Depreciation tables were first introduced to me when studying accounting at the University of Florida. The tables were based on tax schedules and other accounting methods which usually had nothing to do with the actual depreciation of an item. Indeed, if you used tax depreciation tables, some items could be written off immediately despite little use, change in value, or change in condition.
When insurance adjusters argue that the federal government tax depreciation schedule is a trusted source to determine the useful life of something, I often think of the three-year depreciation deduction allowed for race horses as a classic example of why it is not. The horse value may be depreciated to zero in three years, but Mr. Ed is still alive and kicking with many future years of life remaining.
Tax depreciation schedules are for one thing: determining how much one can legally depreciate a property asset as an expense that the government will allow—and is not based on any scientific study except for lobbying to Congress and the IRS. Here is the Internal Revenue Service definition:
Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.
So, are there depreciation tables for personal property which reflect actual scientific study and are reliable?
I recently posted two discussions regarding depreciation:
- Determining Depreciation: Are Policyholders Getting Ripped Off?
- Determining Depreciation: The Definition of Actual Cash Value Varies Widely Between States
These were in response to an article. The article noted the following depreciation table used to resolve disputes when common carriers damage or destroy articles when moving military personnel from place to place:
The United States Federal government standard depreciation guide known as the Joint Military Industry Depreciation Guide (‘JMIDG’), is an example of a depreciation guide some use as a reference in determining depreciation. It is widely used to establish the asset’s actual cash value—“the replacement cost minus depreciation.
I grew up in a Coast Guard family and we moved every couple of years or so. I am certain others reading this blog were in the same military boat, and we learned to pack a lot of the breakable items ourselves because things invariably got destroyed by the movers and then we had to make a claim for those items. But, how was this table ever determined? Is it really reliable and how do we know it is?
When researching how the military depreciation schedule was made, the guide indicates that it was a result of a negotiation between the military and common carriers about how much common carriers would reimburse the Department of Defense. There is no indication from anything that I have found that any scientific study was conducted as to how long items on average have a useful life.
United Policyholders publishes a depreciation table that seems to usually have lower depreciation percentages than what most insurance company adjusters use. United Policyholders also warns consumers about insurance companies taking excessive depreciation and determining depreciation seems to be "subjective" rather than objective:
The ‘normal’ contents claim process is: the claimant (with help from an adjuster) prepares a detailed list of every single damaged or destroyed item noting approximate age, value, and replacement cost. The adjuster/insurer depreciates certain items to account for their age and wear and tear, and cuts a check for what’s called ‘ACTUAL CASH VALUE’ (‘ACV’) of the entire inventory. (Often the depreciation that the adjuster/insurer applies to your item is excessive). Once you replace items your insurer generally owes you the balance between the ACV and what it actually cost you to replace or repair (subject always to your individual policy’s wording and limits.)
If you replace everything you lost and submit receipts to your insurer with a demand for the balance due, you’ll be fully reimbursed and the excessive depreciation won’t matter. But most people can’t and don’t replace everything they lost, so depreciation does matter.
The most important thing to understand about depreciation is that it is subjective and you can refuse to accept excessive depreciation. To recover the full benefits you’re entitled to under your policy, negotiation is the name of the game.
The most important point of this post is that virtually all depreciation tables are not to be trusted. Nobody I have ever spoken with can explain how the years of useful life were ever determined. The concern from an insurance company’s viewpoint should be "how it can be certain that its field adjusters are not taking too much depreciation from its customers if it is using a depreciation table that it does not know is accurate?"
Positive Thought of The Day
All that is gold does not glitter,
Not all those who wander are lost;
The old that is strong does not wither,
Deep roots are not reached by the frost.
—J.R.R. Tolkien, The Fellowship of the Ring