Understanding Depreciation in Homeowners Insurance

After a disaster, homeowners quickly learn the importance of understanding the insurance concept of depreciation. Whether it’s your home itself or personal items like furniture, depreciation plays a significant role in determining how much your insurance will pay to repair or replace your belongings. This article explains clearly how depreciation works, provides real-world examples, and offers guidance on navigating insurance claims involving depreciation.

What is Depreciation in Insurance?

Depreciation refers to the decrease in value of an asset over time due to factors like wear and tear, age, or obsolescence. In insurance terms, depreciation directly affects the amount you’ll receive after a loss.

Insurance policies typically fall into two categories:

1. Actual Cash Value (ACV) Policies

Pay you the current value of your property, factoring in depreciation.
Usually means a lower payout after a disaster.

2. Replacement Cost Value (RCV) Policies

Initially pay you the depreciated value (ACV), then reimburse you for the full cost to replace after you actually replace the item or repair your home.
Usually provide a higher payout, but you must complete the repairs or replacement to recover depreciation.

Understanding which Policy you have is crucial to planning your recovery.

Examples of Depreciation in Real Life

Example 1: Your Home (Structural Depreciation)

Imagine your home was built 20 years ago, and you experience damage from a fire:

Replacement Cost (RCV): To fully rebuild your home would cost $400,000 today.
Depreciation Calculation: The insurance company determines that, due to the age and wear and tear, your home has depreciated by $100,000.
ACV Payout: Initially, you’ll receive $300,000 ($400,000 – $100,000 depreciation).
Recovering Depreciation (if RCV policy): Once repairs are completed, you submit proof to your insurance company, and they release the additional $100,000 withheld as depreciation.

Example 2: Personal Property (Your Couch)

Let’s say you bought a couch for $1,000 seven years ago. Most insurance companies depreciate furniture around 10% per year, though rates can vary based on specific factors:

Original Cost: $1,000
Depreciation Rate: 10% per year
Age: 7 years
Depreciation Calculation: 7 years x 10% per year = 70% total depreciation
Depreciated Value (ACV): $300 ($1,000 – $700 depreciation)

If you have an ACV policy, the insurance company will pay you $300. If you have an RCV policy, you’ll initially get $300 and then receive an additional payment of $700 once you actually purchase a replacement couch for $1,000 (but not more).

Factors that Influence Depreciation

Depreciation isn’t always a simple calculation. Insurance adjusters use several variables:

Age: Older items depreciate more.
Brand or Quality: Higher-quality brands may depreciate slower than lower-quality items.
Condition: Items in excellent condition depreciate less than items showing significant wear and tear.

For example, a 5-year-old high-quality sofa in excellent condition might only depreciate 40–50%, while a low-quality sofa with visible damage might depreciate up to 80%.

Do I Need to Calculate Depreciation Myself?

No, homeowners don’t have to perform their own depreciation calculations—your insurance adjuster does this. However, you should always verify their calculations for accuracy.

Ask for the insurance adjuster’s depreciation schedule.
Verify the age, brand, and condition assigned to your items.
Consider working with a Loti Public Adjuster (PA) who will calculate and build accurate depreciation estimates into your claim.

Using Depreciation Tables and Resources

Understanding depreciation rates can help you better manage your claims. At Loti, we offer homeowners free access to depreciation tables for a huge variety of household items and building materials in our Learning Hub. Feel free to download and apply to your own claims. https://loti.com/docs

This helps you verify your insurance company’s depreciation figures and ensures you receive a fair payout.

Best Practices When Navigating Depreciation

Confirm your policy type: Determine if you have an ACV or RCV policy as soon as possible.
Document everything thoroughly: Take pictures and maintain receipts for high-value items.
Review your insurer’s estimates: Ask your insurer to show how they calculated depreciation.
Consider a Loti Public Adjuster (PA): A good PA can accurately calculate depreciation and advocate for a fair settlement.

Wrap-Up: Depreciation Can Make or Break Your Claim

Depreciation is one of the least understood—but most important—aspects of your homeowners insurance claim. Knowing how depreciation works ensures you’re not caught off guard after a disaster and helps you secure the full value you deserve. Be proactive by checking your policy, understanding your insurer’s process, and verifying calculations carefully.

Helpful Resources:

Insurance Information Institute (III) Guide on ACV vs RCV: III.org
Loti’s Free Depreciation Tables: Available for homeowners at Loti (free resource)
National Association of Public Insurance Adjusters (NAPIA): napia.com