The value to replace your home, contents, or any additional structures depends on what type of policy you have, and what needs to be replaced. Over time, both the structure and the contents will be subject to wear and tear. This depreciates the value of those structures and objects. Much like a new car driven off the lot is worth less than one still on the lot, a 3-year-old roof is worth more than a 20-year old roof.
When you make a claim for losses after an event like a hailstorm, or a tree falling on your home, the insurance company will assess the costs and value of those losses. Some of your items may be subject to depreciation in value as a way of spreading/allocating the cost of an asset during its lifespan. In short, the contents and the structures you own may be valued at less than you think, if you make a claim for a loss. This depreciation may also apply to labor costs as well.
An example of depreciation of costs
Suppose you buy a new, deluxe refrigerator for $4,000. The refrigerator, according to experts who understand the value of refrigerators, should last 10 years. The hurricane that damages your home and its contents, including the refrigerator, occurs four years after you buy the refrigerator.
The annual depreciation for the refrigerator is $400/year based on dividing $4,000 (the purchase price) by 10 (the lifespan of the refrigerator). If four years have lapsed since the purchase, then the replacement value of the refrigerator when the hurricane strikes is $2400:
$4,000 -$1,600 = $2400
Thus, the insurance company will offer to pay you the Actual Cash Value (ACV) of $2,400. An adjustment may be required because, four years later, the same $4,000 refrigerator may sell for more or less money.
The receipt of the $2,400 isn’t the final result, though, if you need to buy a new refrigerator, since there isn’t a big market for used refrigerators. You still have lost $1,600 in a valuable asset. If the insurance policy pays for recoverable depreciation, the owner of the refrigerator should also be able to claim the $1,600 depreciation.
Now, imagine that the losses you’re claiming are for a multi-million dollar structure, or the $200,000 you spent on re-roofing your apartment complex. Suddenly, that depreciation can cost you tens or hundreds of thousands of dollars.
What’s in your policy matters
Home and business owners should always make sure that their policy covers replacement costs, and not just repair costs or the ACV, in order to recoup the recoverable depreciation.
If your policy provides for recoverable depreciation, then you will be paid in two parts. The first check will be for the actual cash value. The second check, only after you confirm you’ve bought a replacement, will be for the recoverable depreciation. Some adjustments may apply.
The experienced insurance dispute lawyers at Warhurst Law understand how depreciation can impact your claim. We help policyholders in Florida, Alabama, and throughout the Southeast by fighting for the best outcome possible. To schedule a consultation at our Mobile office, please call 251-207-1296 or fill out our contact form.