We promised to take a deeper dive into the different insurance policies that common interest developments have, and this month we are still talking about the property policy. When working with property claims, especially larger ones, the question of depreciation usually comes up. What is it? How does it work? How can we get full replacement limits without depreciation taking out a big fat chunk?

First, let’s define it. Depreciation is defined by the Oxford Dictionary as a reduction in the value of an asset with the passage of time, due in particular to wear and tear. It makes perfect sense that a 5-year-old car with 60,000 miles on it doesn’t have the same value as a brand new one sitting on the lot. It also makes sense that the 5-year-old carpeting in a unit doesn’t have the same value as new carpet.

When an adjustor is looking at how much they will pay on a particular property claim, they take into account several things, including how much it will cost to repair or replace the damaged item, what the depreciated value is, and what the policy deductible is. You will usually see a calculation similar to this:

Repair estimate:    $30,000
Depreciation:         $10,000
Policy Deductible: $ 5,000
Amount of check:   $15,000

That depreciation is an amount held back by the insurance carrier to make sure you complete the repairs. Remember back in high school when you got into a little fender bender and the insurance company gave you $750 to fix your bumper and you just kept the $750 to pay for prom? Two things about that 1) that’s insurance fraud and 2) lots of people did it and now we can’t have nice things. But I digress… While the policy entitles you to full replacement cost, that is only if you are completing the repairs. Otherwise, you are paid Actual Cash Value (replacement cost minus the depreciation).

Back to our example, the amount of the depreciation is recoverable. So, once the repairs are completed, you submit proof of completion to the adjustor, and they release that $10,000 in depreciation in the form of another check.

Terri Guest, CIRMS, CMCA is the Northern California Sales & Marketing Representative for Berg Insurance Agency and may be reached at Terri@BergInsurance.com