Some insurance companies will not focus on depreciation when dealing with forest fire claims.
This is good news. Depreciation is something most people don’t understand when they are buying insurance and they can make claims settlement, well, troubling.
Simply put, your home or business building and personal belongings – furniture, fabric, tools, etc. – can lose value over time because they age, show traces of wear, or even become obsolete.
This fall in value is called a “devaluation” by the insurance industry.
The concept becomes relevant when you make a claim because of the way in which most policies are written.
Generally, claim reimbursement begins with an initial amount for the Actual Cash Value (“ACV”) of your loss. ACV is the fair market value of lost or damaged items: Think of the price a willing customer pays to buy from a willing seller.
To avoid depreciation, most insurance companies sell replacement cost coverage that can allow additional money up to the full cost to remove any item.
The catch is that you usually only get a complete replacement cost benefit when you actually replace the missing or damaged item.
I have seen how people have dealt with this concept over the years, so it is worth taking a closer look at how the process works.
Calculating depreciation is usually a simple step in arithmetic.
Let’s say you lost a two-year-old flat screen TV that was in good condition before the blaze. A new, similar unit prices $1,000 in the store. This is the replacement cost or “RCV.”
A TV carries a life expectancy of five years, so it loses 20% of its value each year.
The depreciation calculation here is RCV minus 40% corresponding to ACV $1000 – $400 = $600.
This implies that the insurance company will pay $600 for the destroyed TV as part of a fire insurance policy. If there is substitute coverage, the carrier will send a check for the remaining $400 or $1,000 in total after confirmation of purchase.
The same simple measurement applies to most parts of your home or office that wear out over time. Think carpets, curtains, or roofs.
Each will have its own depreciation schedule. Some items will depreciate over long periods (25 years for a roof in most cases), while others lose quality relatively quickly.
The situation at the time of loss can also count, which usually occurs when the damaged item is not completely destroyed. A flimsy carpet that is smoke-damaged is a good example. Well, in serious events such as a wildfire, some carriers cut through the regular damage process because so many people are affected by the similar accident.
This implies, particularly where there is a total loss, your claims adjuster may not let you jump through the depreciation hoop.
The reason of all this is not to be afraid to ask your insurer to waive the depreciation step in your claim and either to cover the replacement prices directly or to pay the insurance limits separately.
You may be pleasantly surprised by the reaction and ease some of your stress as you recover from the fire.