Recoverable Depreciation Defined (2024)

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. 

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.