You have choices when it comes to the amount of financial protection that you get and what price you pay. An actual cash value policy (ACV) is a cheaper option. This policy incorporates depreciation in your claim payouts. A replacement value (RCV policy may be more suitable if you need to receive a reimbursement to replace your items with newer items at current prices.
RCV can bring up the cost for your homeowners insurance but it can help you to maintain your quality life after a covered loss. RCV claims payouts are often broken up into two parts by insurance companies: recoverable depreciation and ACV. This means that your reimbursement might not be available immediately.
What is recoverable loss?
If you have home insurance with RCV coverage, you’ll hear the term recoverable deduction. Depreciation cannot be recovered under an ACV policy. However, if you have RCV coverage you might be able to recover the amount that any damaged or destroyed items have lost in the years since they were purchased.
Depreciation in most cases is based upon:
- The item’s age
- It has held up well over the years
- It is so outdated that it is based upon newer versions
As an example, take a TV. The TV you purchased in 2015 would not be possible to sell for the price that you paid. Instead, the TV’s years of use and multiple newer models over the years reduce its value or decrease its value. The value of a TV that has a crack in its corner can cause it to lose even more. Your insurance provider might decide that the actual value of the TV, even if it was replaced at $600 in 2015, is $250 today.
An ACV policy will provide $250 coverage (minus your deductible) to replace your TV if it is damaged or stolen. This policy covers theft.
You would receive $250 as your initial claim payment if you have an RCV insurance. After following all the steps, however, you could receive the $350 total recoverable depreciation amount. This usually involves purchasing your new TV and providing proof to your insurer that $600 was the replacement cost of a comparable TV. Your insurer would then release the depreciation and you would receive a second claim check for the $350 amount.
Non-recoverable depreciation
An ACV policy is different in that the time-depreciated value is not recoverable. This means that you will have to settle for a lower quality item (with the deductible subtracted) or pay for the difference in a comparable replacement model from your pocket.
Even homeowners with RCV policies may be subject to non-recoverable deduction. Certain policies provide roof coverage with recoverable depreciation, but only if the roof is damaged by a fire. Roofs that are destroyed by windstorms, however, will not be covered. Talk to an agent or read your policy details to find out how non-recoverable deduction might affect you.
Calculation of recoverable depreciation
Depreciation is largely dependent on the item’s worth and subjective value. You might wonder how insurance companies calculate the total recoverable amount of depreciation for any claim. They consider the item’s usefulness in most cases.
Let’s say you purchase a refrigerator with a 14-year useful life for $1,500. Companies can calculate a data-based insurance recoverable loss estimate by dividing the fridge’s lifespan (14) and its total (1,500). It would lose approximately $107 for each year it is in use. This calculation could vary depending on the provider and your policy details.
What is the effect of recoverable depreciation on a home insurance claim?
Your belongings are generally not recoverable if you have an ACV insurance. You could face higher out-of pocket costs to replace valuable personal property if they lose value quickly.
RCV insurance will allow you to recover depreciation for almost every item that you own following a covered loss. This is a crucial point to remember. Most insurance companies require you to provide receipts or invoices within a certain time frame to recover the amount.
Here are some steps to follow when you have an RCV policy.
- Covered loss is: Typically, after emergency services are involved, the first step is to contact your insurance provider and begin your claim process.
- Your insurance company calculates ACV. Usually, a claims adjuster visits the premises to assess damage and determine the ACV of any compromised belongings. The ACV of any stolen or destroyed items will be deducted from your deductible. You will receive a claim check.
- You replace the items. Using the ACV checks you have received, purchase new items of the same make and quality. You will need to show proof that you have replaced the item within a specified timeframe, along with receipts, in order to recover depreciation. Check with your agent to confirm what information is required by your policy.
- The recoverable depreciation is paid by your insurance provider. Once you prove that you have replaced the stolen or destroyed items with new ones and show your insurer how much they cost, you will typically be issued a second check to cover the amount of the recoverable deduction.
How do you claim depreciation
Many insurance companies have specific guidelines about how to claim the second recoverable deduction check. You must submit all documentation by the deadline if applicable.
Important: If you find a great price on an item, don’t expect to make a profit. Let’s say that you find a similar replacement refrigerator for $1,200 instead of the original $1,500. Your insurer will reimburse you enough for the $1,200 purchase price, but not the full value of the refrigerator.
Insurance companies make you do all these additional steps instead of just reducing your deductible and letting you get a single check. This helps to prevent or eliminate insurance fraud. You wouldn’t be able to cash a $1500 check for a fridge if your in-laws got rid of it and gave you a free replacement.
It also prevents insurance companies from overpaying. Your second claim check will only allow you to bring the total amount of your claim up to the cost for your replacement fridge (less your deductible).
It also guarantees that you actually replace items that have been damaged. If you decide you don’t need a fridge anymore, you will only receive the actual value of the item, and not the second, because it was not replaced.
Recoverable depreciation is a more complicated process, but it can be worthwhile for items that lose their value rapidly. You will need to keep meticulous records to show your insurance company how much you paid for the replacement items. You can review your policy and learn about the insurance company’s procedures for recovering depreciation to be prepared after a loss.