?
Short answer. Insurance usually calculates depreciation as the item's age divided by its expected life, multiplied by the replacement cost, then adjusted for condition. For example, a 12-year-old roof with an assumed 30-year life is 40 percent depreciated, so $5,000 of a $12,500 roof would be withheld or deducted.
The formula
Depreciation = (age ÷ expected life) × replacement cost, with a condition adjustment. Actual cash value is the replacement cost minus that depreciation.
The inputs, and where they go wrong
- Replacement cost. Priced line by line from a regional price list. If items are missing, everything built on them is understated too.
- Age. Taken from permits, sales records, your answer to the adjuster, or the adjuster's judgment. An age that is off by five years can swing depreciation by thousands of dollars.
- Expected life. Set by the estimating software or carrier guidelines for that material. Architectural shingles are typically given a longer life than three-tab shingles.
- Condition. A well-kept roof may be depreciated less than its age suggests; one with prior problems may be depreciated more.
Which lines get depreciated
Materials that wear out, such as shingles, underlayment, and paint, carry depreciation. Some lines often carry little or none, such as tear-off, permits, and debris removal, though carriers handle labor differently. Check each line's depreciation column rather than only the total.
Checking the math yourself
Divide each line's depreciation by its replacement cost. If the shingle line is depreciated 60 percent on a roof you know is 10 years old, ask what age and life expectancy were used, and send proof of the real install date.
Related: roof age and insurance, Xactimate roof estimates, and recoverable depreciation.