Recoverable Depreciation Defined (2024)
Recoverable depreciation is the difference between replacement cost and the actual cash value (ACV). Read on to learn more about recoverable depreciation and how it relates to insurance.
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Scott W. Johnson
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Scott W Johnson is an independent insurance agent in California. Principal Broker and founder of Marindependent Insurance Services, Scott brings over 25 years of experience to his clients. His Five President’s Council awards prove he uses all he learned at Avocet, Sprint Nextel, and Farmers Insurance to the benefit of his clients. Scott quickly grasped the unique insurance requirements of his...
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UPDATED: Feb 26, 2024
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UPDATED: Feb 26, 2024
It’s all about you. We want to help you make the right coverage choices.
Advertiser Disclosure: We strive to help you make confident auto insurance decisions. Comparison shopping should be easy. We are not affiliated with any one auto insurance provider and cannot guarantee quotes from any single provider. Our partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- An item’s actual cash value (ACV) is its current value after depreciation
- In the event of an item’s theft or total loss, a replacement cost value (RCV) insurance policy first pays the ACV and then pays the recoverable depreciation after the item is replaced
- The ACV insurance check plus the recoverable depreciation check will equal the item’s replacement cost
When you buy any item brand new, it’s generally at its peak value. Over time, the value begins to depreciate as it becomes older. But what is recoverable depreciation exactly, and what does this mean when you have insurance on the item that needs replacement? Read on to learn all about recoverable depreciation.
What is recoverable depreciation?
Almost all items depreciate in value over time. This includes household items, expensive electronics, vehicles, and nearly everything else you could purchase. The current value with depreciation factored in is considered the actual cash value (ACV). The cost to replace the item with another is the replacement cost value (RCV). In most cases, the RCV will be higher than the ACV.
If you have an insurance policy that covers the RCV, then the gap between this and the ACV is considered recoverable depreciation. This is because the insurance company helps you recover the difference between an item’s ACV and RCV if it needs to be replaced.
Should the item need to be replaced due to damage or theft, there will be a difference between the item’s current value and what it will cost to replace. When an insurance company covers this gap, it is considered recoverable depreciation. In terms of car insurance, this is called GAP insurance.
It’s important to understand what your insurance policy covers. Some policies only cover the ACV while others will cover the RCV. When your insurance policy only covers the ACV, you are responsible for paying the difference for the replacement. This is considered non-recoverable depreciation.
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Insurance Claims With Recoverable Depreciation
If an insured item needs to be replaced due to damage or theft under an RCV insurance policy, you’ll need to file a claim. The insurance company will determine the ACV of the item, which may or may not require a visit from an insurance adjustor, and it will send you a check for the determined ACV minus your policy’s car insurance deductible.
The expectation is that you use this check to replace the item. However, if the check is not enough to cover the replacement you may need to initially pay out-of-pocket to cover the difference due to the damaged item’s depreciated value.
After you’ve secured a replacement of the same or similar quality, you will provide proof of the replacement cost to the insurance company. At this point, it will send a second check for the recoverable depreciation. This check is typically made out directly to you and is intended to reimburse for the out-of-pocket difference you paid for the replacement.
How is the ACV calculated?
Every type of item depreciates differently. When it comes to how insurance companies determine the value of your car, there is no set formula, as a car depreciates differently than a large kitchen appliance, for example. Even across cars, the depreciation is largely affected by factors such as make, model, and mileage.
For a basic example, consider a situation where your home’s water heater has died. Let’s say the water heater cost $3000 brand new and has an expected useful lifespan of 10 years. The insurance company may determine the rate of depreciation is $3000/10, which means it loses $300 of value per year. So if this water heater needs to be replaced after eight years, you’re looking at an ACV of $600. This, of course, will also be affected by the brand and model of the water heater.
Key Takeaway: Recoverable Depreciation Is Lost Value Covered by Insurance
With rare exceptions, most items lose value over time. When the gap between the ACV and RCV is covered by your insurance policy it is considered recoverable depreciation. If your policy only covers the ACV rather than the RCV, then the loss in value is non-recoverable depreciation.
When depreciation is non-recoverable, you are responsible for paying the difference between the insurance company’s check and the replacement cost. It’s important to check your policy to understand whether you have ACV or RCV coverage.
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Frequently Asked Questions
Can recoverable depreciation be claimed for normal wear and tear?
Recoverable depreciation typically applies to events like damage or theft, not normal wear and tear. Review your policy or consult with your insurance provider for coverage details.
Does recoverable depreciation apply to all types of insurance?
Recoverable depreciation can apply to various insurance policies, but specifics may vary. Check your policy or consult your insurance provider to understand how it applies to your coverage.
Are there exceptions to recoverable depreciation?
While recoverable depreciation is common, there may be exceptions depending on your insurance policy. Review your policy or consult with your insurance provider for specific details.
How can I determine if my policy covers ACV or RCV?
Review your insurance policy to determine if it covers the actual cash value (ACV) or the replacement cost value (RCV). RCV coverage ensures better replacement cost coverage, while ACV coverage may require additional out-of-pocket expenses.
What’s the difference between recoverable and non-recoverable depreciation?
Recoverable depreciation is covered by insurance, representing the lost value between ACV and RCV. Non-recoverable depreciation occurs when insurance covers only ACV, requiring the policyholder to pay the difference between the insurance check and replacement cost.
How is the ACV calculated?
The ACV is determined based on factors such as the item’s initial cost, expected useful lifespan, and depreciation patterns. For example, a water heater with a $3,000 cost and a 10-year lifespan may have an ACV of $600 if it needs replacement after eight years.
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Enter your ZIP code below to view companies that have cheap auto insurance rates.
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Scott W. Johnson
Licensed Insurance Agent
Scott W Johnson is an independent insurance agent in California. Principal Broker and founder of Marindependent Insurance Services, Scott brings over 25 years of experience to his clients. His Five President’s Council awards prove he uses all he learned at Avocet, Sprint Nextel, and Farmers Insurance to the benefit of his clients. Scott quickly grasped the unique insurance requirements of his...
Licensed Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about auto insurance. Our goal is to be an objective, third-party resource for everything auto insurance related. We update our site regularly, and all content is reviewed by auto insurance experts.