# Depreciation

_Glossary_

Canonical: https://www.claimspages.com/learn/glossary/depreciation/

The reduction in the value of property over time due to age, wear and tear, and obsolescence, used to calculate actual cash value.

Depreciation in the insurance claims context refers to the decrease in a property item's value over time caused by physical wear and tear, age, and obsolescence. Adjusters apply depreciation when calculating Actual Cash Value by estimating the item's total useful life and the percentage of that life already consumed at the time of loss.

Depreciation can be calculated using various methodologies, including straight-line depreciation (equal annual reduction over useful life), accelerated depreciation, or condition-based depreciation that accounts for the item's actual physical state rather than age alone. Some states restrict the types of property to which depreciation can be applied — several states prohibit withholding depreciation on labor costs in construction repairs, limiting it to materials only.

Under a Replacement Cost Value policy, the depreciation withheld by the insurer is referred to as recoverable depreciation, which is released to the policyholder once repairs or replacement are completed. Under an Actual Cash Value policy, depreciation is non-recoverable.



A 15-year-old HVAC unit with a 20-year useful life is damaged by a covered peril. Straight-line depreciation yields 75%, so a $6,000 unit has an ACV of $1,500. Flooring installed 8 years ago with a 16-year expected life carries 50% depreciation — a $4,000 floor would have an ACV of $2,000.