In insurance, recoverable depreciation refers to the monetary gap between an item’s original, retail cost and its current, depreciated value. Recoverable depreciation typically applies to homeowners policies that pay claims based on replacement cost: If you have a claim for a damaged or stolen item, you can “recover” this amount of depreciation.
How recoverable depreciation affects a home insurance claim
To better understand recoverable depreciation, let's look first at how insurance companies determine the amount of money they'll pay you to replace a damaged or stolen item. This determination depends on the type of policy you have.
For example, let’s say your camera, which cost $1,200 to purchase two years ago, is stolen. You decide to file a personal property claim with your homeowners insurance company.
If your policy pays actual cash value (ACV), the insurance company’s payment will be based on the camera's depreciated (current) value. Due to the camera’s age, the insurance company may determine that its ACV is only $1,000 — it’s depreciated $200 in the two years since you bought it. So that’s the amount on which they’ll base the amount of the payout.
If, however, your policy pays replacement cost value (RCV), the insurance company will base its total payout on the $1,200 cost of a new camera.
The $200 difference between the ACV and the RCV is the amount of depreciation. Because the RCV policy accounts for this in your claim payout, it’s referred to as “recoverable depreciation.”
Note that in either case, the policy’s deductible will apply. If there’s a $500 deductible for personal property claims, you'll receive a check for either $500 or $700, depending on your policy type.
Check your policy contract to see whether your insurer pays ACV or RCV in case of a claim. If you're still unsure, contact the insurance company or your agent for clarification.
How to calculate recoverable depreciation
Each insurance company takes a different approach to calculating the depreciation of an item. However, a standard method is to divide the retail cost of the item by its useful life.
Let’s go back to our camera example. The insurance company may determine that your DSLR camera has a useful life of 12 years. This is based on average wear and tear and product obsolescence for your style of camera. The insurer would therefore divide the $1,200 retail cost of the camera by 12 to get a depreciation of $100 per year.
Original purchase price of camera: $1,200
Useful life: 12 years
Rate of depreciation ($1,200 / 12): $100
Depreciation after two years: $100 * 2 = $200
Depreciation after six years: $100 * 6 = $600
How to file a claim for recoverable depreciation
If your policy pays RCV and you hope to claim recoverable depreciation, there are a few things you should know.
As with any other claim, your first step should be to contact your insurance company or agent. They’ll review the process for filing a claim and receiving payment, and can answer any questions you have. Pay close attention to their instructions. Be sure to note any deadlines or documentation you’ll need to provide to support your claim.
The insurance company will review your claim and decide on its validity. Assuming it approves the claim, you can expect to receive two payouts:
The first payout will be for the ACV of the item, minus your deductible. Once you have this money in hand, you'll need to put it toward purchasing a replacement. Then, you'll submit the receipt to the insurance company.
Once the insurance company receives your receipt, it’ll determine your recoverable depreciation and send you a second payout for that amount. Depending on the type of claim, this second payout may be sent directly to your service provider (for example, a contractor hired to replace a damaged roof or deck).
Going back to our original example of the stolen camera:
- You’ll receive a first check for $500, representing the ACV of the camera minus your deductible.
- You'll purchase a new camera for $1,200 and submit the receipt to the insurance company.
- You’ll receive a second check for $200 for the camera’s recoverable depreciation.
Important: If the replacement item costs less than the original purchase price, the insurance company will only pay recoverable depreciation based on that lower cost. So if you find the camera on sale for $1,100, the value of your recoverable depreciation check will be only $100. The insurance company will not let you pocket the difference.
Recoverable depreciation is important to understand for homeowners insurance
Recoverable depreciation is an important concept to understand when you have a homeowners insurance policy. If your policy pays claims based on RCV, be sure you follow your insurer’s instructions to help maximize your payout.
Frequently asked questions: Recoverable depreciation
Do I get to keep the recoverable depreciation?
If your insurance policy pays based on replacement cost value (RCV), and you follow your insurer's instructions when you file a claim, you should expect to be paid for recoverable depreciation. Note that your insurance claim payout will reflect your policy's deductible, so you may still have to spend some out-of-pocket money to replace the covered item.
What is the difference between depreciation and recoverable depreciation?
Think of depreciation as the monetary value an item has lost since you purchased it. Most of the things you buy — your electronics, appliances, tools, furniture, clothing, sporting goods, etc.- depreciate as time passes. The laptop you purchased two years ago or the golf clubs you bought last year simply aren't worth their purchase price anymore.
Some insurance policies will use the depreciated amount of an item — also known as its actual cash value (ACV) — when determining what to pay you if the item is stolen or damaged.
With recoverable depreciation, however, the insurance company uses the cost to buy the item new — its replacement cost value (RCV) — when determining what to pay. Recoverable depreciation thus represents the gap between the ACV and the RCV of an item.
What is recoverable depreciation on a roof claim?
If your homeowners policy pays replacement cost value (RCV) for roof repair or replacement, then you should be able to file a claim for recoverable depreciation.
The insurance company will want to know the original roof’s useful life and replacement cost. The company will then calculate the roof's depreciation to determine its actual cash value (ACV) when it was damaged. Assuming you follow all the insurance company's instructions, you'll receive a first check for the amount of the ACV. You'll then hire a contractor to repair the roof and pay that contractor the ACV plus your policy deductible. Upon completion of the work, you'll submit a copy of the invoice to the insurer. The insurer will then send a check to the contractor for the value of the recoverable depreciation.