What does depreciation mean in insurance, and what makes it recoverable?
Short answer. In insurance, depreciation is the reduction in value of damaged property because of age, wear, and obsolescence, and it is what separates replacement cost from actual cash value. It is recoverable when your policy promises replacement cost, so the insurer pays it back once you actually repair or replace the property.
Why insurers depreciate at all
Insurance follows the principle of indemnity: it restores you to your position before the loss, not better. A 15-year-old roof was not worth what a new one costs, so the base value of the loss is the depreciated value. Replacement cost coverage is an extra promise, paid for in your premium, to close that gap when you rebuild.
What makes depreciation recoverable
- A replacement cost loss settlement for that type of property
- Actual completion of the repair or replacement
- Notice and completion within the policy's time limits
- Proof of what was actually spent
What makes it non-recoverable
- An actual cash value policy or endorsement
- A roof payment schedule
- Choosing not to repair or replace
A quick check of your policy
Open the loss settlement section of your homeowners policy. If it says the insurer pays actual cash value until repair or replacement is complete, you have recoverable depreciation on that property. Then scan the endorsements list on your declarations page for anything that changes how the roof is paid.
Related: ACV vs RCV, roof payment schedules, and recoverable depreciation on a roof.