When the need arises to file an insurance claim on your home, you don’t want to be surprised by unexpected costs. Understanding your policy is important so that when disaster strikes you have the coverage you need. One part of your policy you will want to be clear on is whether your coverage is recoverable or non-recoverable.
What Is Depreciation?
- In homeowners’ policies, all things covered are given a value. Due to wear and tear, and age, those items may decline in value over time. That loss is called depreciation.
What is Replacement Cost Value? What is Actual Cash Value?
- The actual cost to replace an item to its pre-loss condition is called replacement cost.
- Most people that file claims will be reimbursed for the actual cash value (ACV) of whatever was damaged. ACV is a measure of the insured property and is NOT the same as replacement cost. ACV is calculated by subtracting an items depreciation from its replacement cost.
For example, let’s say you purchase a refrigerator for $2000. Its assumed useful lifespan is 10 years. The estimated depreciation would go as follows:
$2000/10 years= $200 per year depreciation
You file a claim four years later stating the refrigerator is destroyed. The calculations for actual cost value would be:
$2000- ($200 depreciation X 4 years) = $1200
The ACV is $1200 for the refrigerator. That means $800 was lost to depreciation.
A Recoverable Policy VS. A Non-Recoverable Policy
- Having a recoverable depreciation clause in your policy will allow you to collect the depreciation from the claim. In the case above, that amount would be $800. In a non-recoverable policy, the homeowner cannot claim the depreciation and is only subject to ACV reimbursement.
- It is very important for policy owners to check clearly whether they have a recoverable or non-recoverable plan. Also, some recoverable plans may become non-recoverable if certain conditions like repairs or replacements are not made.
- With a non-recoverable plan, you will pay more out-of-pocket than just your deductible costs. Your costs will include your policy’s deductible PLUS any depreciation amount for full replacement.
- With a recoverable plan, you will pay your deductible then, receive the ACV on your claim PLUS the depreciation amount.
You do not want to be caught needing repairs on your home and discover that you will not receive the funds from your insurance you were hoping for. Check in with your insurance agent to find out if your policy is recoverable or nonrecoverable. Knowing your policy and making changes that are needed will be your best plan to stay properly covered.
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