Recoverable depreciation is the dollar amount difference between your roof’s cash value and its replacement value. Insurance companies use recoverable depreciation to prevent insurance claim fraud. The insurer does this by distributing the insurance payments in increments. The first distribution is toward the roof’s cash value, which you use toward roof repair or roof replacement costs. The second distribution goes toward the recoverable depreciation amount of the roof.
Understanding Recoverable Depreciation
Depreciation refers to how much of your roof has decreased in value since you first purchased it. Insurance companies calculate depreciation based on three main factors.
- Roof Age
From an insurance perspective, your roof depreciates as soon as you install it. As a result, your recoverable depreciation grows smaller each year. Once your roof is 20 years old, the insurance company may adjust your insurance rates drastically, demand that you replace the roof, or cancel your coverage and tell you to find another insurance company.
- Roof Condition
Even the most well-built roofing systems wear out in time. Insurance companies account for common wear when calculating recoverable depreciation. If you neglect your roof, it will wear out sooner. To keep the roof from depreciating too fast, schedule routine roof inspections and roof maintenance. Doing so will keep your roof in excellent condition and maintain a high cash value.
- Newer Roof Products
New roof products may emerge on the market, rendering your roof obsolete. If your roof is more than 20 years old, you may have to pay more to repair it or find certain components. For instance, if you have asphalt shingles, you may discover that the manufacturer no longer makes the shingles on your roof. Consequently, it can be more expensive to repair your roof. Insurance companies factor in obsolescence when calculating the value of your roof.
Actual Cash Value vs. Recoverable Cash Value
Understanding the difference between replacement cost and actual cash value is one of the best ways to help you decide how much coverage you need.
Replacement Cost Value (RCV)
Replacement cost value (RCV) is the cost of rebuilding or replacing your home with the same materials at current market prices. To calculate the replacement cost of your property, your insurance company uses a roof replacement cost estimator. The RCV adds up the cost of those materials to reflect how much it would cost to replace your roof with the same materials today.
Actual Cost Value (ACV)
Actual cash value (ACV) is the cost to rebuild your home minus depreciation. Depreciation is the decrease in value that occurs over time due to the change in the cost of building materials or wear and tear. If you experience a loss with this kind of coverage, it is helpful to have documentation of the roofing materials you installed or roof inspections and maintenance you previously scheduled. When the adjuster determines the ACV of the damaged items, you have a better chance of getting a reasonable payout.
How Do Insurance Companies Calculate Recoverable Depreciation?
There is no industry-wide standard for calculating recoverable depreciation. Each insurance company develops a unique system based on the nature of the damage claim. The most common calculation method is estimating the item’s overall performance timeline and reducing its cash value by a fraction of the timeline each year down to zero. Here is an example:
You pay $10,000 for a new roof that is expected to last twenty years. Each year, it would depreciate by one-twentieth of its purchase value, or $500. If it is destroyed in a storm in year five, its actual cash value would be $7,500, and the recoverable depreciation would be $2,500.
Year Actual Cash Value Recoverable Depreciation
1 $10, 000 $0
2 $9,500 $500
3 $7,500 $2,500
4 $5,000 $5,000
5 $0 $10,000
What is Nonrecoverable Depreciation?
If you have a cash value policy, it reimburses you for the damaged roof’s depreciated value. In this case, you may have some amount of non-recoverable depreciation when you are making your insurance claim.
Even if you have a replacement cost policy, there may be exceptions on some items or causes of damage.
Your policy may not cover items such as skylights, satellites, or other items that you install on or through the roof. Therefore, they are non-recoverable items. You may have to pay 100 percent out-of-pocket to have these items repaired or replaced.
Schedule a Free Roof Inspection
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