What Is Recoverable Depreciation?

Key Takeaways

To qualify for recoverable depreciation, you’ll generally have to pay for an RCV policy, which is often more expensive than an ACV policy.
Qualifying for recoverable depreciation means you’ll usually receive a higher payout on a successful claim than you would have otherwise.
If your insurance policy includes recoverable depreciation, a successful claim covers the cost to replace the insured property with an equivalent.
Whether or not you should pay extra for an RCV policy depends on your financial situation, your risk tolerance, and the value of the property in question.

Definition and Examples of Recoverable Depreciation

Recoverable depreciation is the gap between an insured piece of property’s actual cash value and its replacement cost value. If your depreciation is recoverable, your insurance provider reimburses you for that difference—after you prove you have replaced the insured property. If the difference is not recoverable, you’ll only be reimbursed for the ACV of your property.

You’re typically eligible for recoverable depreciation if you have an RCV policy. To better understand recoverable depreciation, here’s a closer look at ACV and RCV.

Actual Cost Value vs. Replacement Cost Value

Your ACV is the cost to replace your insured property minus deductions for depreciation.1 Depreciation is an item’s loss in value due to age and normal wear and tear. This means that if you have an ACV policy, insurers reimburse you for the covered item’s depreciated value minus your deductible.2

But if you have an RCV policy, your insurer would pay out the amount necessary to replace your lost or damaged property with a like-kind substitute. This amounts to the cash you’d need to purchase the same or similar item again, also minus your deductible.

Note

There’s often a time limit on how soon you have to make repairs to receive reimbursement under RCV policies—typically six months to a year. Check your policy for those details.

How Does Recoverable Depreciation Work?

In policies with RCV, insurers first reimburse you for the ACV of the items on the claim. Once you replace or repair the lost or damaged property, you submit your receipt to your insurer. It then reimburses you for the difference between the initial ACV payment and what you actually paid to replace the item. This additional reimbursement is your recoverable depreciation.

Here’s a realistic example of recoverable depreciation in practice.

Recoverable Depreciation: An Example

Imagine you buy a $2,500 computer and that after two years, it is stolen from your home. Fortunately, your homeowners or renters insurance policy covers the theft. How much you’d receive from your claim depends on whether your depreciation is recoverable.3

Let’s say your insurer assumes that personal computers have a useful life of five years, so a $2,500 computer would depreciate by $500 per year under straight-line depreciation. Because two years elapsed before the theft, you’d have $1,000 ($500 x 2 years) in accumulated depreciation. That means the computer would have an ACV of $1,500 upon approval of your claim.

Let’s also say you have a $500 deductible for these types of claims. If your policy specifies ACV, your total payout would be $1,000 ($1,500 ACV - $500 deductible). If you later paid $2,600 to replace your computer with the same or similar model, you’d pay the difference out of pocket.

If your policy covered the RCV, you receive the same $1,000 ($1,500 ACV - $500 deductible) upon the initial approval of your claim. Later when you show the insurance company that you replaced your computer at a cost of $2,600, you’d receive your second check for the balance: $1,100 ($2,600 RCV - $1,500 ACV).

In this example, the replacement cost was $2,600, but the insured property had a value of $2,500. That difference can arise due to inflation. You might want to consider an RCV policy that includes an adjustment for inflation.

Note

Your insurer will follow its own depreciation schedule and method as it determines your payout. If you feel the insurer has calculated excessive depreciation, you may be able to negotiate a depreciated value that’s more favorable.4

What Recoverable Depreciation Means for You

Should you ever have to file a claim for stolen or destroyed property, your reimbursement is generally higher if your policy allows for recoverable depreciation. That’s because due to depreciation, the difference between the ACV and the RCV of a property increases the longer you hold onto it

Of course, there’s no such thing as a free lunch. RCV policies generally have higher premiums than ACV policies. That means you’ll have to choose one: higher premiums and better coverage or cheaper premiums and less coverage.

Which type of policy makes the most sense for you depends on your budget, the type of property in question, and your risk tolerance.

Do I Need Recoverable Depreciation?

While you don’t technically need to buy a plan with recoverable depreciation, it’s often a good idea for property that you can’t live without. For example, you might want to pay the increased RCV premiums for your homeowner’s insurance policies.

Note

You can choose to get an RCV policy on your dwelling and an ACV policy for your personal belongings, or vice versa, if you’d prefer. It’s not mandatory to have the same coverage for both.

Even if you live in a place where the chances of a natural disaster destroying your residence and personal belongings are low, the cost of replacing them could make the risk intolerable.

If you don’t have a homeowners policy with recoverable depreciation and the worst happens, you’ll have to pay for the gap between your replacement cost and insurance proceeds out of pocket. For a dwelling or all of your possessions, that gap can be a significant amount of money.