What is Depreciation in Insurance Claims?
Your dwelling and most of its contents – such as your roof, laptop, and furniture – may lose value over time due to factors such as age and wear and tear. This loss in value is commonly known as depreciation.
Under most insurance policies, claim reimbursement begins with an initial payment for the Actual Cash Value (ACV) of your damage, or the value of the damaged or destroyed item(s) at the time of the loss.
If you have replacement cost coverage included on your policy, you may be able to receive additional money to cover the depreciation of these items. If this is the case, reimbursement may involve two or more payments – one for your initial payment based on the ACV of your items and then additional payment(s) once you repair and/or replace the damaged or destroyed items and provide us with documentation.
Here’s more information on how we calculate depreciation and determine whether or not you may be entitled to any additional payment(s).
Generally, depreciation is calculated by evaluating an item’s Replacement Cost Value (RCV) and its life expectancy. RCV represents the current cost of repairing the item or replacing it with a similar one, while life expectancy is the item’s average expected lifespan.
For example, let’s say your laptop was destroyed in a fire. You bought the laptop two years ago and it was in normal condition for its age before the fire. A similar laptop is sold in stores today for $1,000 (the RCV). This laptop has a life expectancy of five years, meaning it loses 20% of its value each year. Because your laptop was two years old, it had lost 40% of its value before being destroyed by the fire. Therefore, the actual cash value (i.e., the value at the time of the loss) of your laptop is $600. Here is the calculation:
This calculation method also applies to most of the structural components of your dwelling or building that wear out over time, such as the roof. If your dwelling has a 25-year composition shingle roof, it would depreciate at 4% a year under normal conditions. If the roof is 10 years old at the time of your loss and it requires replacement, we would subtract 40% depreciation (10 years x 4% a year) from your replacement cost estimate to determine the ACV of your roof.
Please keep in mind that the condition of an item may also factor into the depreciation calculation.
Submitting a Request for Recoverable Depreciation
In most instances, you should notify your Claim professional of your intent to recover your depreciation within 6 months or 180 days of the date of loss. In some states, and depending on your policy, the length of time to do so may be longer or shorter. If you aren’t sure about the amount of time you have, just ask your Claim professional to provide guidance.
If you have replacement cost coverage, here are the next steps you should take if you decide to recover your depreciation:
- Repair or replace the lost or damaged item(s).
- Save all invoices, signed contracts, receipts and/or canceled checks associated with the repair or replacement of your property; and submit them to your Claim professional.
- Specify in writing at the top of each receipt or invoice which items were replaced and/or what work was completed.
- Provide either the original documents or legible copies to your claim professional, and remember to keep copies for your files.
- Include your Travelers claim number on all correspondence.
- Once your request for reimbursement is received, your Claim professional will contact you to discuss any additional payment(s).
Your potential reimbursement is governed by the replacement cost. Please keep in mind that when repairing or replacing an item, you can recover only the amount you actually spend. For instance, in our earlier example we determined the RCV of your laptop was $1,000. If you purchase a replacement laptop for $900 and submit a request for the recoverable depreciation, Travelers will reimburse you $300 – the difference between the ACV of your previous laptop ($600) and the cost of your new one ($900).
Keep in mind, you may purchase a more expensive item to replace the one you lost, but we can reimburse you only up to the replacement cost. In the previous example, we determined the ACV of your 13-inch laptop was $600, and the cost of a similar laptop is $1,000. If you purchase a 15-inch laptop for $1,500 and submit a request for recoverable depreciation, you will be reimbursed $400 – the recoverable depreciation on your original laptop.
If you find that you cannot repair or replace damaged or destroyed item(s) for the replacement cost established on your estimate, please contact your Claim professional before repairing or replacing the item(s). If you decide not to repair or replace some of your damaged items, you may not be able to submit a request for additional payment(s) for those items.
Frequently Asked Questions
While there are some exceptions, most insurance policies include some replacement cost coverage. Your Travelers Claim professional will go over your coverage with you upon inspecting your property.
We use estimating software that relies on data from many reputable sources, including guides published by the U.S. government and the National Association of Home Builders. The information in these guides is widely used in the industry and is composed of relevant data from manufacturers, retailers, installers, contractors, insurance companies, home inspectors, etc.
In most instances, you should notify your Claim professional of your intent to recover your depreciation within 180 days of the date of loss.
You may purchase a more expensive item to replace the one you lost, but we can reimburse you only up to the replacement cost. In the previous example, we determined the ACV of your 13-inch laptop was $600, and the cost of a similar laptop is $1,000. If you purchase a 15-inch laptop for $1,500 and submit a request for recoverable depreciation, you will be reimbursed $400 – the recoverable depreciation on your original laptop.
This decision is entirely yours. If you do not repair or replace some of your damaged items, you may not be able to submit a request for additional payment(s) for those items.
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