How does recoverable depreciation work in a roof insurance claim?

If you are a homeowner who has recently experienced roof damage, you may wonder how to file an insurance claim. One important concept to understand is recoverable depreciation, which can impact the money you receive from your insurer.

Over the decades, our team, “Roofing in Rhode Island,” has helped hundreds of homeowners with roofing insurance claims and repairs according to the insurance company’s direction.

Based on our experience, I will explain the recoverable depreciation, its process, and everything you need to know. This guideline will be comprehensive. However, this guideline is not only applicable to Rhode Island but also to other states throughout the US.

Let’s get started.

What is recoverable depreciation?

Recoverable depreciation is the difference between your damaged property’s actual cash value and replacement cost. In simpler terms, it is the amount of money your insurance company deducts from your claim payout due to the age, wear and tear, or other factors of your damaged property.

How do you calculate the recoverable depreciation?

Let me give you an example that will make things clear. Let’s say you paid $15,000 for a roof. The condition is it has to last 15 years (at least). It will be deprecated by one-fifteenth of its purchase value yearly or ($15,000/15) = $1000. Assume that a storm destroyed your roof in the 10th year.

If the roof experiences damage, and you have an insurance policy that covers Replacement Cost Value (RCV) with recoverable depreciation, here’s a simplified example:

1. Original Roof Cost: $15,000
2. Expected Lifespan: 15 years

Let’s say the roof is damaged after 10 years.

3. Remaining Useful Life: (15 years – 10 years) = 5 years

The insurance company would now consider depreciation based on the remaining useful life. Let’s assume the roof depreciates evenly over its lifespan.

4. Annual Depreciation: $15,000 (original cost) / 15 years (lifespan) = $1,000 per year

Since 10 years have passed, the total depreciation is:

5. Total Depreciation: $1,000 per year * 10 years = $10,000

If the insurance policy covers recoverable depreciation, you may initially receive the Actual Cash Value (ACV) payout. Let’s assume the ACV is calculated by subtracting the total depreciation from the original cost:

6. ACV Payout: $15,000 (original cost) – $10,000 (depreciation) = $5,000

This means you would receive $5,000 initially to cover the depreciated value of the roof.

Once you complete the repairs or replacement, you can submit proof of the completed work to the insurance company. If your policy includes recoverable depreciation, you would be eligible to receive the remaining amount to reach the Replacement Cost Value (RCV).

7. Recoverable Depreciation: $15,000 (original cost) – $5,000 (initial ACV payout) = $10,000

Recoverable depreciation is a way to ensure that you receive the full cost of replacing your damaged property with new or like-new materials.

How many types of recoverable depreciation policies are there?

There are two types of recoverable depreciation policies:

1. RCV
2. ACV

RCV stands for replacement cost value. ACV stands for actual cash value.

RCV

An RCV policy covers the full cost of replacing damaged property with new or like-new materials. Some of the benefits of this policy are as follows:

• Full Replacement Coverage
• Higher Payouts
• Financial Protection
• Maintaining Value
• Encourages Timely Repairs
• Better Coverage for Depreciable Assets

It also has some drawbacks:

• Higher Premiums
• Policy Limits (payout is capped at the maximum limit specified &in some cases, this may not be sufficient for full replacement)
• Deductibles (policyholder must pay before the insurance coverage kicks in)
• Claims Process Complexity

ACV

ACV policy covers the cost of replacing your damaged property minus depreciation. Some of its benefits are as follows:

• Lower Premiums
• Depreciation Consideration
• Sufficient for Older Items
• Simplicity in Claims Processing
• Based on the current market value of the damaged items

RCV policies offer more comprehensive coverage but are more expensive than ACV policies. But which one is the best for you?

RCV vs ACV – which one is the better

It depends on various factors, including your preferences, budget, the nature of your assets, and your risk tolerance. Both RCV and ACV have their advantages and disadvantages. Here are some considerations to help you decide:

RCV is better in these conditions	ACV is better in these conditions
You want full replacement coverage.	You want lower premiums.
You are willing to pay higher premiums	Your assets have already depreciated significantly.
You want to maintain the value of your property.	You prefer a simpler claims process.

RCV typically involves higher premiums, so consider your budget and how much you will pay for insurance coverage.

If your assets are relatively new or have yet to experience significant depreciation, RCV may be more appropriate. ACV may be sufficient if your assets are older and have depreciated substantially.

RCV provides more comprehensive coverage, which may be appealing if you want to ensure that complete replacement costs are covered. ACV, on the other hand, involves some level of out-of-pocket expenses for replacement costs.

Recoverable depreciation process

Now you know what it is. But what process do you have to go through to get the payout?

This is what I am going to explain in this section.

The process of recovering depreciation for roof damage claims typically involves the following steps:

1. Documenting: One of the most essential steps before you go to the next step. Capture pictures and document everything related to the damages. You can also get help from your local reputable roofer to avoid mistakes and risks and fast-forward the process. To learn more, please check our checklist.
2. File a claim: First, you should report the damage and start the claims process. Be sure to provide as much information as possible about the extent of the damage and any repair estimates you have received.
3. Get an inspection: An adjuster will come to inspect the damage. He/she will also estimate the cost of repairs. The adjuster will consider your roof’s age, condition, and other factors when determining the recoverable depreciation amount.
4. Receive a payout: After the adjuster completes their inspection, your insurance company will provide a payout that includes the actual cash value of your damaged roof and the recoverable depreciation amount.
5. Complete the repairs: Once you receive your payout, you can use the money to hire a contractor and complete the repairs to your roof. Be sure to keep all receipts and documentation of the repair work. Show your insurance paper and directions to the roofer. Also, make sure the roofer follows every direction mentioned in the paper. A professional & reputable roofing company may not start working until you show them the paper. This will also help you to prevent any fraudulent activities.
6. Submit proof of repairs: After completing the repairs, you must submit evidence of the work to your insurance company. This can include receipts, invoices, and photos of the completed repairs.
7. Receive additional payout: Once your insurance company receives proof of the repairs, they will release you the extra recoverable depreciation.

It’s important to note that the recoverable depreciation amount can vary depending on your insurance policy and the specific details of your roof damage. Some policies may have a deductible or other limits that impact your payout amount.

Additionally, the recoverable depreciation may be subject to taxes, so it’s important to consult with a tax professional if you have any questions.

How to avoid insurance fraud?

As a homeowner, you may not know many bad tactics out there. Many scammers may exploit your honesty or lack of knowledge about insurance policies. End of the day, they will repair your home without following any guidelines provided by the insurance company and take the most of your money. This is a big problem, especially when you need further claims in the future. Moreover, you may need to re-repair your roof shortly from your pocket.

This is what we saw many times in the past. If you call that specific roofer again, they generally don’t respond. At least they never come back to fix issues.

Working with local, professional, licensed & reputable roofing companies is very important.

To get around this type of insurance fraud, be honest about the age and condition of your assets. Attempting to inflate the value of your assets or claiming that they are in better condition than actual to receive a higher payout is fraudulent.

Additionally, it is important to provide all necessary documentation to your insurance company, including receipts, appraisals, and repair estimates.

Suppose you are unsure about how to proceed. In that case, consulting with your insurance company or a licensed insurance professional is best to ensure you follow the proper procedures.

Conclusion

Recoverable depreciation is important to understand when filing a roof damage insurance claim. By following the steps outlined above and working with your insurance company and contractor, you can ensure that you receive the full amount of money needed to repair your damaged roof.