Understanding Depreciation in Property Damage Claims: The Hidden Factor That Reduces Your Payout

By Geraci LLP – Property Damage Law Division

INTRODUCTION

When homeowners receive an insurance estimate after fire, water, storm, or smoke damage, they often feel blindsided. What they expected to be a straightforward process suddenly becomes confusing, frustrating, and financially overwhelming.

The most common source of that frustration?

Depreciation.

Depreciation is a heavily misunderstood component of property damage claims, and insurers often use that confusion to their advantage. Many homeowners don’t know:

• Why depreciation was applied

• Whether depreciation was calculated correctly

• Which items should not be depreciated

• That depreciation may be partially or fully recoverable

• That incorrect depreciation can reduce a claim by thousands

At Geraci LLP, we routinely uncover misapplied depreciation, inflated depreciation percentages, or improper use of Actual Cash Value (ACV) calculations — all of which unfairly reduce the payout homeowners receive.

This article explains:

• What depreciation is

• How it affects your claim

• ACV vs RCV — the difference that matters most

• The types of depreciation insurers use

• How depreciation is calculated (or miscalculated)

• How to challenge incorrect depreciation

• When insurers must release withheld depreciation

• Real examples of depreciation abuse

This guide will help you understand your rights — and maximize your recovery.

1. WHAT IS DEPRECIATION IN AN INSURANCE CLAIM?

Depreciation is the insurer’s way of determining the current value of damaged property based on its:

• Age

• Expected lifespan

• Wear and tear

• Functional condition

The idea is simple: if a 15-year-old roof is damaged, the insurer reduces its value because it was not new at the time of the loss.

But in reality, depreciation is often:

• Arbitrary

• Inconsistent

• Incorrect

• Strategically inflated

Why does this matter?

Because an inflated depreciation value means:

• A lower payout

• Higher out-of-pocket expenses

• Delayed repairs

• Increased likelihood of underpayment

Understanding depreciation is essential for protecting your rights.

2. ACV VS RCV: THE MOST IMPORTANT DISTINCTION

Your insurance policy determines how depreciation affects your claim. There are two primary coverage types:

A. Actual Cash Value (ACV)

ACV = Replacement Cost Value – Depreciation

With ACV coverage:

• You receive a payment based on the item’s depreciated value

• You may never recover the full cost of replacement

• Many homeowners are shocked by the low payout

Example:A roof costs $20,000 to replace.If the insurer applies 50% depreciation, the ACV payout is only $10,000.

B. Replacement Cost Value (RCV)

RCV = Full cost to replace with new materials, regardless of age.

With RCV coverage:

You may receive two payments:

1. ACV payment (upfront)

2. Recoverable depreciation (after repairs)

The catch?You often have to prove repairs were completed before receiving the depreciation.

Many homeowners don’t realize:

• RCV policies still apply depreciation initially

• You must request the second payment

• Insurers frequently delay or deny the release of recoverable depreciation

Geraci LLP frequently helps homeowners recover this withheld amount.

3. HOW INSURERS CALCULATE DEPRECIATION — AND WHY IT’S OFTEN WRONG

Depreciation should reflect:

• Useful lifespan

• Actual age

• Condition before the loss

But insurers often deviate from these standards.

Example of correct depreciation:

A roof with:

• 30-year lifespan

• Installed 10 years ago

  
  

  → 1/3 of its lifespan used

  
  

  → 33% depreciation

Example of incorrect depreciation:

Insurer claims:

• 10-year-old roof

• 50% depreciation

Why is it wrong?They used an inflated depreciation percentage to reduce payout.

4. TYPES OF DEPRECIATION INSURERS USE

There are three major types of depreciation, and insurers sometimes misuse or misapply them.

A. Physical Depreciation

Based on wear and tear.

Correct Example:An older carpet showing signs of use will have physical depreciation.

Incorrect Application:Applying physical depreciation to items that were in good condition.

B. Functional Depreciation

Applies when an item becomes outdated or less effective compared to modern alternatives.

Correct Example:Old HVAC systems may have functional depreciation.

Incorrect Application:Applying functional depreciation to items that still worked perfectly.

C. Economic Depreciation

Tied to market conditions.

Correct Example:If better, cheaper materials now exist.

Incorrect Application:Using economic depreciation to justify lowballing labor costs — this is improper.

5. ITEMS THAT SHOULD NOT BE DEPRECIATED

Insurers often depreciate items they legally should not.

Items that should not be depreciated include:

• Labor costs

• Demolition

• Debris removal

• Cleanup services

• Mold removal

• Code upgrades

• Permits

• Contractor overhead and profit

• Emergency mitigation services

Why insurers improperly depreciate these:

To reduce the payout and hope homeowners don’t challenge it.

Geraci LLP routinely reverses improper depreciation on these categories.

6. WHY INSURERS OVERSTATE DEPRECIATION

A. To reduce payouts

The higher the depreciation, the lower the ACV payment.

B. To make the claim appear cheaper

This affects their reserves and financial reporting.

C. To pressure homeowners into cheaper repairs

If the payout is small, homeowners may use lower-quality contractors.

D. To create leverage in negotiation

Insurers can always “increase” offers later and look cooperative.

7. WARNING SIGNS YOUR DEPRECIATION IS WRONG

Be alert if:

• You weren’t asked about condition before the loss

• Lifespan tables seem generic

• Depreciation percentages are rounded (e.g., 50%, 75%)

• Items appear on the depreciation list that shouldn’t

• No explanation is provided

• Only photos taken after the loss were used

If your estimate feels low, it probably is.

8. HOW THE DEPRECIATION PROCESS SHOULD WORK

Here is the correct process insurers must follow:

Step 1: Determine the replacement costStep 2: Identify the item’s expected lifespanStep 3: Calculate the percentage of lifespan usedStep 4: Apply depreciation only where appropriateStep 5: Provide a detailed breakdownStep 6: Release depreciation if RCV policy once repairs are complete

Insurers often fail at Steps 4–6, which is where Geraci LLP steps in.

9. COMMON DEPRECIATION ABUSES — REAL CASE EXAMPLES

Example 1: The "50% Roof"

A homeowner had a 30-year roof installed 8 years prior.Insurer applied 50% depreciation.Correct depreciation: 26.6%

Recovered Difference: $9,200

Example 2: Carpet Depreciation Scam

Insurer depreciated:

• Labor for installation

• Removal of damaged carpet

• Cleaning of surrounding area

None of these should have been depreciated.

Recovered Difference: $4,500

Example 3: Kitchen Cabinets

Insurer depreciated:

• Custom cabinetry

• Soft-close hardware

• Labor

• Demolition

All were improper.

Recovered Difference: $12,000

10. CAN YOU CHALLENGE DEPRECIATION? YES. HERE’S HOW.

Depreciation can be challenged through:

A. Requesting the insurer’s depreciation worksheet

This document reveals:

• Lifespan tables used

• Condition assumptions

• Replacement cost values

• Depreciation percentages

B. Providing proof of condition before loss

Examples include:

• Photos

• Appraisals

• Receipts

• Contractor evaluations

• Home inspection reports

C. Independent contractor quotes

Contractors often identify inaccurate depreciation.

D. Arguing misapplied depreciation on labor or code upgrades

E. Using state laws and case law

Many states restrict depreciation on labor or mixed materials.

F. Filing a supplemental claim

If the insurer undervalued your loss, a supplement is often appropriate.

G. Retaining an attorney

Lawyers know:

• Whether depreciation is legal

• Whether it violates policy language

• How to challenge the insurer’s methodology

• How to force release of withheld depreciation

Geraci LLP has recovered tens of thousands of dollars in withheld depreciation for homeowners.

11. RECOVERING WITHHELD DEPRECIATION (RCV CLAIMS)

If you have a Replacement Cost Value policy, you may be entitled to recover withheld depreciation after completing repairs.

But homeowners often lose this money because:

• They don’t know they must request the payment

• Insurers delay or ignore requests

• Incorrect documentation is submitted

• Contractors fail to provide itemized invoices

• Adjusters dispute the scope of work

To recover depreciation:

1. Complete repairs

2. Obtain final invoices

3. Compare invoices to insurer’s estimate

4. Submit proof of repairs

5. Request release of recoverable depreciation

Insurers must release the funds unless repairs differ significantly from their estimate.

12. WHEN DEPRECIATION BECOMES BAD FAITH

Improper depreciation can be considered bad faith when the insurer:

• Does not justify depreciation

• Uses unreasonable lifespan values

• Ignores homeowner evidence

• Depreciates labor or non-depreciable services

• Applies blanket percentages without evaluation

• Misinterprets policy language

If bad faith is proven, homeowners may recover:

• Extra-contractual damages

• Attorney’s fees

• Interest

• Punitive damages

Geraci LLP aggressively pursues bad faith cases when appropriate.

13. HOW GERACI LLP CHALLENGES WRONGFUL DEPRECIATION

Our property damage attorneys:

• Review all depreciation calculations

• Demand supporting documentation

• Identify unlawful depreciation

• Request updated scopes of work

• Coordinate contractor inspections

• Negotiate with insurers

• File appeals and bad-faith actions when needed

Homeowners rarely have the expertise to identify improper depreciation — but we do.

CONCLUSION

Depreciation is one of the most misunderstood—and most abused—parts of the property damage claim process. Insurance companies rely on the fact that homeowners are unfamiliar with how depreciation works, and they routinely use this to justify drastically reduced payouts.

But depreciation is not final.

It can be challenged.

It can be corrected.

And with the right evidence and representation, it can be recovered.

At Geraci LLP, we ensure homeowners are not taken advantage of. If your insurer undervalued your claim or withheld depreciation unfairly, our team is ready to fight for the full compensation you deserve.