Recoverable depreciation: how to get the money your insurer held back

When an adjuster prices your damage, the estimate starts with replacement cost. That’s what it costs today to fix or replace the damage with new material of like kind and quality. Then the adjuster takes off depreciation for age and wear. What is left is actual cash value (ACV).

On a replacement cost policy, the insurer usually pays the ACV first and holds the depreciation back until the work is done. That held-back amount is recoverable depreciation. It’s recoverable because you can get it back by finishing the repair or replacement. On the estimate summary, look for a line such as “less recoverable depreciation”. That line is the held-back amount.

The simple formula:

• Replacement cost minus depreciation minus deductible = first check
• Recoverable depreciation = second check, paid after the work is done

New to the two payment methods? Our side-by-side guide to actual cash value vs replacement cost explains them with a roof example.

Non-recoverable depreciation is depreciation you won’t get back. It’s taken off and stays off. Here’s when each one usually applies:

Your estimate may not label which kind it is. Ask the adjuster in writing: “Is the depreciation on this claim recoverable, and what do you need from me to release it?”

Some states also give you the right to see how the depreciation was figured. Under Alabama’s claim-handling rule, an insurer that settles on an actual cash value basis must, if you ask, give you the claim-file worksheets showing every depreciation deduction. Illinois has a similar worksheet rule for residential fire and extended coverage claims paid at actual cash value. When a first check looks too small, ask for the worksheet in writing.

These numbers are made up to show how the math flows. They aren’t typical amounts.

Example: a storm damages a roof and a bedroom ceiling. The policy pays replacement cost. The deductible is $1,000.

Now three ways the story can end:

• Repairs cost $22,000. You send the final invoice. The second check is $7,000.
• Repairs cost $20,000. Many policies pay only what you actually spent, so the second check is $5,000.
• The contractor finds rotted decking under the shingles. That extra work is a new item, not depreciation. You ask for it as a supplement for hidden damage, and it gets its own estimate and depreciation.

Notice that the deductible came off the first check only. It isn’t taken again from the second, as our guide to homeowners insurance deductibles explains.

Until the work is done, the insurer keeps it. Once you prove the repair or replacement is finished, the insurer releases it. Who the check is made out to depends on your policy and your paperwork:

• You. On many claims, especially for belongings, the check goes to you.
• You and your mortgage lender. If you have a mortgage, the lender is usually named on the policy, and the standard form pays claims for the house to you and the lender together. The lender may hold the money and release it in stages as work is done. Call the lender’s loss draft department early to learn what it needs.
• You and your contractor. Some insurers add the contractor’s name, especially if you signed a direction to pay or an assignment of benefits. Read those papers slowly before you sign, because some hand over control of claim money.

The money is meant to pay for the finished work. If your contract price included the full replacement cost, the second check usually goes to the contractor’s final bill. It isn’t a bonus for the homeowner, and it isn’t extra profit for the contractor beyond the contract.

Yes, almost always. The limit is in your policy, and some states add their own minimums. Look in the Loss Settlement section for two kinds of deadlines:

1. A notice deadline. Under the common ISO HO-3 form, you must tell the insurer within 180 days after the date of loss that you intend to repair or replace. Do it in writing so you have proof, and check whether your own policy has this rule.
2. A deadline to finish the work. Many policies say the repair or replacement must be completed within a set time, often counted from the date of loss or from the first payment.

State rules can give you more time. California, for example, doesn’t allow a time limit of less than 12 months from the first ACV payment to collect full replacement cost. After a declared state of emergency it is 36 months, with 6-month extensions for good cause, like permit delays or contractor shortages. Each state’s insurance department can tell you its rules.

After a big disaster, contractors can be booked for months. If you may not finish in time, ask the insurer for an extension in writing before the deadline, explain why, and save the reply.

Insurers want to see that the work was done and what it cost. Common requests:

• The contractor’s final invoice, showing the work and the total price
• A signed contract and any change orders
• Photos of the finished work, taken from the same spots as your damage photos
• A certificate of completion, if the insurer has its own form
• Receipts for replaced belongings, matched to the lines on the contents list
• The final permit inspection, if your town required a permit

For belongings, many insurers let you claim depreciation item by item as you replace things, rather than all at once. A clear contents inventory with the claim line number next to each receipt makes this much faster.

Roofs are where depreciation is often largest, because roofs age fast on paper. Three roof details matter:

• Your roof terms. Some policies pay the roof at ACV, or by a payment schedule based on roof age, even when the house is on replacement cost. In that case the roof depreciation isn’t recoverable.
• The roof’s age. If the estimate lists the roof as older than it is, the depreciation is too high. A roofing invoice or permit date fixes that.
• Code upgrades. Items your local building code requires, such as drip edge or ice and water shield in some areas, aren’t part of replacement cost in the standard form. They fall under Ordinance or Law coverage, which that form sets at up to 10% of your dwelling limit. Check the limit on your own policy.

Our full guide to roof insurance claims covers how adjusters decide between repair and full replacement.