Depreciation: Recoverable vs. Non-Recoverable Differences

As we’ve previously discussed,  your homeowner’s insurance policy is a contract between you and your insurance company.  In the event of a covered cause of loss, your insurance company agrees to pay you for that loss.  However, there are generally two types of damage valuations:  Actual Cash Value and Replacement Cost Value.  This distinction is important when negotiating payments for your hurricane claim.

All damaged items covered under your homeowner’s policy are assigned a monetary value. Your home, its contents, and all other structures on your property decline in value over time due to age or wear and tear. This loss in value is known as depreciation.

Most policies are Actual Cash Value policies and will reimburse you for the actual cash value of your damaged property as opposed to the cost to replace the property. Replacement cost is the actual cost to replace an item at its pre-loss condition, whereas actual cash value is calculated by subtracting an item’s depreciation from its replacement cost.

While depreciation varies based on each individual item, some items like replacement of building materials such as sheetrock or flooring will not suffer greatly from depreciation.  On the other hand, household items like electronics and children’s toys depreciate rapidly.

If your homeowners’ insurance policy includes replacement cost coverage, then you should not see depreciation on the insurance adjustment because it’s recoverable.

How is depreciation calculated? 

Depreciation is calculated by evaluating an item’s replacement cost value and useful life, or the amount of time it’s expected to last. For example, that $2,000.00 television that you purchased two years ago was working fine when you evacuated. Let’s also assume that the model in question typically lasts five years, or loses 20% of its value every year. In this situation, the actual cash value of your television would be $1,200.  Non-recoverable depreciation is the amount of depreciation that is deemed ineligible for reimbursement under your insurance policy. If you have a non-recoverable insurance policy, your insurance company will only pay the Actual Cash Value of the items for which you file claims.  So, if your policy is an ACV policy, you will only be able to recover $1,200.00 for your $2,000.00 TV, but a replacement cost policy would pay you the full $2,000.00 or whatever the current replacement cost should be at that time it was damaged.

If you need help quantifying your damages or understanding your insurance coverages, call or text the attorneys at Favret Carriere Cronvich at (504)-372-6175 for a free consultation.