Why does an insurance company hold part of the claim money as “depreciation” until the job is completed

Most property insurance policies pay out on an actual cash value basis. As a general rule, property loses value over time. So, it may actually cost less than the original purchase price to repair or replace damaged property. Although actual cash value may sound like it would pay more than replacement cost, the reverse is true. In fact, actual cash value (ACV) is defined as the replacement cost after accounting for depreciation.

When you file a claim, your insurance adjuster will make an initial assessment of the damage to determine how much it will cost to repair or replace the property. Since this estimate is just that-- a guess-- your insurance company may withhold a portion of that claim settlement until the actual replacement cost has been determined. An insurer will never pay you more than you are owed for a loss, so it's important that the correct amount is awarded for your claim.

Often, the way that your claim is settled depends on the type of loss that occurred. For instance, your insurance company may not pay anything until all the work has been performed on your roof after it has been damaged by a windstorm. In this case, no payment may be made until the roofing contractor has completed their work. At this point, your insurance company would pay out the cost to replace the roof based on your roof's value. Unless you had a brand new roof, the replacement cost will be subject to depreciation.

On the other hand, after a lightning strike or burglary claim, your insurance company may award a portion of the claim settlement up front so you can begin to replace the lost or damaged personal property in your home. With appliances, it can be difficult to determine the exact value of an item that is several years old, so insurance companies tend to withhold a greater amount of the settlement for depreciation. After submitting receipts showing the cost of the new items, you may be reimbursed for the difference.

If you have recently filed a claim, or have reason to suspect you may need to file one soon, it's a good idea to take a look at your policy details to find out exactly how your policy coverage works. It should stipulate whether property claims would be paid out on a replacement cost or an actual cash value basis. Then, if you still have questions, it's a good idea to talk to your agent to find out exactly how your insurance carrier typically settles property claims.