What is recoverable depreciation?
Although no state or federal law requires homeowners insurance, many mortgage lenders require it. Even if you aren’t financing your property, you’ll likely want a homeowners insurance policy because it provides coverage in the event of a destructive incident.
Homeowners insurance policies offer two different types of reimbursement: actual cash value, which is the depreciated value of an item or structure, and replacement cost, which is the original value of an item or structure.
Recoverable depreciation is the difference between an item’s or structure’s original value and its current value.
For example, your roof might be irreparably damaged during a major storm and require a full replacement. Assuming that the original roof cost $10,000 and has depreciated in value to $6,000, the reimbursement from your insurer depends on which type of coverage you have.
An actual cash value policy pays only the replacement cost minus depreciation and your deductible. Depending on your deductible, you’d receive $6,000 or less in this example. A replacement cost policy pays for what it costs to replace the roof at today’s rate. You’ll receive a full reimbursement of the cost, minus your deductible.
As you shop for a policy you’ll notice most, including HO-2, 3, 5, and 6, feature replacement cost coverage for your dwelling and actual cash value for its contents.
Should I have recoverable depreciation coverage on my home?
“When purchasing property insurance, I’d recommend in the majority of situations to have replacement coverage on the property,” says Dominic Frey, an insurance professional at Hitchings Insurance Agency, adding he believes it ensures that the policyholder’s out-of-pocket cost is only the deductible at the time of the claim.
“Because it is a higher amount of coverage, a replacement cost value policy would be more expensive than an actual cost value policy,” he continues. “However, at the time of the claim, the insurer will likely pay thousands more than the policyholder’s out-of-pocket cost.”
Frey also notes that the costs of a policy with recoverable depreciation will be lower than the overall expenses of similar claims with an actual cash value policy. Homeowners who have multiple items with depreciating values, such as electronics, will benefit the most when a claim is filed.
Learn More: Actual Cash Value vs. Replacement Cost: Which Is best?
Nonrecoverable depreciation is just that – the depreciated value of an item that your homeowners insurance doesn’t reimburse you for. If you have an actual cash value policy, then all your items fall under the “nonrecoverable depreciation” category.