When you file an insurance claim for your auto, home or other property, you may receive less money from the insurance company than you were expecting. The reason for this is that insurance companies depreciate your claim. Understanding depreciation can help you make sure you buy the right kind of insurance to protect your property.
What is Depreciation?
Depreciation is the difference between the actual value of an item and the amount it would cost to repair or replace the item. For example, the depreciated value of a 3-year-old television might be $100, which would be the amount that television would fetch if sold on the open market. However, if that television were damaged or stolen, it might cost $800 to buy a replacement. The cost difference is depreciation.
Depreciation vs. Actual Cash Value
When you buy homeowners insurance, you can choose between an actual cash value policy and a replacement cost policy. If you have an actual cash value policy, the insurance company pays the depreciated value of your belongings. In other words, they would pay the $100 that your old television set is actually worth after depreciation. However, if you have a replacement cost policy, your insurance company would pay the cost to replace your television with an new, similar television.
Recoverable Depreciation Clause
Some replacement cost policies include a recoverable depreciation clause. If your policy includes this clause, the insurance company only has to pay for items that you actually repair or replace. In order to receive your funds, you will first need to repair or replace an item and then submit your receipts to the insurance company. Only then will they process your claim and send you a check. If you decide not to repair or replace your property, the insurance company will not send you any money.
Standard auto insurance policies do not offer a replacement cost option. Instead, depreciation is applied to auto claims, with the actual cash value based on a vehicle's age and condition. However, some insurance companies do offer a replacement cost policy for new vehicles. This coverage would pay the entire cost of repairing or replacing the vehicle if it is damaged in an accident. Actual cash value still applies if the vehicle is stolen or damaged in a fire.