What method of depreciation does an insurance policy use?
Short answer. Most homeowners policies do not spell out a formula; they define or refer to actual cash value and leave the calculation to the adjuster, who typically uses straight line age over expected life with condition adjustments. Some endorsements replace that method with a fixed schedule of percentages by roof age and material.
Where to look in your policy
- Definitions. Some policies define actual cash value and say depreciation can include labor as well as materials, or that it reflects age, condition and obsolescence. Others leave the term undefined.
- Loss settlement condition. States which property is paid at replacement cost and which at actual cash value.
- Endorsements. A roof payment schedule or actual cash value roof endorsement overrides the general rule for the roof.
Methods you will see in practice
- Straight line age over life. The common default in estimating software: a 15 year old item with a 30 year life is 50 percent depreciated.
- Condition adjusted. The adjuster raises or lowers that percentage based on what the item actually looks like.
- Scheduled percentage. A table in the policy, such as a roof payment schedule, sets the payable share by age and material.
- Category tables for contents. Personal property is depreciated by item category, so electronics lose value faster than furniture.
Why the wording matters
If your policy is silent on whether labor can be depreciated, treatment can differ between carriers and between states. Compare the depreciation column on each estimate line with your policy wording, and ask the adjuster in writing which method and life expectancy were used. See roof payment schedule endorsements and ACV vs RCV.