This month’s coverage corner subject comes to us courtesy of a great question from Diana at Liberty Management.  One of her communities suffered a fire recently, and she was wondering how depreciation worked.  I personally think this is one of the most confusing things about property claims.  Let’s make it less confusing!

Depreciation means that an item is worth less when it is no longer new.  That doesn’t mean it won’t cost the same to replace it, it just means that item, whatever it is, no longer holds the same value as when it was originally purchased new.  For example, you may pay $20,000 for a new car, but 5 years later you probably can’t re-sell it for $20,000 because the value has depreciated.  The new value, or actual cash value, is probably much less than that.

When there is a property claim, insurance companies initially pay the association the depreciated, or “actual cash value” of the property which was damaged.  The amount of depreciation is held back as an incentive for the association to get the work done.  Once all the repairs are completed, receipts or paid invoices can be turned in as verification, and the depreciation amount held back will be paid.  Basically, it boils down to showing that the repairs were actually completed.