Depreciation
The value things lose over time — the gap between what you paid and what it’s worth now.
Depreciation is the amount an insurer subtracts from a repair or replacement price to account for age, wear and remaining useful life. It is not a penalty and it is not a negotiating tactic — it is the arithmetic behind an actual cash value settlement.
The usual method weighs age against expected life. If shingles are rated for twenty-five years and the roof is ten years old, roughly forty percent of its life is used up, and something close to that comes off the replacement price. Condition can push the figure either way, and different insurers use different depreciation schedules for the same category of item.
The word that matters most on a claim letter is recoverable. On a replacement cost policy, depreciation is held back and then paid once the work is finished and documented. On an actual cash value settlement it is non-recoverable — it comes off and never comes back.
Depreciation and the deductible are two separate subtractions, and they stack. Depreciation reduces the value of the loss first, then the deductible reduces the payment. Whether labor can be depreciated alongside materials is contested and handled differently from state to state.
Vehicles depreciate on a schedule of their own, and quickly in the early years. That is the mechanic behind a loan balance that outruns the car's value, and the reason gap coverage exists at all.
In real life
Hail damages a twelve-year-old roof rated for twenty-five years. The replacement quote is $14,000. The adjuster applies roughly 48 percent depreciation, bringing the value to about $7,280, then subtracts a $2,000 wind and hail deductible. The first check is $5,280. On a replacement cost policy, the remaining $6,720 is released once the roof is finished and the invoice is submitted. On an actual cash value roof, that $6,720 never arrives.
Common questions
How do insurance companies calculate depreciation on a claim?
The common method compares an item's age to its expected useful life, then applies that share to what a comparable new item costs today. A ten-year-old roof rated for twenty-five years is roughly forty percent through its life. Condition, maintenance and the insurer's own depreciation schedule can shift the number, so two insurers can reach different figures for the same item.
What is recoverable depreciation?
It is the depreciated amount an insurer holds back on a replacement cost claim and pays later. The first check covers the actual cash value. Once the repair or replacement is finished and receipts are submitted, the holdback is released, usually within a deadline the policy sets. On an actual cash value settlement the depreciation is non-recoverable, meaning it is never paid at all.
Is depreciation taken before or after the deductible?
Depreciation generally comes first. The adjuster reduces the replacement price by depreciation to reach actual cash value, then subtracts the deductible from that figure. The two subtractions stack rather than overlap, which is why a high deductible on an older item can leave a very small payment, and occasionally none at all.
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Definitions describe how these terms are generally used across the U.S. market. Wording, limits and exclusions vary by insurer, policy form and state — the policy you hold is what controls. See the full Insurance Glossary.