Depreciation is the amount your property drops in value since you first bought it. When you need to replace your property, depreciation can affect your insurance claims.
If you have to file an insurance claim, chances are you're already stressed out. A thief may have violated your right to privacy and raided your home. A devastating natural disaster could’ve left your house in ruins. An accidental water leak or burst pipe might leave you mopping up the damage.
On top of all this stress, you’re faced with paying depreciation on your insurance claim. What is depreciation, and how does it apply to insurance claims? And is there anything you can do to prevent it?
Insurance broker Jerry
has what you need to know about insurance depreciation and how to handle it on a claim. What is depreciation in insurance?
Both your home and its contents had an initial purchase price or value. It’s what the item was worth when you first bought it. Over time and with use, the value goes down due to wear and tear, as it goes out of style, the technology advances, or it doesn’t work like it once used to.
Of course, it would be silly for someone to pay you the same amount that you initially paid for it, wouldn’t it? That’s how depreciation works.
Depreciation is the difference between what you paid for an item and what it’s now worth, based on any number of factors. Here’s an example:
In 2007, you bought a brand-new iPod Touch with the latest digital music technology for $199.
You spent hundreds of hours of your life adding your music, creating playlists, and listening to your device.
In 2020, you finally subscribe to a streaming music service like Spotify or Prime Music, and you no longer need your iPod.
When you try to sell it, your Marketplace ad garners no attention for even $50. You sell it eventually for $20.
The depreciation is your purchase price of $199 minus the actual cash value of $20, or $179.
In the example, your iPod depreciated since the technology is years old, it’s no longer in demand, and it’s very well used. The same goes for your home and belongings. How much depreciation there is might be different, but the premise is the same.
MORE: 4 car depreciation hacks courtesy of Kelley Blue Book
Do all insurance claims experience depreciation?
Although depreciation affects almost every aspect of ownership (both homes and personal property), how it applies to your insurance claim can differ. It depends on the homeowners insurance policy you purchased. Do you have an actual cash value policy or a replacement cost policy?
The difference between actual cash value and replacement cost policies
Many insurance policies compensate you for your loss based on the actual cash value of the item. That’s what you would’ve been able to sell the item for if you had a buyer for it immediately preceding the loss. It’s the depreciated value of an item, in other words.
Other policies are based on replacement cost, though. For these insurance policies, you’re entitled to the cost to either restore the item to its like-new condition or the cost to replace what you have lost.
Typically, you need to purchase the item and request reimbursement.
Although a replacement cost policy is obviously more desirable than an actual cash value policy, you can certainly expect higher premiums for it.
How to combat depreciation in an insurance claim
If you’re dissatisfied with the depreciated amount you’re being offered by your insurer, you have a few options to fight for a higher valuation.
Provide proof of value
If you have a recent receipt for the item that you’re claiming or if you have comparable listings for the item in a similar pre-loss condition, you can present that information to the claims adjuster
. At their discretion, they might reconsider their valuation. Prove the condition of your belongings
Do you have a selfie with a snapshot of your jukebox in the background that shows it’s in pristine condition? Proof of condition either with an appraisal or photo evidence can support your claim for a higher price.
Compare with a depreciation guide
Several depreciation calculators are available online to aid in evaluating items involved in your claim. Research your claim by item and send it to your adjuster.
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