Understanding “Recoverable Depreciation”

Chances are that you have never heard the words “Recoverable Depreciation,” unless you have had a homeowners insurance claim. If you have had a homeowners claim, and are staring at that word, you probably don’t know what it means, are also staring at a check, and might even be a little bit angry the check wasn’t as much as you had expected. Well, understanding recoverable depreciation is important because it is money that you can get back and can help you repair your house.

Real estate appreciates (goes up in value), right? Well… generally yes, but the individual parts of a house depreciate (go down in value). Let’s take a roof as an example. As a homeowner you know that if you own your house long enough that you will have to replace your roof. If you have composite shingles they will actually tell you what the expected life of the shingle is. For example, you might hear “this is a 20 year shingle.” That is the manufacturer telling you this shingle will be shot in 20 years. So, let’s say that at year 10 you have roof damage. You are 50% into the life of that shingle and therefore 50% into the life of the roof. The adjuster will come out, calculate out what the cost to replace that roof will be let’s say $10,000, then subtract the recoverable depreciation (let’s say $5,000), subtract the deductible (let’s say $1000), and cut you a check (in this case $4,000). WHAT!?

Let’s understand what happened here. Let’s start with the deductible, that’s easy it’s the part you are responsible for. The recoverable depreciation is the replacement cost of the home minus the depreciation. So the amount they cut the check for is, theoretically, the current value of the roof.

But wait, my policy covers me for replacement cost. Good. That makes that depreciation recoverable. See, insurance policies can be written at the Actual cash value, or at the Replacement Cost. Actual Cash value depreciates the parts, and pays you less. Replacement Cost pays to get you new stuff. At least that is the simple explanation. The problem is, once again, your crummy neighbor. You would never do this, but your neighbor is trying to make money off insurance which insurance is designed for it is supposed to put you back where you were not provided a windfall. See your neighbor doesn’t really want to replace his roof, he wants to pocket the money instead. So the company will pay him, and because of him, you, the actual cash value of the roof. Then,if you provide invoices or show that the roof is in the process of being replaced or has been replaced (each company is a little different), then you get that depreciation back. You are able to “recover”the depreciation. While it is a pain, it’s how the insurance companies make sure that your crummy neighbor does what he is supposed to do, which creates a hassle for all, but because the insurance companies know that you are an upstanding citizen that is going to replace your roof, they created recoverable depreciation. So in this case you would be able to get $9,000 for your roof. The replacement cost minus the deductible, which is what you should have expected in the first place.