What is Recoverable Depreciation in Home Insurance?
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What is Recoverable Depreciation?
When insuring your home and belongings, you will see two terms: ACV and RCV. ACV stands for actual cash value, and RCV means replacement cost value. ACV is the value of your item as it is today (including depreciation), while RCV covers the cost to replace it at retail price. The difference between RCV and ACV is the recoverable depreciation.
Knowing how this works can help you when it is time to file an insurance claim. Let’s dive in.
Recoverable Depreciation
Rather than pay your entire claim payment at once, insurance companies make two payments. First, they will pay for an item based on its current ACV value, deducting any depreciation from wear and tear. Once it is fixed, they will pay you the remaining amount, finally getting you to the RCV value.
This assumes the item has RCV coverage. If you only have ACV coverage, there is no second payment. The purpose of recoverable depreciation is to prevent insurance fraud.
For example, let’s say you have a brand-new dishwasher. You bought it for $1,000 a few years ago, and it is now worth $500. If you only have ACV coverage, you will receive $500 (minus any deductible). If you have replacement cost coverage, you will still only get $500 upfront; then, once you buy a new dishwasher and show the insurance company the receipt, they will send the rest.
Again, this system discourages fraud. If you got all $1,000 upfront, you could potentially buy a used $600 dishwasher and pocket the difference.
Recoverable depreciation works the same for home repairs and replacements as well. Let’s say you must replace damaged kitchen counters and cabinets from a tree falling through the roof. You will get a check for the current value of the building materials, then the rest once you finish the work.
What is Non-Recoverable Depreciation?
As the name suggests, non-recoverable depreciation doesn’t provide a second check, the amount of the item’s depreciation. So, if your dishwasher only has ACV coverage, you will not receive the $500 depreciation amount.
Often, homeowners insurance provides RCV for structural damage and ACV for personal property. Check your insurance plan to see if you can receive the total replacement cost for your items. You do not want a surprise when you think you are claiming recoverable depreciation. You can upgrade from ACV to RCV.
Recoverable Depreciation for Your Roof
Home insurers use a formula to determine how much your assets depreciate. The procedure usually looks like this:
Cost divided by the expected lifespan equals the annual percentage.
So, let’s use a roof as an example. Say you paid $20,000 for a new roof eight years ago. This roof will last 20 years, meaning that it depreciates five percent each year ($20,000/20). That translates to about $1,000 annually.
Now you need a roof replacement because of hail damage or a fallen tree branch. After eight years, the roof is now worth $12,000 ($20,000 – $8,000).
Assume you have a $1,000 deductible as well. Based on these figures, you will get a check for $11,000 from your insurance company right away. Once you finish replacing your roof, you will get the remaining $8,000. This $8,000 is the recoverable depreciation. You will only get this $8,000 if you have RCV coverage on your roof. If you have ACV coverage on your roof, you only get the $11,000 check.
Flood Insurance Recoverable Depreciation
Most homeowners must buy flood insurance through the National Flood Insurance Program. The NFIP policy comes with recoverable depreciation. The NFIP offers both structural and personal contents coverage as separate policies. This insurance only covers flood damage, nothing else.
The coverage limits for NFIP insurance are $250,000 for your home, and claims are valued at RCV. You get up to $100,000 for personal property, which is valued at ACV for claims.
As with other insurance types, you can upgrade to replacement cost coverage. Otherwise, personal property will only come with ACV insurance. Also, there are sub-limits on specific categories of personal property. Some notable sub-limits include:
- Currency
- Jewelry
- Collectibles
- Precious Metals
- Stocks and Bonds
Recoverable depreciation for flood coverage works the same as home insurance. Your flood insurance carrier will pay the ACV value for a claim first, and then after you finish the repairs, they will pay up to the full RCV value – that assumes the item has RCV coverage.
Recoverable Depreciation FAQs
Is There a Recoverable Depreciation Time Limit?
Yes, insurance companies will put a time limit on recoverable depreciation payments. However, the exact timeframe depends on the insurer and the item. In some cases, you might have six months, while other plans may give you up to two years. Talk to your insurance agent or look through your policy to find the limit.
Does the Homeowner Get the Recoverable Depreciation?
Yes. When claiming recoverable depreciation, the insurance company pays the homeowner. From there, you can pay any repair company or contractor.
Does the Contractor Get the Recoverable Depreciation?
The insurance company does not pay contractors directly. Instead, your insurer pays you, and you pay the contractor. If the recoverable depreciation exceeds the repair costs, you do not keep that money. Insurance companies require homeowners to return any unspent funds.
Otherwise, the practice could lead to fraud.
How Do I Get Recoverable Depreciation Back?
You must provide proof of renovations and repairs to claim recoverable depreciation. Because of how the system works, most contractors will bill you the same way. They will take the ACV check first, then wait for recoverable deprecation to bill the rest.
Be sure to ask repair companies or contractors for documentation once they have finished. Without this paperwork, you cannot get any extra money.
Recoverable Depreciation in Florida
Florida homeowners do not have to do the recoverable depreciation dance. A Florida recoverable depreciation-related court case in 2013 made it so that insurance companies must pay the total replacement cost upfront. So, if you live in Florida and have RCV insurance, you do not have to wait for the recoverable depreciation.
To prevent fraud, though, homeowners must have insurance up to 80 percent of their home’s value. That is outlined in your policy’s coinsurance clause. Also, homeowners still cannot keep any extra money. If the replacement value is $10,000 and you charge a contractor $8,000, the insurance company gets $2,000 back.
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