Depreciation is a fact of life. It refers to the process in which owned goods lose value, or depreciate, over time. Your car isn’t worth the same amount it was before you picked it up from the lot because of depreciation, even if it still looks shiny and new.
Depreciation is an important factor when it comes to home insurance. The process of “recoverable depreciation” describes the process of ensuring that should something happen to your household goods, you will be reimbursed for the amount it would take to replace the item new, not its actual value at the time it was destroyed.
An Example of Recoverable Depreciation
If you buy a new refrigerator for $2,000 and plan to keep it for 10 years, it might lose 10 percent of its value each year it’s used in your home. The math looks like this: $2,000/10 = $200 per year in depreciation.
If you have a house fire and the fridge is destroyed after five years, your insurance reimbursement might be only $1,000 – the actual current value of the fridge that has been used for five years ($200 x 5). This would be unfortunate since it will likely cost you $2,000 or more to replace the fridge.
For this reason, many homeowners and businesses choose an insurance policy that includes a recoverable depreciation clause. With this clause in place, you would get a claim that includes $2,000 to replace the refrigerator: $1,000 in actual cash value (ACV) plus the $1,000 in recoverable depreciation. Sometimes, the recoverable depreciation is referred to as replacement cost value, or RCV, in insurance policies.
Essentially, a recoverable depreciation clause in an insurance policy accounts for the deterioration in the value of your insured possessions and adds to the amount so you can replace your lost goods. If recoverable depreciation is part of your policy, you may claim those depreciation costs as well as the cash value of the possessions that were destroyed or damaged. Together, cash value plus recoverable depreciation should equal the cost of replacing the item. (However, it is important to remember that there may be a deductible on the insurance policy, and this will be subtracted from the total amount of the claim you receive.)
Insurance that includes recoverable depreciation is naturally going to cost more in premiums, but it will also ensure that you’re able to replace your household goods or business assets should they be lost or damaged.
Does My Home or Business Insurance Include Recoverable Depreciation?
You may not know, but it’s important to find out whether depreciation in your current policy is recoverable or non-recoverable. In some cases, depreciation that is initially recoverable may become non-recoverable if certain policy clauses are not met or honored, such as a requirement for repair or maintenance under a predetermined schedule. In any case, check with your insurance agent to go over the terms of your current policy.