Understanding Depreciation

When you need to file an insurance claim for lost or damaged property, you’ll likely be met with more than a few terms that you may not fully understand. Rather than assuming their meaning, it’s always best to comprehend all aspects of the claims process in order to ensure that you’re getting the settlement you’re entitled to.

You’ve likely heard of the idea that you can buy a car brand new, but as soon as you drive it off the lot, it loses half of its value. Regardless of whether or not this is entirely true, the idea is legitimate.

Depreciation is one of those terms that can be confusing to property owners. It deals with the value of your property and the loss of its value over a given period of time. RCV represents the current cost of repairing the item or replacing it with a similar one, while life expectancy is the item’s average expected lifespan.

Depreciation is typically calculated by evaluating an item’s Replacement Cost Value (RCV) and its life expectancy.

The value of any given item will depreciate over time; that is, it will start to decrease in value from its purchase date. There are a variety of factors that go into determining how much an item may depreciate, such as:

• Age
  
• Wear and Tear
  
• Obsolescence
  

Most insurance policies operate in a similar fashion when it comes to dealing with depreciation. For these policies, claim reimbursement begins with an initial payment for the Actual Cash Value (ACV) of your damage, or the value of the item at the time of the loss. Then, one may also have replacement cost coverage which helps to cover some of the moneys that would have been lost due to depreciation. In these cases, reimbursement may involve multiple payments –

1. Initial payment based on the ACV of your items
   
2. Additional payment(s) once you repair and/or replace the damaged or destroyed items and provide documentation
   

So what needs to happen is that for every item that has been lost or damaged, you’ll have to calculate what it’s currently worth based on a few factors. You’ll need to find a comparable item in today’s market to get the RCV. Then, based on a depreciation percentage for your item (which you’ll need to get from your insurance company), you’ll see how much of that value is lost based on how many years you had the item and what condition it was in at the time of purchase. The RCV less the depreciation costs will equal your ACV.

From there, you’ll subtract your deductible amount to get your net claim amount. If your depreciation is recoverable, then you can add that factor back into the claim amount as well. To make your life easier, be sure to inventory all of your lost or damaged items in an easy-to-navigate spreadsheet where you can insert all of these values. For items where you have receipts, you’ll be in an easier position.


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