What Is Recoverable Depreciation?

Property damage, including weather-related damages, accounts for the majority of homeowners insurance claims.^[1] Whether you have roof damage from a storm or personal property damage from a fire, you’ll probably file a claim to replace your structures or possessions. And, depending on your homeowners insurance policy, you might only receive reimbursement for the depreciated value of your belongings.

As a homeowner, you can select a policy that includes or excludes recoverable depreciation coverage, though it’s not the right investment for everyone. This article defines recoverable depreciation, examines how it’s calculated, and explores situations where it’s favorable for you to have this coverage.

What is recoverable depreciation?

Although no state or federal law requires homeowners insurance, many mortgage lenders require it. Even if you aren’t financing your property, you’ll likely want a homeowners insurance policy because it provides coverage in the event of a destructive incident.

Homeowners insurance policies offer two different types of reimbursement: actual cash value, which is the depreciated value of an item or structure, and replacement cost, which is the original value of an item or structure.

Recoverable depreciation is the difference between an item’s or structure’s original value and its current value.

For example, your roof might be irreparably damaged during a major storm and require a full replacement. Assuming that the original roof cost $10,000 and has depreciated in value to $6,000, the reimbursement from your insurer depends on which type of coverage you have.^[2]

An actual cash value policy pays only the replacement cost minus depreciation and your deductible. Depending on your deductible, you’d receive $6,000 or less in this example. A replacement cost policy pays for what it costs to replace the roof at today’s rate. You’ll receive a full reimbursement of the cost, minus your deductible.

As you shop for a policy you’ll notice most, including HO-2, 3, 5, and 6, feature replacement cost coverage for your dwelling and actual cash value for its contents. 

Should I have recoverable depreciation coverage on my home?

“When purchasing property insurance, I’d recommend in the majority of situations to have replacement coverage on the property,” says Dominic Frey, an insurance professional at Hitchings Insurance Agency, adding he believes it ensures that the policyholder’s out-of-pocket cost is only the deductible at the time of the claim.

“Because it is a higher amount of coverage, a replacement cost value policy would be more expensive than an actual cost value policy,” he continues. “However, at the time of the claim, the insurer will likely pay thousands more than the policyholder’s out-of-pocket cost.”

Frey also notes that the costs of a policy with recoverable depreciation will be lower than the overall expenses of similar claims with an actual cash value policy. Homeowners who have multiple items with depreciating values, such as electronics, will benefit the most when a claim is filed.

Learn More: Actual Cash Value vs. Replacement Cost: Which Is best?

Nonrecoverable depreciation

Nonrecoverable depreciation is just that – the depreciated value of an item that your homeowners insurance doesn’t reimburse you for. If you have an actual cash value policy, then all your items fall under the “nonrecoverable depreciation” category.

How recoverable depreciation is calculated

To calculate recoverable depreciation, insurers determine the replacement or repair cost and the life expectancy of an item or structure. Most insurers calculate depreciation based on the condition of the item when it was damaged or lost, the new cost of that item, and the lifespan of the item.

Actual cash value and recoverable depreciation

If a homeowner has an actual cash value (ACV) policy, the insurer pays the policyholder the depreciated cost of the item. This is calculated by the item’s life expectancy subtracted from the cost of a replacement. ACV policies don’t “recover” the value lost to depreciation.

How insurance pays for recoverable depreciation

Total recoverable depreciation is available in a replacement cost value (RCV) policy. For example, imagine two homeowners need to replace their $10,000 roofs after a storm and have a $1,000 deductible. However, one homeowner has an RCV policy, and the other has an ACV policy.

The homeowner with RCV will receive $9,000 to replace their roof: the cost of a new roof minus the deductible. The homeowner with ACV will still pay the $1,000 deductible, but their reimbursement amount will be lower due to the roof’s age. The value of the roof in its current condition might be $5,000, so the homeowner would receive $4,000 after paying the deductible. This means they’ll need to pay out of pocket for the rest of the cost to replace the roof.

See Also: Homeowners Insurance Canceled Because of the Roof? Consumer Guide

How to file a recoverable depreciation claim

When you file a claim for recoverable depreciation, Frey notes that you’ll file in a similar manner regardless of which type of homeowners policy you have. The adjuster will assess the actual cash value of the property, item, or structure and calculate the recoverable amount for policyholders with a replacement cost policy.

“If the homeowner has specific documentation, like the exact age of the property that is damaged, it could be helpful for the adjuster to take that information into consideration,” Frey says.

Although your specific insurer may have a certain process for filing a claim, take note of these general guidelines for filing a claim for recoverable depreciation.

1. Call your insurer and initiate the claims process. Ask them what you need to do throughout this process to comply with all reimbursement requirements.

2. Take photographs and videos of items in their damaged state. This is especially important if you need to remove or move damaged items from an area, such as removing a tree from a roof.

3. Receive the actual cash value for your damages. After an adjuster assesses your damages, you’ll be given reimbursement for the actual cash value of the damaged property.

4. Save all receipts regarding repairs, replacements, and other costs associated with the damage. Keeping copies of all expenses related to the damage, including if you need to temporarily stay at a hotel, is necessary to prove to the insurer that the money they reimburse you will go directly toward expenses covered by your policy.

5. Submit a request for recoverable depreciation reimbursement. After you submit receipts or other paperwork for replacement and repair costs, your insurer will verify the amount and release a check for the recoverable amount to you.

Read More: How to File a Home Insurance Claim

Recoverable depreciation for roof replacements

Roofs are covered under recoverable depreciation for homeowners with an RCV policy. The insurance company will reimburse the homeowner for the costs of repairing or replacing the roof, minus their deductible.

Learn More: Roof Insurance Coverage Guide: Does Home Insurance Cover Roofs?

How to find home insurance with recoverable depreciation

As you consider whether an RCV policy with recoverable depreciation is right for you, use these tips to identify the policy that best meets your needs.

1. Understand the pros and cons of RCV and ACV. Before searching for a homeowners insurance policy, it’s important to know the difference between these policies. In some cases, an actual cash value policy without recoverable depreciation might be a better financial choice for your property and possessions.

2. Identify any items in your home that may need coverage that RCV doesn’t provide. Replacement cost policies don’t provide recoverable depreciation on certain excluded items. Possessions such as jewelry or artwork might require a separate rider to receive coverage under a homeowners insurance policy.

3. Use a comparison platform to accelerate your search. By using a homeowners insurance comparison platform, you can make your search faster and more efficient. Compare multiple policies from multiple insurers using one streamlined source.

4. Choose the policy with the coverage you need for the budget you have. As you receive different quotes, compare their overall costs — not just their premiums. A policy that’s more comprehensive may be cheaper in the long run than a policy that provides the minimum coverage required by your mortgage lender.

Recoverable depreciation FAQs

No homeowner wants to be caught by surprise when filing a claim, especially when it comes to how much they’ll be reimbursed. It’s important to understand the limits of recoverable depreciation in the context of your homeowners insurance policy and to always speak directly to your insurer if you have any questions.