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📉 '''Depreciation''' in the context of [[Definition:Insurance | insurance]] refers to the reduction in the value of a covered asset over time due to age, wear, normal use, or obsolescence — a concept that directly determines how much an [[Definition:Insurance carrier | insurer]] pays when settling a [[Definition:Claim | claim]]. It is the central distinction between an [[Definition:Actual cash value (ACV) | actual cash value (ACV)]] settlement, which deducts depreciation from the [[Definition:Replacement cost | replacement cost]], and a [[Definition:Replacement cost | replacement cost]] settlement, which pays to restore or replace the damaged property without such a deduction.

🔧 When a [[Definition:Claims adjuster | claims adjuster]] evaluates a [[Definition:Loss | loss]], they estimate the item's replacement cost and then apply a depreciation factor based on the asset's age, expected useful life, condition at the time of loss, and maintenance history. A ten-year-old roof with a thirty-year rated lifespan, for example, might be depreciated by roughly one-third. Under an [[Definition:Actual cash value (ACV) | ACV]] policy, the [[Definition:Policyholder | policyholder]] receives the depreciated amount minus the [[Definition:Deductible | deductible]]; under a [[Definition:Replacement cost | replacement cost]] policy, the insurer initially pays ACV and then reimburses the remaining depreciation — known as [[Definition:Recoverable depreciation | recoverable depreciation]] — once the insured completes repairs or replacement. Some policies designate certain categories of depreciation as [[Definition:Non-recoverable depreciation | non-recoverable]], meaning those amounts are never reimbursed regardless of whether the property is repaired.

💡 Depreciation calculations are among the most common sources of [[Definition:Claims dispute | claims disputes]] between insurers and policyholders, particularly after large-scale events such as [[Definition:Catastrophe | catastrophes]] where thousands of similar claims are processed under time pressure. Regulatory scrutiny has increased in several states, with some [[Definition:Department of insurance | departments of insurance]] issuing guidance on acceptable depreciation methodologies — including whether labor costs can be depreciated alongside materials. For [[Definition:Insurtech | insurtech]] platforms and [[Definition:Claims management | claims management]] systems, embedding transparent, consistent depreciation algorithms helps carriers reduce dispute rates, accelerate settlements, and demonstrate compliance during [[Definition:Market conduct examination | market conduct examinations]].

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Actual cash value (ACV)]]
* [[Definition:Replacement cost]]
* [[Definition:Recoverable depreciation]]
* [[Definition:Claims adjuster]]
* [[Definition:Useful life]]
* [[Definition:Property insurance]]
{{Div col end}}

Definition:Depreciation - Revision history

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