Recoverable depreciation is the portion of a replacement-cost insurance claim an insurer withholds (the difference between replacement cost value and actual cash value) and pays later after you prove repairs or replacements were completed.
Insurers hold recoverable depreciation to ensure claim funds are actually used to restore the damaged property rather than paid out for other purposes. By paying the depreciated (ACV) amount first and releasing the holdback after verification, carriers limit overpayment on older items and confirm repairs meet policy terms.
Actual Cash Value (ACV) is the replacement cost minus depreciation: it reflects an item’s current value after accounting for age, wear and expected useful life. ACV is often the initial check an insurer issues after a claim.
Replacement Cost Value (RCV) is the cost to replace or repair damaged property with materials of like kind and quality with no deduction for depreciation. RCV is the goal amount under replacement-cost policies.
Recoverable depreciation = RCV − ACV. The insurer typically pays ACV up front, holds the recoverable depreciation, then pays that withheld amount once you submit proof of repair or replacement so the total reaches the RCV.
Example: RCV for a roof = $10,000. Depreciation (age/useful life) = $5,000, so ACV paid = $5,000. Recoverable depreciation held = $5,000. After replacement and submission of invoices, insurer pays the $5,000 holdback so total paid = $10,000 (RCV).
Anyone with a replacement-cost homeowners or renters policy should understand recoverable depreciation because it affects cash flow and the paperwork needed to receive full reimbursement.
Owners and managers of rental properties frequently face recoverable depreciation issues—lenders, tenants, and operating income can all be affected by held-back funds.
Contractors and restoration firms must provide proper invoices, permits and sometimes lien waivers so clients can obtain the recoverable depreciation held by the insurer.
Lenders and escrow officers often place conditions on release of insurance proceeds; accountants need to understand timing and tax implications when recoverable depreciation is released.
Common conditions for release include: submission of final contractor invoices or receipts, proof of payment, photographs of completed work, permits or certificates of occupancy when required, and sometimes a field inspection by the adjuster.
Most replacement-cost policies require that you actually repair or replace the damaged property to receive recoverable depreciation. Some policies allow exceptions (see endorsements) but typically insurers demand proof that money was spent on repairs or replacement.
Exceptions include policy endorsements like a "recoverable depreciation waiver" or "ACV to RCV upgrade" which may waive the repair requirement in certain circumstances (e.g., total loss, urgent public safety reasons). Some carriers offer agreed-value or guaranteed-replacement endorsements that change how holdbacks work.
Insurers use depreciation schedules that assign expected useful lives to materials and items. Depreciation = (age ÷ useful life) × RCV for that line item, adjusted for condition. The schedule varies by carrier and by region.
Depreciation can be calculated per line item (e.g., HVAC, roof shingles) or by broader methods like per-square-foot adjustments for flooring or siding. Global adjustments may be applied to a grouping of items rather than individually—this can produce different ACV results.
Provide itemized final invoices showing work performed and materials, paid receipts or proofs of payment, and clear before-and-after photos tied to the billed line items.
Insurers and lenders often require lien waivers from contractors, copies of permits and inspections, and a certificate of occupancy or final permit sign-off when structural repairs were made.
Organize documents by claim line item, include a summary cover letter referencing claim number, highlight amounts requested, attach photos and permits, and send via the insurer’s preferred channel (online portal plus email). Request confirmation of receipt and an estimated timeline.
Processing times vary but commonly range from 7–30 days after full documentation is received. Some carriers pay within a few business days for straightforward claims; complex claims or lender coordination can add time.
Mortgagees are often listed as loss payees on insurance checks. Lenders can require all insurance proceeds to pass through escrow and may place holds or set conditions before funds are released to the homeowner or contractor.
Lenders commonly require: recorded endorsements, contractor draw schedules tied to inspections, final lien waivers, and copies of permits and final inspection reports before releasing held insurance funds.
Notify your lender early, provide them a copy of the claim estimate, request their required documentation list, and schedule any required inspections. Clear coordination prevents late surprises when you submit proof to the insurer.
Recoverable depreciation reimbursements for repair or replacement generally are not taxable income because they reimburse you for a loss. However, specific tax treatment can vary based on whether you claim a loss deduction or receive extra payments beyond your basis.
Recoverable depreciation in an insurance claim is distinct from tax depreciation (the gradual expense deduction for tax purposes). Depreciation recapture applies when you sell an asset and must report gain attributable to prior tax depreciation—this is separate from insurance proceeds.
Consult a CPA if you: received a large payout, claimed casualty losses on prior returns, have rental or business property involved, or are unsure how the reimbursement affects basis and deductions.
Collect competing contractor estimates, independent appraisals, manufacturer invoices for like items, and photos proving condition and age to rebut insurer depreciation.
Submit a concise cover letter summarizing why the depreciation is incorrect, attach your evidence by claim line item, request a reinspection, and ask for a written position from the carrier.
If informal dispute resolution fails, use the policy’s appraisal clause (if available), file a complaint with the state insurance regulator, seek mediation, or retain an attorney for bad-faith or complex claims.
Insurers typically issue an ACV payment soon after the claim is approved to help start repairs. You can use that ACV to begin work, but you’re usually required to complete repairs and submit proof to get the recoverable depreciation.
Common methods include draw schedules tied to milestones, using an escrow account controlled by the lender or owner, or contractor invoices paid directly by the owner as work progresses.
For partial losses, recoverable depreciation is common: insurer pays ACV first, then the holdback upon proof of repair and paid invoices.
In total loss scenarios some policies pay RCV without holdback (especially with agreed-value endorsements) or they may apply different rules. Often the insurer will still require proof or may settle on an expedited basis.
If salvage value is involved, the insurer may reduce the RCV by salvage recovered by the insured or carrier. Salvage and write-off treatments can change the holdback amount—confirm the carrier’s position early.
Policies commonly set time limits for filing proofs of loss and completing repairs (often 6–12 months). Missing deadlines can jeopardize your right to recover the held depreciation.
State laws vary on timelines and insurer obligations. Check your state insurance department guidance or consult an attorney if your claim is near time limits.
Maria’s 12-year-old roof (20-year expected life) is storm-damaged. Carrier estimates RCV $12,000. Depreciation = 12/20 = 60% → ACV paid $4,800; recoverable depreciation held $7,200.
Insurer releases $7,200 within 14 days. Lessons: get itemized invoices, secure permits and lien waivers, and notify your lender early to avoid escrow delays.
It’s the withheld amount representing depreciation (RCV − ACV) that an insurer will pay after you prove repairs or replacements were completed.
ACV is the depreciated value paid first; RCV is the full replacement cost. Recoverable depreciation is the difference the insurer holds back until repairs are verified.
Usually yes—replacement-cost policies commonly require proof of repair or replacement. Exceptions depend on policy endorsements or total-loss rules.
Itemized paid invoices, receipts, before/after photos, permits, final inspection reports, and lien waivers as applicable.
Typically 7–30 days if documentation is complete, but timing varies by carrier and lender involvement.
Yes—lenders often require proceeds to pass through escrow and may set draw/inspection conditions before release.
Recoverable depreciation reimbursements for repairs are generally not taxable as income. Premiums typically aren’t affected by a one-time recovery payment, but filing claims can influence future rates—consult a tax advisor or CPA for specifics.
Subject: Claim #[CLAIM NUMBER] – Request for Release of Recoverable Depreciation Dear [Adjuster Name], Attached please find the final, itemized paid invoice from [Contractor Name], copies of paid receipts, photo documentation of completed repairs, the final inspection/permit sign-off, and a contractor lien waiver for the work at [Property Address]. Per policy, please release the recoverable depreciation holdback of $[AMOUNT]. Please confirm receipt of these documents and advise of any additional items required. Thank you, [Name] [Phone] [Email]
Hire a public adjuster for large or complex property claims, an attorney for bad-faith disputes or complex lender issues, and a CPA for tax-basis or reporting questions.
Check your state insurance department website for consumer complaint procedures and guidance. (Search “[Your State] Department of Insurance” for contact details.)
Recoverable depreciation is the held-back portion of a replacement-cost claim (RCV − ACV) that insurers pay after you prove repairs or replacements. It ensures funds are used to restore property and protects insurers from overpaying on aged items.
If you’d like, I can convert this into a printable homeowner checklist or produce the full printable draft formatted for Webflow with embedded internal glossary links to Actual Cash Value and Replacement Cost Value.
