Whether your insurance company forced you to sift through soot and ash, trying to recollect what has just been stolen, or trying to identify items damaged by water, going through damaged contents and creating an inventory is an emotionally draining experience that typically comes with little to no guidance by the insurance company. After spending countless hours substantiating lost personal property contents, the insurance company responds with random, and sometimes substantial reductions in the value of the personal property for depreciation, often with little to no explanation as to how it arrived at that conclusion.
But what is depreciation, and why is it important?
Depreciation is the loss in value to a particular item due to wear and tear, age, obsolescence, or any other factor. Depreciation is subtracted from the cost to replace the damaged items to arrive at an actual cash value. While most insurance policies provide for recovery based on a replacement cost basis, some policies limit recovery of personal property contents to the actual cash value. It is also common for replacement cost value policies to limit recovery to actual cash value until the damaged property is repaired or replaced. While it may not be difficult to replace an inexpensive item that has been substantially depreciated, it can become very difficult, or nearly impossible, to replace an expensive item improperly depreciated to a point where the policyholder is financially unable to purchase a replacement item.
To determine depreciation, Colorado follows the broad evidence rule which requires that all relevant factors must be considered to determine appropriate depreciation. This requires looking beyond just wear and tear or market value, and includes looking at all facts and circumstances which would lead to a correct estimate of the value of the particular item.1 These facts may include the original cost, the cost of replacement, collectability, location, use, and even the opinion of witnesses. More important, depreciation should not be taken generally, and items should be depreciated on an individual basis.
Colorado policyholders should always carefully review and scrutinize personal property contents estimates provided by the insurance company to determine whether excessive or unsupported deductions have been made for depreciation. If you suspect the insurance company has not considered all relevant factors to determine appropriate depreciation, consider requesting the insurance company provide a reasonable explanation of the depreciation methodology used in determining the depreciation applied to the individual items.
1 Nebraska Drillers, Inc. v. Westchester Fire Ins. Co., 123 F.Supp. 678 (D.Colo.1954).