How much more complicated can they make insurance? Most of the time, it’s really very simple. Insurance works on a principle called Indemnification.” This means that you get paid for what you lost. Your car insurance will pay you the depreciated value of your car. So, if your 2010 Ford F-150 is totaled from a loss, you get paid the current value of a 2010 Ford F-150. This is called the “actual cash value” of the vehicle.
House insurance used to work on the same basis. If your 20 year old roof was damaged by hail and needed to be replaced, the carrier paid you the depreciated value of the roof. So, if you have a 30 year shingle roof and you have gotten the 20 years use out of it, they paid you the remaining 1/3 of the roof’s value. But along comes the 1980’s when the concept of replacement cost on home policies gets introduced. Replacement cost is a coverage that eliminates the depreciation AS LONG AS YOU REPAIR THE DAMAGE.
Remember, insurance pays you for what you lost.
Most insurance companies will pay you for the actual value of the damage initially. Then, there is a portion of the claim called “Recoverable Depreciation.” It is recoverable because if you spend it and incur the full value of the loss, you are entitled to the depreciation that is held-back.
Confused? Think about it this way, you cannot profit from a loss. Indemnification pays you for what you lost. Didn’t replace the damaged item? You are only entitled to what it was worth. Replace it? You receive the replacement cost which is the original “actual cash value” and the hold-back on the depreciation. Spend it to get it.