What is the definition of recoverable depreciation in insurance?
Short answer. In insurance, recoverable depreciation is the difference between an item's replacement cost and its actual cash value that the insurer withholds at first and pays once the item is repaired or replaced. It exists only under replacement cost coverage.
Terms that go with it
- Replacement cost value (RCV): what it costs to repair or replace with like kind and quality today.
- Depreciation: the reduction in value for age, wear, and obsolescence.
- Actual cash value (ACV): RCV minus depreciation.
- Recoverable depreciation: depreciation you can collect after repair or replacement.
- Non-recoverable depreciation: depreciation you cannot collect.
- Holdback: a common nickname for recoverable depreciation.
- Incurred: actually spent; most policies pay replacement cost only as costs are incurred.
The policy language behind it
Replacement cost policies typically say the insurer pays no more than actual cash value until actual repair or replacement is complete, and then pays the smaller of the replacement cost or the amount actually and necessarily spent. Recoverable depreciation is the gap between those two stages.
A one-line example
RCV $10,000, depreciation $3,000, deductible $1,000: first payment $6,000, then recoverable depreciation of $3,000 after the work.
Where you will see it
Look on the estimate summary, the payment letter, and sometimes a separate letter that states the deadline to collect. It may be labeled recoverable depreciation, depreciation holdback, or replacement cost holdback.
Related: recoverable depreciation on a roof and ACV vs RCV.