Depreciating an insurance claim can be a difficult lesson when you have a claim. Learning that you receive a fraction of what your property is worth because depreciating an insurance claim is part of the process can be alarming. You may be wondering, “if the company is depreciating an insurance claim how will I ever have enough to replace my ruined property?”
Here we will discuss how depreciating an insurance claim works and what you can do to make sure you get the best settlement to replace your damaged property.
How does depreciating an insurance claim work?
Depreciating an insurance claim applies to most types of insurance. While most people are familiar with depreciating an insurance claim when it comes to auto insurance, many consumers are surprised that it also applies to other types of insurance.
Your home and everything in it loses value with age. This loss in value is due mostly to wear and tear of the property. The decline in value of your property over time is known as depreciation.
Depreciating an insurance claim and the first steps
The claim reimbursement process begins with your insurance company issuing you an initial payment based on the actual cash value (ACV) of the item. So, let’s say lightning struck your home and your laptop and television were damaged beyond repair.
You file the claim. The initial payment from your insurance company is going to be the actual cash value of the laptop and the television. Now if your laptop and television are a few years old, this payment won’t be enough to replace those items. This is known as depreciating an insurance claim.
Replacement cost coverage and depreciating an insurance claim
The key to getting the best claim settlement is having replacement cost coverage on your policy. Still, depreciating an insurance claim is part of the settlement process, but if you have replacement cost coverage on your policy, you have a chance to get fully reimbursed for your damaged property.
If you have replacement cost coverage, depreciating an insurance claim will involve at least two payments. The initial amount is based on the actual cash value of the damaged property. Then you submit your receipts from replacing the damaged items, and your insurance company issues another check for the difference.
It’s important to note that even home damages can be subject to depreciation. For example, if your roof is damaged in a storm, your insurance company will issue a payment based on the actual cash value of the roof. If you have replacement cost coverage on the policy, once repairs are completed and signed off on by a licensed contractor, your insurance company issues payment for the additional cost.
The math behind depreciating an insurance claim
Calculating the depreciation of an insurance claim sounds difficult but isn’t all that complicated. You only need to know two pieces of information when depreciating an insurance claim: the first is the age of the item and the second is the average life expectancy of the item.
So, let’s say for example a lightning strike destroyed your laptop. You’ve owned the computer for two years, and during that time it’s had only normal wear and tear. A similar kind and quality laptop today cost $1,000 – that’s the replacement cost, but how much is your two-year-old laptop worth? What is the actual cash value? Let’s say the life expectancy of the computer is five years. This means the laptop loses 20 percent of its value each year you own it.
So now we can calculate the depreciated value if your laptop. The cost to buy a new laptop of similar quality ($1,000) minus the depreciation of your laptop (2 years multiplied by 20 percent is $400) equals the actual cash value of your laptop $600.
Of course, this is just an example with round numbers, but the formula works the same across the board when depreciating an insurance claim.
Your home and depreciating an insurance claim
Depreciating an insurance claim also applies to your home’s structure, including walls, windows, and the roof. The calculation works the same way. For example, let’s say you have a 25-year composition roof. The roof is ten years old when a windstorm blows in and destroys it. The rate of depreciation for such a roof is four percent per year under normal circumstances. So, if your roof is ten years old when the loss happens, you would subtract 40 percent (4 percent per year multiplied by ten years) from the replacement cost of your roof to come up with the actual cash value.
Making the most out of depreciating an insurance claim
Depreciating an insurance claim isn’t complicated, but it can be frustrating for homeowners who expect to receive full replacement cost immediately for their damaged property. But there are some things homeowners can do to make sure they get the best possible settlement when depreciating an insurance claim:
- Make sure you have replacement cost coverage on your policy. Make sure the replacement cost valuation covers your personal property, dwelling, and roof.
- Save all your invoices, receipts and records of repair. As you replace items that were damaged in your claim, keep the receipts. As part of depreciating an insurance claim, you may need to submit them to the insurance company.
- Keep a video inventory of your home – the inside and out. If you have a significant loss, a video inventory can help substantiate your property’s value.
Depreciating an insurance claim is a standard industry practice. If you have replacement cost coverage on your policy, you should be able to recover the cost to replace your damaged property. If you are having difficulty with your insurance company depreciating an insurance claim and would like a second opinion, contact Bulldog Adjusters. We are a team of public adjusters who work for policyholders to make sure they get fair claim settlements.