How Does Depreciation Work on Insurance?
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As a professional insurance agency we believe in giving advice not just a cheap price on insurance.™ In this post we want to talk about insurance claims that are settled on an actual cash value basis. (ACV)
Claims settled on an actual cash value basis (ACV) simply mean that a deduction for depreciation is taken into consideration when settling your insurance claim.
For instance many of us aware that automobile insurance claims are settled on an ACV basis. If you are unfortunate enough to total your brand-new vehicle just as you drive it off the dealership parking lot, your insurance company is not going to pay you full value for what you just paid for that vehicle! (Unless you have a special endorsement attached to your policy for new car replacement.)
How Depreciation Is Calculated?
The first step taken by the insurance company to determine the fair value of the property at the time of loss. In other words what would someone would “pay” for that property based on the age, condition, and wear and tear of that damaged item.
For instance, if your insurance company considers the life expectancy of a roof to be 20 years and your roof is 10 years old at the time of a loss the insurance company will (in addition to your deductible) subtract 50% from the loss amount!
So if the cost to replace a roof on one of your buildings is $37,000, the insurance company subtracts $18,500 because of depreciation and then subtracts your deductible from that figure.
So as you can see it’s important to know whether or not your losses would be settled on actual cash value basis, or a replacement cost basis because your out-of-pocket expense could be significant. ACV loss settlements could leave you in a deep hole financially, so choose your options wisely.
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