Your home and most of your personal property, such as your television, washing machine and even your roof, may lose value over time due to factors such as age, wear and tear, and obsolescence. This loss in value is commonly referred to as depreciation.
In most insurance policies, claim reimbursement begins with an upfront payment for the actual cash value of your damage. Actual cash value means the value of the damaged or destroyed item(s) at the time of the loss.
If your policy includes replacement cost coverage, you may be able to receive additional money to cover the depreciation of these items. The reimbursement process may involve two or more payments--one for your initial payment based on the ACV of your items and then additional payment(s) once you repair and/or replace the damaged or destroyed item(s) and provide documentation to your insurance company.
Generally, depreciation is calculated by evaluating an item's replacement cost value (I.e. the current cost of repairing the item or replacing it with a similar one and its life expectancy ( I.e. the item's average expected lifespan).
For example, let's say your 42-inch flat screen television was destroyed in a house fee. You bought the television 3 years ago and it was in good condition before the fire. A similar television is sold today for $1200 (replacement cost value). Your television has a life expectancy of 10 years, meaning it loses 10% of its value each year. Because your television was 3 years old, it had lost 30% of its value before being destroyed by the fire. Therefore, the actual cash value (I.e. the value at the time of the loss) of your television is $840.00.
Cost of new television today = $1,200.00
Minus 30% depreciation. (360.00)
Equals the value of your tv. $ 840.00
This calculation technique also applies to most of the structural components of your house that wear out over time, such as the roof.
Please keep in mind the condition of an item may also factor into the depreciation calculation.
While most insurance policies include some replacement cost coverage check with your insurance agent to verify your policy specifics.