Depreciation on Insurance Payout

[Dean Letfus]

We have just made our first claim after major water damage in a rental. The insurance company deducted nearly 6K off the payout for depreciation?  This makes no sense to us and we have never heard of it before.  Is this normal in the USA? Should we challenge it?

How can you depreciate essential repairs on a property?

[BreAnn Stephenson]

Hi Dean, I think I may be able to help clear this up pretty quickly. :)

In the US, in either case of Actual Cash Value (ACV) coverage or Replacement Cost (RC) coverage, depreciation is always subtracted from the initial settlement. The difference is that with Replacement Cost, the depreciation is recoverable whereas with Actual Cash Value the depreciation is not. 

Practically how that works for RC is you would receive your initial settlement and make your repairs. Then, once the repairs are made, if you spend more than your initial settlement amount plus your deductible, you can recoup some or all of the depreciation that was initially withheld.

Your deductible is always your out-of-pocket expense, so that does come into play, but again, once the repairs are made, gather your receipts to submit to your insurer. They may then be able to cut you a second check for any recoverable depreciation that you can still collect.

Also, they are not depreciating the repairs, the depreciation is based off of the usable life that was left in the damaged materials at the time of the loss. So, let's say you have a roof with 20-year shingles that is 5 years old that was damaged in a hail storm and it needs to be replaced. They are essentially reimbursing you for the 15 years you still had left on those shingles...to try to put it simply... If you have Actual Cash Value coverage, you would only receive one check, subtracting your deductible and depreciation. The depreciation here is accounting for the 5 years that you were able to use the shingles... If you have Replacement Cost, you theoretically would be able to get your 5 years back too... 

Now, one last thing... if the item(s) that are damaged are brand new, the settlement may end up being close or exactly the same in the case of either RC or ACV... this is because there is essentially little or nothing to depreciate. Then your only out-of-pocket cost would be the deductible.

Clear as mud? ;)

Hope that helps!

-BreAnn