Understanding Less Recoverable Depreciation in Homeowners Insurance

When you file a claim on your homeowners’ insurance policy, the amount you’re reimbursed often falls short of what you actually need to repair or replace your damaged property. This gap frequently stems from less recoverable depreciation—the portion of an item’s value loss that your insurance policy simply won’t cover. Understanding this distinction could save you from a financial surprise when disaster strikes.

The Gap Between Replacement Cost and Actual Cash Value

Your insurance company uses two key figures when processing claims: replacement cost and actual cash value (ACV). Replacement cost is straightforward—it’s what you’d pay today to replace a damaged item in its pre-loss condition. Actual cash value is more complicated: it equals the replacement cost minus depreciation. This depreciation represents how much value an item has lost due to age and wear. With less recoverable depreciation policies, the insurance company only pays the ACV, not the full replacement cost. That difference between the two becomes your financial burden.

Consider a real example: You have a television destroyed in a storm. The same model sells for $2,000 in stores today. You bought it two years ago, and this particular model typically lasts five years before it becomes obsolete—meaning it loses about 20% of its value annually. After two years of ownership, your TV has depreciated by $800 (20% per year × 2 years), making its actual cash value just $1,200. If your policy includes recoverable depreciation coverage, you’d receive the full $2,000. With less recoverable depreciation, the insurance company only reimburses you $1,200, leaving an $800 gap you must cover yourself.

How Depreciation Reduces Your Insurance Reimbursement

Depreciation gets calculated using an item’s useful life—the manufacturer’s estimated lifespan before replacement becomes necessary. The formula is straightforward: take the replacement cost, divide it by the useful life in years to find annual depreciation, then multiply by the number of years the item has been in use.

Now imagine your roof needs replacement after storm damage. The repair costs $10,000, and that’s actually what you paid for the roof when it was installed. However, your roof has a 20-year useful life. That means it depreciates by 5% annually (100% ÷ 20 years). If your roof was 10 years old when damage occurred, it has depreciated by 50% (5% per year × 10 years). Under a less recoverable depreciation policy, the insurance company calculates your ACV at just $5,000 ($10,000 original cost minus 50% depreciation). You receive $5,000 in compensation, but you still need $10,000 to make the repairs. The missing $5,000 represents your non-covered depreciation loss.

Why Less Recoverable Depreciation Leaves You Short

The cumulative impact of less recoverable depreciation can be substantial. If you experience multiple claims—kitchen appliances, flooring, HVAC systems—each one suffers the same treatment. A 15-year-old furnace, a 12-year-old water heater, carpeting that’s nearing the end of its lifespan—all receive heavily discounted reimbursement under a policy with less recoverable depreciation coverage.

This is precisely why many homeowners choose policies with replacement cost coverage whenever possible. These policies ensure that depreciation becomes recoverable, meaning the full replacement cost gets reimbursed regardless of how old the damaged items were. While replacement cost policies often cost more in premiums, they protect you from bearing the depreciation burden yourself. Before selecting your homeowners’ insurance policy, ask specifically about how depreciation is handled and whether less recoverable depreciation limitations apply to your coverage.