Understanding How Insurance Depreciation Affects Your Claim Payouts

When you file a homeowners’ insurance claim, the amount you receive depends largely on how your insurance company calculates depreciation. Not all insurance policies treat depreciation the same way, and understanding the difference between recoverable and non-recoverable depreciation can significantly impact your reimbursement.

The Foundation: How Depreciation Works in Insurance Claims

Every item covered under your homeowners’ policy loses value over time due to age and normal wear. This decline is called depreciation, and it’s central to how insurance companies determine what they’ll actually pay you.

There are two key concepts here: replacement cost (the price to buy a new item identical to what you lost) and actual cash value (the replacement cost minus depreciation). When you file a claim, your insurer calculates depreciation based on an item’s useful life—essentially how many years it’s designed to last.

The Critical Difference: What Gets Paid Back?

Non-recoverable depreciation represents the portion of value loss that your insurance company simply won’t reimburse. If your policy only covers actual cash value, you bear the full cost of depreciation yourself.

Consider a roof that originally cost $10,000 with a 20-year lifespan. If it’s damaged after 10 years, the roof has depreciated by 50% (losing 5% annually over those 10 years). The actual cash value drops to $5,000. With a non-recoverable depreciation policy, you receive only $5,000—the missing $5,000 gap is entirely your financial loss.

Recoverable depreciation, by contrast, is the portion you can recover through your insurance claim. This applies when your policy includes replacement cost coverage. In this scenario, after you receive the actual cash value payment, you can file for an additional reimbursement to cover the depreciation costs, ultimately allowing you to replace the item at its full pre-loss price.

Real-World Example: How the Numbers Work

Suppose a storm destroys your television purchased two years ago. The current retail price for the same model is $2,000, and this model typically lasts five years (depreciating 20% annually).

After two years of ownership, your television’s actual cash value is $1,200 ($2,000 minus $800 in accumulated depreciation). With a recoverable depreciation policy, that $800 difference becomes recoverable—you’d eventually receive funds to bridge the gap between the depreciated value and full replacement cost. Without it, you simply lose the $800.

Why Your Policy Type Matters

The distinction between recoverable and non-recoverable depreciation isn’t academic—it directly affects your wallet when disaster strikes. Policies offering replacement cost coverage with recoverable depreciation provide superior protection, ensuring you’re not penalized for an item’s age. Understanding which type you carry allows you to plan accordingly and make informed decisions about additional coverage or self-insurance strategies.