If a time comes when you need to file a homeowners insurance claim, you’ll want to receive all of the money that you deserve. You may believe that, since you have replacement coverage, you’ll receive the entire amount upfront, even if you decide not to replace damaged or lost items. Unfortunately, most insurance policies pay less because of “withheld depreciation.”
If you choose to take the money instead of replacing what you lost, the insurance company may only pay you the actual cash value, or ACV of the claim. This is the value of the damaged or destroyed items at the time of loss. This value is lower due to depreciation.
Depreciation is the estimated loss in value due to wear and tear, age, and obsolescence. It’s calculated by comparing the value to the life expectancy in order to determine how much it drops each year. For instance, if you bought a laptop two years ago and its average lifespan is 5 years, the laptop loses 20% of its value each year. With depreciation, your $1,000 purchase is only worth $600 after two years. Obviously, if you file for a catastrophic loss withheld depreciation can reduce your payment significantly, but it can also affect a claim for partial loss or damage.
Roof damage is a common claim on a homeowner’s insurance policy. It may cost $10,000 to replace the roof, but your insurance company may only pay you $6,500. Once you show proof of replacement, you can recover the withheld depreciation – the remaining $3,500.
If you’re paid for damaged property and you repair the roof yourself, they may exclude future claims, especially for water damage. Even if your first claim was for hail damage and then a hurricane strikes, you cannot submit a claim again when you keep the money. Insurers consider the roof “unrepaired” when you do this because a licensed professional didn’t complete the repair.
Even if you decide to replace what you’ve lost, many policies stipulate that you will only receive the actual cash value initially. To receive the balance of the claim, you need to provide documentation and submit a request to recover the withheld depreciation. This includes providing receipts, cancelled checks, signed contracts, and sometimes photographs to the insurer. If you can buy a replacement for less than you paid, the insurance company may pay the lower amount.
The same idea applies if you buy a replacement cost policy for your household belongings. The insurance company pays you the actual cash value of damaged or stolen items until you actually replace the items and provide them with receipts – then they will pay you the withheld depreciation.
It is important you understand your coverage thoroughly. While keeping the money might tempt you, it also has an impact on future claims. In our roof example, if you have the roof replaced by a professional and problems exist, you can pursue it through the contractor. You may even qualify for a new roof discount. If you take the money and decide not to make the repairs, or if you decide to make the repairs yourself, you’re basically on your own.
You can’t cancel your policy and move to another insurer to get around this, either. Insurance companies access the CLUE report on your home, which shows your claims data. If the new insurance company sees “unrepaired” damage on the report they might cancel your policy or insist you repair it professionally before they’ll issue you a policy.
Discuss your policy with your local insurance agent and, while you’re at it, take the time to prepare a home inventory. You can use free apps to record what you own, how much you paid, and estimate the replacement value. Take it with you so your agent can identify any gaps and explain your coverage so you’re not surprised if you file a claim. If you do file a claim, let the professionals at Loiselle Insurance Agency help walk you through the process and explain how to recover any withheld depreciation.