I often hear the same complaint from clients: They feel the insurance company has undervalued their personal property after a loss and are frustrated by the insurance company’s valuation and rate of depreciation. The reality is that even when an insured has a “replacement cost” policy, the insurance company can depreciate personal property values because the majority of insurance policies contain language allowing insurers to depreciate the value and first pay out the “actual cost value,” which includes depreciation.
In most insurance policies, it is only after that item is replaced and receipts demonstrating the new purchase at replacement cost, is the value of depreciation paid out. Unfortunately, this means that in most instances insurance companies attempt to take a high depreciation on the value of the contents lost so that initial payouts to insureds are lower and many insureds do not replace each of their items, saving the insurance company money.
Thankfully, in California laws protect the insured requiring that depreciation be reasonable and take into account the condition, age, quality, and additional subjective aspects of the item to be depreciated on a case-by-case basis. This means an across the board depreciation cannot be taken and each item that an insured has lost must be individually and reasonably depreciated. Although depreciation guidelines vary by state, in California, section 2695.9(f) of the Fair Claim Settlement Practices Regulations states:
When the amount claimed is adjusted because of betterment, depreciation, or salvage, all justification for the adjustment shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment, depreciation, or salvage. Any adjustments for betterment or depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property. The basis for any adjustment shall be fully explained to the claimant in writing.
Every time an insured is concerned about the depreciation taken on their personal property claim after a loss, they should question and scrutinize the amount considering the condition of their property pre-loss. For example, if you purchase shoes but never wear them and leave them new in their original box, there can be no wear or tear on that item even if you have owned it for five years. However, if your favorite shoes purchased within the last year are worn every day, five hours a day, then the depreciation on those worn shoes would be much greater.
It’s important to remember that in California, each item on your loss list should be evaluated individually to determine the depreciation taken so that the initial payout for personal property at the “actual cost value” accurately depicts the value of the items. Insureds in California are entitled under their policies and the law to proper evaluation of depreciation.