Depreciation in homeowner insurance is the reduction in value of your property due to age, wear, and condition. The actual cash value (ACV) of your claim is calculated as the replacement cost minus depreciation. You can recover the withheld depreciation through a supplemental claim after repairs are completed.
Understanding how depreciation works is the key to maximizing your claim payout. Many homeowners unknowingly leave thousands of dollars on the table by not claiming recoverable depreciation.
What Is Actual Cash Value (ACV) vs Replacement Cost Value (RCV)?
Your policy likely pays on a replacement cost basis for your dwelling and actual cash value for personal property. Understanding the difference is essential.
| Replacement Cost Value (RCV) | The full cost to repair or replace the damaged item at today's prices |
| Depreciation | The reduction in value based on age, condition, and useful life of the item |
| Actual Cash Value (ACV) | RCV minus depreciation = what you get paid initially |
| Recoverable Depreciation | The difference between ACV and RCV, paid after repairs are completed |
How Depreciation Is Calculated
Insurance companies use a standard formula to calculate depreciation based on the expected useful life of the item and its remaining life at the time of the loss.
- A 20-year-old roof with a 30-year useful life has approximately 33% of its life remaining
- A 10-year-old HVAC system with a 20-year life has 50% remaining value
- Different items have different useful life schedules used by the insurance industry
- Condition and maintenance history can affect the depreciation calculation
- Some items like carpet and paint depreciate faster than structural materials like roofing
Supplemental Claims: Recovering Depreciation
Most standard homeowner policies include recoverable depreciation. This means you can claim the withheld depreciation after you complete the repairs. The process is called a supplemental claim.
- Complete the repairs and keep all invoices and receipts
- Submit the receipts to your insurance company as proof of completion
- The insurer pays the difference between ACV and RCV once repairs are verified
- You have a limited time (often 180 days to 1 year) to complete repairs and claim depreciation
- If you do not complete the repairs, you only keep the ACV amount
