Recoverable Depreciation: What It Is and How It Works

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

Have you ever dealt with an insurance claim and stumbled upon the term recoverable depreciation? It might sound confusing at first, but understanding it can make a huge difference in how much you get back from your insurance company. Let me break it down for you in simple terms so you can navigate this process with confidence.

Key Takeaways

• Recoverable depreciation is the amount your insurance company reimburses after you complete repairs or replacements.
• It’s available with replacement cost value (RCV) policies, not actual cash value (ACV) ones.
• Knowing how it works can help you get the full benefit of your insurance claim.

What Is Recoverable Depreciation?

Think of recoverable depreciation as the gap between what it costs to replace something (RCV) and what it’s currently worth (ACV). Here’s how these terms break down:

• Replacement cost value (RCV): The price to replace an item with a brand-new equivalent.
• Actual Cash Value (ACV): The current value after accounting for wear and tear.

For example, imagine a storm damages your roof. A brand-new roof (RCV) would cost $20,000, but because your roof is 10 years old, its ACV is $12,000. That $8,000 difference is the recoverable depreciation, and you’ll only get it if you replace the roof and submit proof to your insurance company.

How Does Recoverable Depreciation Work?

Here’s a step-by-step look at how this process typically unfolds:

1. Initial Payment: Your insurance company gives you the ACV upfront to start repairs.
2. Complete Repairs: You replace or repair the damaged item and document everything—receipts, invoices, and photos.
3. Get Reimbursed: Once the insurer verifies the work, they issue the recoverable depreciation amount as a second payment.

Practical Tip: Recoverable depreciation is only an option if your policy includes replacement cost coverage. Some people choose ACV-only policies because they tend to have lower premiums, even though they don’t cover depreciation. While this might save money upfront, it can leave policyholders with higher out-of-pocket costs when making claims.

Hypothetical Example

Let’s say your hardwood floors are damaged by water:

• RCV: $10,000 (cost of new floors).
• ACV: $6,000 (current value after wear and tear).
• Recoverable Depreciation: $4,000 (the difference).

Your insurer pays you $6,000 upfront. After replacing the floors and submitting receipts, they send you the additional $4,000. If you think the RCV or ACV values in your claim are too low, don’t hesitate to negotiate with your insurer—providing additional documentation or estimates can help support your case.

Why Is Recoverable Depreciation Important?

Recoverable depreciation can significantly impact how much you receive from your insurance claim. Here’s why it matters:

• Maximize Your Claim: If you don’t complete repairs, you lose the recoverable depreciation.
• Full Coverage: It ensures your policy’s replacement cost value truly restores your property.
• Budget-Friendly: Knowing about recoverable depreciation helps you plan financially for repairs.

Common Mistakes to Avoid

• Skipping Repairs: Not finishing the work means forfeiting the recoverable depreciation.
• Missing Deadlines: Policies often have strict timelines for completing repairs and submitting proof.
• Poor Documentation: Keep thorough records—receipts, photos, and invoices are your best friends.

FAQs

Do I always get recoverable depreciation? 

No, it’s conditional on completing repairs and providing documentation as per your policy.

How long do I have to claim it? 

Deadlines vary by insurer. Some allow up to a year; others might require action sooner. Always check your policy.

Does it apply to personal belongings? 

Yes! For instance, if your furniture is damaged in a fire, recoverable depreciation could cover the gap between its ACV and RCV.