When you purchase a home, condo or renters insurance policy, you’ll have the option to choose “replacement cost coverage,” which pays to replace damaged or stolen property with new, similar items. Part of that process includes what’s called “recoverable depreciation.” Recoverable depreciation refers to the gap between the depreciated value of an item and how much it costs to replace a damaged or stolen item with a new, similar item. For example, if the depreciated value of a stolen TV is $900 but the cost of a new, similar model is $2,000, the recoverable depreciation is $1,100.

How Is Recoverable Depreciation Calculated?

When you make an insurance claim under “replacement cost coverage,” your insurance company will first calculate the actual cash value (ACV) of the damaged/destroyed item.

Actual cash value reimbursement

If your item is damaged due to a problem covered by your policy (such as a fire) or stolen, your insurance company will assign an insurance adjuster to determine the ACV of your item. This takes depreciation into account, including the item’s age, life expectancy, and wear and tear. For example, if you purchased a laptop for $2,000 three years ago and it is stolen, your homeowners insurance adjuster might determine that a laptop’s general life expectancy is five years. Since the laptop was three years old (60% of expected lifespan), it depreciated by $1,200 (60% of $2,000 = $1,200). An ACV payment would be $800 ($2,000 – $1,200 depreciated value = $800 ACV). Your insurance deductible will also apply to a claim. So in this scenario, let’s assume you have a $500 deductible. Your insurance check for the ACV of your stolen laptop will be $300 ($800 ACV – $500 insurance deductible = $300).

Recoverable depreciation insurance payment

If your homeowners insurance policy does not have replacement cost coverage, you will only receive an insurance check for the ACV (minus your deductible).
If your policy does have replacement cost coverage, your insurer will first issue a first payment for the ACV of the item so you can start to repair or replace your item. A second payment will be issued for recoverable depreciation. After you receive an ACV insurance payment and you repair or replace your item, you submit your receipt to the insurance company for the new item. You then get a recoverable depreciation insurance payment. If you don’t repair or replace an item, you don’t receive a second check for recoverable depreciation. In this case, you’d only receive a check for the item’s ACV. For example, let’s say you had a fire that destroyed a chair, but you decide not to buy a new chair. Your insurance payment would be only the actual cash value of the original chair.

How To Make a Recoverable Depreciation Claim

If you need to make a recoverable depreciation claim, here’s what to do:

  1. Notify your insurance company as soon as possible about the damage.
  2. Gather all relevant documentation, such as police reports (for theft claims), receipts and photographs.
  3. Submit your claim form, along with any supporting documentation, to the insurance company.
  4. Wait for the insurance company to process your claim.
  5. Receive your first payment for the item’s actual cash value.
  6. Repair or replace your item.
  7. Submit the receipt to the insurer.
  8. Receive your second payment for recoverable depreciation.

It’s okay to negotiate the value of your recoverable depreciation check if you disagree with your insurance company’s assessment. You can also ask for a line-item breakdown of values rather than a lump-sum if you want to see how they’ve evaluated each item. Trevor Chapman, a spokesperson for Farmers Insurance, says that Farmers sees a lot of recoverable depreciation claims for expensive items like appliances, home furnishings and TVs.

Who Gets a Recoverable Depreciation Insurance Check?

The recoverable depreciation payment may be issued to you, a lienholder or the repair company, depending on the nature of the claim. For example, if your home is damaged, your mortgage company might be listed on the insurance check because it has a legal interest in your home. But if you’re replacing an appliance or furniture, the payment will be issued to only you.

What Factors Impact Recoverable Depreciation Payment?

The actual cost of the replacement item is less than the value of your original item

Say you paid $1,500 for a TV that got destroyed but the replacement TV you bought only cost $1,000. In this case, your recoverable depreciation payment would be calculated based on the $1,000 TV. You won’t get to pocket the difference.

You decided not to replace or repair an item

If you choose not to repair or replace the item, you won’t receive a recoverable depreciation check. You will only receive a check for the item’s actual cash value.

You filed a claim for an item that doesn’t depreciate

If you filed a claim for an item that doesn’t appreciate in value—such as certain jewelry—you won’t receive a second check.

You missed the claim deadline

Some states give you a set time period to make a claim for recoverable depreciation. This time period could be six months or a year, depending on where you live. For example, in Florida, you must file a claim for recoverable depreciation within six months of your ACV payment or a final court order declaring your right to replacement cost (whichever is later).

What Is Non-Recoverable Depreciation?

Non-recoverable depreciation refers to any items you’re not able to claim under replacement cost coverage. So if you have a home insurance policy that pays only actual cash value, for example, all your claims would count as “non-recoverable depreciation.”

Do I Need Recoverable Depreciation Insurance?

Everyone’s financial situation is different, but think of it like this: If your personal belongings were damaged, would you have enough money to easily cover the full replacement cost (minus the ACV insurance check you’d receive)? If not, having replacement cost coverage helps you fill in the gap. Replacement cost coverage is more expensive but it’s generally the better option.

~ Cassidy Horton: Contributor, Forbes Blog