Most of what you or your business own depreciates with time. Computers become obsolete, office furniture suffers wear and tear, inventory becomes outdated and machinery breaks down. As a result, they're all worth less than when you bought them. When you file an insurance claim, your insurer will take the depreciation into account when cutting you a check. However, you should be able to file a second claim for recoverable depreciation.
Actual Costs and Replacement
Property insurance comes in two main flavors, covering either actual costs or replacement costs. The difference is significant. Say you have an actual-cost policy and part of your roof tears off in a storm. Actual-cost coverage pays for the replacement price of your roof, less depreciation. If your roof repairs would cost $5,000 but the roof has $3,000 of depreciation, you get $2,000, less any deductible. You'll have to find the remaining $3,000 in your pocket.
Replacement coverage pays enough for you to repair or buy replacements for what you lost, up to the coverage limits of the policy. If you need $5,000 in roof repairs, the insurance will pay that much, less your deductible.
Some insurance shoppers wonder which coverage is required by law. Legally, you can go either way and decide not to get property insurance at all. If you take out a mortgage to buy a home or a warehouse, however, your lender will probably insist on you taking out insurance as well.
Dealing With Insurance Depreciation
If you lose new property that's suffered little depreciation, the insurer can probably cut you one check to cover your losses. If depreciation is in play, and you have replacement coverage, you'll need two checks.
Say you work from home on your laptop. Someone breaks in and steals it. The insurer looks at the model and the software you installed on it and concludes it would take $1,600 to buy a comparable replacement computer. Unfortunately, your laptop was three-years-old and depreciation is $200 a year, so you get a check for only $1,000, or less if a deductible applies.
Since you paid for replacement cost coverage, that's not the end of the story. You get to go out, buy a replacement computer and submit the receipt to the insurer. The company then cuts you a check for the $600 of recoverable depreciation.
You need your receipts because the insurance company will only reimburse you for what you spend. If you find a bargain model that's only $1,400, they'll cover $400 for depreciation. If your parents buy you a new laptop as a gift, or you decide not to buy one, you don't get a second check. If you buy a $2,000 laptop, you won't get more than the $600 in recoverable depreciation. Anything above that is on you. Regardless of how much you spend, you still get to keep the first check.
The Clock Is Ticking
Another limitation on recovering depreciation is that the insurer won't wait forever. You have to start on the repairs or purchasing within a certain time frame, or you won't be able to claim the second check. Travelers' Insurance, for example, says that you should notify them within 180 days that you intend to make a recoverable depreciation claim. Other insurers will have their own rules.
Keep Good Records
Just telling your insurer you've made the repairs, then asking for the second check, isn't going to cut it. Document everything you do and everything you pay. Save your invoices, contracts, receipts and canceled checks, make copies and submit them to your insurer. Make it clear what the paperwork covers: the repairs you paid for and the replacement items you bought. Include your claim number to make it easier for the insurer to process the paperwork speedily.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com