Home Insurance Depreciation

There are new clauses with home insurance policies that may depreciate claims more than you thought. Michael Giusti of Bankrate.com, explains how more insurance companies are depreciating policies, in his July 25, 2006 article, “No depreciation in home’s insurance? Look again.”

“Depreciation is the difference between the cost required to actually repair or replace something and its value before it was destroyed. While that amount may be withheld from you initially, it becomes ‘recoverable’ once you file the required paperwork and ask that it be refunded to you.”

Industry observers claim that such depreciation clauses used to be applied depending on what type of policy you had.

"It used to be that if you had a replacement cost policy and your home's 20-year roof was blown off in a storm, the insurance company would just write a check for the whole cost of a new roof minus the deductible. That is, until this year,’ says J.D. Howard, founder and executive director of the Arizona-based Insurance Consumer Advocate Network. ‘Since claims have begun to go up and get more expensive, insurers are now depreciating policies more and more."

There are two types of policies you should be familiar with; replacement cost and actual cash-value.

With a replacement cost policy, the insurance company agrees to pay whatever it costs to replace what you lose, minus the deductible.

With an actual cash-value policy, the insurance company agrees to pay what it believes your property was worth at the time of the loss, not the original purchase price. Basically, it covers the depreciated value, minus the deductible.

For example, if you have a 25-inch television that gets destroyed in a fire, a replacement cost policy will refund you the amount a new 25-inch television costs today regardless of depreciation.

Now, assuming a 25-inch television had a life expectancy of 10 years and your television was destroyed in a fire after having it for five years, your actual cash-value policy would pay you 50 percent of what it would cost to replace it.

“But that's where it gets tricky. Most replacement-cost homeowner’s policies today include a ‘recoverable depreciation’ clause, allowing the insurer to hold back a portion of the proceeds until you prove your repairs (or replacement) are complete.”

Even if you have a replacement cost policy, you have to go through the process of providing proof of repairs. This could take a long time to get your money.

"This is actually done to protect a lot of people. It protects the mortgage company, it protects the insurance company, and yes, it even protects the insured," said Don Griffin, a vice president at Property Casualty Insurers of America.

But Howard disagrees with Griffin, saying “It makes policy holders jump through hoops. . . For the insurance company, it is really quite effective. People get worn out and stop pursuing it. Other people just don't replace it, and then they are out of luck and don't get the full benefit their policy guarantees them."

Even if you have a home insurance policy that you think provides you full coverage in case of theft or disaster, you should re-read your policy. You can always change your policy.

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