I thought I’d record a short video to share my take on depreciation.
I had several hours of driving to do and decided to at least get some thoughts out there.
Depreciation, in short, is the difference between ACV and RCV of your property – whether that be your house, car or furniture.
RCV is the Replacement Cost Value of something. Phrased differently, RCV is what it would cost to replace an item today.
ACV is the Actual Cash Value, or sometimes referred to as Fair Market Value. It’s a more subjective valuation of what an item is worth on the open market today.
Why should you care? Because when it comes to paying out your property claim, your insurance adjuster will use the ACV value as the basis for their initial (and sometimes only) settlement offer. I see potential errors and problems every day when it comes to property claims and depreciation. I’ll list a couple here.
Flat Rate Depreciation
This is the most common error I see, and also the most dishonest in my opinion. Taking a flat 25% or 35% depreciation on a claim is just lazy adjusting and is completely inaccurate.
The adjuster who uses this technique is essentially saying that everything in the estimate has decreased in value at the same rate over the same amount of time. In the case of property claims, it’s like saying your carpets and countertops have the exact same “useful life”, have experienced the exact same wear and tear, and were installed at the exact same time. It’s just not an accurate portrayal of reality.
The biggest issue I have with Flat Rate depreciation is the fact that it also reduces the labor costs at the same rate. How does labor depreciate in value? It doesn’t. Depreciating labor then becomes another tool for insurance carriers to reduce the “severity” of claims when dealing with uninformed claimants and contractors.
50% or more Depreciation
I shake my head every time I see an adjuster take 50% or more value from an item. And I’ve been there when homeowners get fairly upset and insulted by it. Taking that much depreciation is just hurtful and unfair.
The problem is in the rebuild. When that homeowner goes to hire a contractor to perform repairs, what is the first thing that contractor will need: a deposit. A claim that has been depreciated at this level puts the homeowner in a position of having to come out of pocket to start repairs, even if the claim is fully covered.
What Can We Do?
The first thing you can do is understand your policy and the part that depreciation plays. Most homeowner’s and auto policies have depreciation written in. It is possible to buy an insurance policy that is “RCV”, you’ve just got to know what to ask for.
The second thing is to understand that depreciation is subjective and completely negotiable. If you feel that depreciation has been taken unfairly or incorrectly calculated, push back. Don’t settle for a “that’s just the way it is” answer from your adjuster. Ask them how they calculated depreciation, and come to the table with your own valuations.
The third thing to do is to learn how to RECOVER the depreciated amount taken. This is the area that most carriers hope you just forget about. If you never ask for your depreciation, guess who gets to keep it. It’s not like the insurance company is going to call you up in a couple months and say, “hey, remember that recoverable depreciation? Are you gonna want that back?”
Recover Your Depreciation
The most common way to recover depreciation is you spend the money. For contents, that means going out and replacing that TV or coffee table and providing a receipt for replacement cost. This is not a straightforward or simple process, and your carrier with drag it’s feet the entire way.
For property damage repair, you can usually get an RCV check written if you show that you’ve contracted for AT LEAST the full amount of the settlement. This means you’ve negotiated a repair contract with a contractor and their bid meets or exceeds the full claim settlement amount.