Recoverable Depreciation
Plain English
With replacement cost coverage, many insurers pay in two steps. The first check is the repair cost minus wear-and-tear depreciation and your deductible. The second check, the "recoverable depreciation," comes after you finish the repairs and send the bill. If you don't repair or replace, you may not get it.
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Definition
Recoverable depreciation is the amount an insurer holds back from a replacement cost claim at first, and pays later once the damaged property has been repaired or replaced. The first payment is generally the repair cost minus depreciation and the deductible; the held-back depreciation is paid after the policyholder shows the work is done, usually within a time limit the policy sets.
Why It Matters
The first check can look short of the repair estimate, and people sometimes think that's all the insurer will pay. Knowing that the depreciation is recoverable, and what it takes to recover it, can be worth thousands of dollars. The deadline to finish repairs matters too.
Real-World Example
Imagine a roof repair estimated at $14,000, with $4,000 of depreciation for age and a $1,000 deductible, on a replacement cost policy. The first check would be $14,000 minus $4,000 minus $1,000, which is $9,000. After the homeowner has the roof replaced and sends the contractor's final bill, the insurer pays the $4,000 it held back, bringing the total to $13,000, the full cost minus the deductible. If the work isn't done within the policy's time limit, the $4,000 may not be paid.
Common Misconceptions
- Treating the first check as the final settlement on a replacement cost policy.
- Assuming recoverable depreciation is paid automatically. It usually requires proof that the work was completed.
- Confusing it with actual cash value coverage, which generally pays the depreciated value only, with nothing held back to recover.
Key Takeaways
- The Texas Department of Insurance: with a replacement cost policy, "most companies pay with two checks." The first is "for the estimated cost of repairs, minus depreciation and your deductible."
- The second check: the insurer pays "the amount it kept for depreciation after it gets the bill for the finished job," per the same guide.
- You usually must complete repairs within a certain period. Ask your insurer or adjuster how long you have.
- Keep the contractor's final invoice and photos of the finished work; that's what the second payment is based on.
Frequently Asked Questions
How long do I have to recover depreciation?
It's set by your policy and state law. The Texas Department of Insurance says you usually must complete repairs within a certain period and suggests asking your agent or adjuster.
Is depreciation recoverable on all policies?
No. It applies to replacement cost coverage. Actual cash value coverage pays the depreciated value.
What's it commonly confused with?
Non-recoverable depreciation, which is deducted and isn't paid back, as on an actual cash value policy or an actual-cash-value roof endorsement.
Related Terms
Related Coverages
- Homeowners Insurance
Related Scenarios
Explore the rest of the Claims category.
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The factual claims on this page were checked against these sources. Rules and figures change, so check the source itself if you need to confirm the current version.
- Home insurance guideTexas Department of Insurance
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