Your house suffered heavy damage during a storm in your area. The insurance company adjuster showed up and you worked with him to file a claim. To your delight, the insurance company agreed with the adjuster and processed the claim speedily. You got the check, but when you opened the envelope and looked at it, the amount was less than the claim. On the attached explanations, you see that the difference is listed as recoverable depreciation.
What is recoverable depreciation? Recoverable depreciation is the difference between the actual cash value of your home and the replacement value. If your insurance policy is for replacement cost, the insurance company will pay you this difference when the repairs are completed successfully.
Insurance claims can get complicated and involved. Understanding what goes into an insurance claim, the terminology and language of the insurance industry, and how the calculations that lead up to your eventual settlement are made is critical. Before you purchase your homeowner's insurance policy, you should consider how these things might affect you in the event of a calamitous loss.
Many people are under the impression that homeowner’s insurance will replace or repair any loss that they suffer. Unfortunately, this isn’t always true. How much you can recover from your insurance coverage after a loss depends on how the homeowner's insurance policy was written and the options you elected to add to the policy at the time you agreed to the contract.
Let’s look at what you can expect from a standard actual cash value homeowner's policy in the event the home is damaged.
The Claim – You filled out all the paperwork, and the adjuster looked at your loss and calculated his estimate of what your claim is worth. You agreed, and the claim was filed. In our example, let's say the adjuster estimated that the loss to your home was $10,000.
Seeing those kinds of numbers can be shocking. Most people think that insurance on their home is going to repair, replace, or rebuild their homes. Unfortunately, any homeowner's insurance policy that has only actual cash value coverage is going to leave the homeowner financially crippled in the case of a major loss. This is where recoverable depreciation is key.
If the homeowner's policy had a replacement cost add-on with the policy, the scenario changes drastically. Taking the same set of circumstances and the same $10,000 claim against an insurance policy that pays replacement costs, allows us to capture that depreciation, which is now termed recoverable depreciation.
This makes a huge difference. Instead of having to foot a $6,000 cost to replace our $10.000 roof, with recoverable depreciation, we are only responsible for the $1,000 deductible. You can see how having a homeowner's policy with replacement value coverage can be a lifesaver.
There are advantages and disadvantages to both kinds of homeowners' insurance policies. You should consider your options, consult with a professional financial advisor or your insurance agent, and get their advice before deciding. Some things to consider as you explore your options are:
Whichever type of homeowner’s policy you elect to purchase, it is your responsibility to know and understand the contents of that policy. The insurance policy is a contract between you and the insurance company. As with any contract, you should read and understand the provisions of the contract. Knowing the limits of your coverage, the values that are set on your home and its contents, and the way the insurance company will handle any claims is vital to protecting your interests.
Your lender has a vested security interest in your house. They, in effect, are your partner in your home purchase until you pay back the money they loaned you to purchase the house plus any interest that is owed. It is in their interest to see that the insurance settlement is used for the purposes of rebuilding or repairing the damage to the home to maintain its value. Several things can happen at this point.
If your home is badly damaged and you cannot live in it while it is undergoing repairs, your insurance policy may pay for certain expenses that you incur while you can’t live in your home. Some of these additional living expenses are:
Some insurance policies contain provisions for advance additional living expenses. These quick sums of money allow you to plan for you and your family without stressing your personal finance.
There are some critical things to know about additional living expenses.
Don’t get confused about what constitutes ALE and what should be covered under the personal property provisions of your insurance policy. If you are displaced from your home, there will be lots of needs as an example.
All too often, insurance adjustors miss or can’t see all the damage that needs to be addressed. This is particularly true where damage to a home is severe, and the adjuster can’t see portions of the structure still covered by the finishes. When the contractor begins demolition before the rebuilding or repairing process, it is common to find structural damage that must be addressed.
You will be required to file a supplemental claim in this case. Many contractors are familiar with this process and can handle filing your supplemental claim on your behalf. If not, the process is simple and straightforward. If your contractor can’t or won’t file the supplemental claim, there are some steps you should follow.
This article does not constitute legal advice and is intended for educational and informational purposes only. Before entering any contract, you should consult an attorney for legal advice.
In the end, the goal of buying homeowners' insurance is to accomplish several things.
Whether you choose actual cash value or replacement value homeowners, insurance coverage is a decision you must make based on your evaluation of the best set of options. You should do your due diligence in making that decision by consulting your insurance agent or a public insurance adjuster and educating yourself about the options available in the homeowner's insurance market.
I hope that this article has helped you understand a bit more about how actual cash value and replacement value can affect you in the event of a loss. Recoverable depreciation is certainly a large factor in making decisions about what kind of homeowner’s insurance coverage to purchase.
It is our aim to give you a clearer understanding of how these things work and how they can affect you if you must file a claim with your homeowner's insurance company.