"Recoverable Depreciation" vs. "Non-recoverable Depreciation"

Insurance coverage provides a type of financial protection against damage or loss. And while insurance comes in a range of different forms, depreciation factors only come into play when insuring physical, tangible items. Insurance policies vary in the types of protection offered and the actual conditions that warrant compensation. Conditions involving recoverable versus non-recoverable depreciation have to do with the physical age and corresponding value of a physical item.

Property Depreciation Overview

When determining coverage amounts and coverage costs, insurance companies consider the value of the item being insured whether it’s a home, a car or a property. When a policyholder files a claim for loss or damage, the age of the item may become a factor in terms of its present-day value. In effect, physical items depreciate in value with time, which may have a bearing on how much an insurance company pays out on a claim.

Insurance policies may include conditions that reference recoverable or non-recoverable depreciation when describing coverage limits. In some instances, policy conditions regarding recoverable versus non-recoverable depreciation may mean the difference between full payment for loss or damage and no payment at all.

Policy Coverage Guidelines

Insurance policy coverages define certain value guidelines for determining how much it will pay to repair or replace an item. A company may choose to base its value guidelines on an item’s replacement cost or on its actual cash-value.

Policies that use the actual cash-value as a guideline base coverage amounts on the present-day — or pro-rated — value of an item, meaning a 5-year old, $50 end table may only have a depreciated, actual cash-value of $15.

In effect, this type of guideline means policyholders may not recover the item’s depreciation costs. On the other hand, a policy that lists replacement costs as a value guideline grant policyholders some protection in terms of recoverable depreciation costs.

Claim Payment Delays

Insurance policies that list a recoverable depreciation clause may require other conditions be met before the insured can collect on a damaged item. Other conditions may include receipt documentation that verifies repairs have been made or a replacement item has been purchased.

In other words, the policyholder must cover a portion of replacement or repair costs and then request reimbursement for the remaining costs from the insurance company. As a result, insurance companies may use the recoverable depreciation clause as a means for delaying full payment on a claim.

These conditions prevent policyholders from pocketing the insurance money instead of applying it toward repair or replacement costs. By doing so, insurers don’t have to worry about paying on the same claim should a policyholder file again in the future.

Non-Recoverable Depreciation Considerations

With non-recoverable depreciation-type policies, pro-rated values serve as the only guideline for paying on a claim. Pro-rated values may also have a bearing on policies that list recoverable depreciation guidelines.

An insurance company may cover the initial costs of repairs or damages based on pro-rated values. Once the policyholder submits proof to the insurance company, the company pays out the remaining cost amount. In cases where a policyholder fails to submit the required documentation, any depreciation costs become non-recoverable.