After a fire, flood, or other damage, you expect your insurer to cover the full cost of repair or replacement. However, when the first check arrives, the amount is often significantly lower than the actual cost of the work.
What Are Preferred Vendor Programs?
A press release from the Swiss Re Institute states that in just Q1 and Q2 of 2025, natural disaster losses reached $80 billion. What does this mean? Thousands of people file claims at the same time. Insurers activate PVPs to process claims quickly. But there is a catch: the priority becomes speed and cost savings, not the quality of your repairs.
One of the main reasons for this is the Depreciation Clause in your policy. It’s one of the most powerful tools insurers use to reduce payouts. Curious how it works?
Below, we’ll explain how this mechanism functions and, most importantly, how you can minimize the impact of the Depreciation Clause when filing a homeowners insurance claim.
What Is the Depreciation Clause?
In insurance, depreciation means the reduction in value of your property due to its age and level of wear and tear. For example, you own a car. Each year it gets older and loses a bit of value. This is depreciation, or natural wear and tear. The insurance company always considers this factor when calculating your payout.
Does the insurer have the right to reduce payments? To answer that, it’s important to first understand two terms that are always in your policy:
- RCV (Replacement Cost Value) – the full amount needed to repair or replace the damaged property at today’s material and labor costs.
- ACV (Actual Cash Value) – the value of the property at the time of damage, taking depreciation into account.
The formula is simple:
RCV – Depreciation = ACV
The insurance company pays you the ACV in the first check.
Depreciation applies to various categories of property:
- roof (shingles, metal, tile);
- flooring (laminate, hardwood, tile);
- appliances (refrigerator, washing machine);
- furniture (sofas, tables, cabinets);
- electrical and plumbing (wires, pipes, water heaters).
While buying a new washing machine may not be very expensive, replacing flooring throughout an entire apartment can cost the insurer a lot. That’s why the payout is often much lower than the homeowner expects.
How the Depreciation Clause Reduces Your Payout: Real-Life Example
The insurance company withholds the depreciation amount (the so-called holdback) and will only pay it after you complete repairs and provide all proof (receipts, invoices). But the ACV is often so low that homeowners cannot start repairs.
Let’s look at an example from our practice to better understand how this works – and to see how the intervention of an independent public adjuster can recover funds.
The client’s policy limit was $500,000, while the full cost to restore the house (RCV) was $800,000. The insurance company, trying to minimize the payout, simply capped the restoration cost at the policy limit. Here’s how both sides calculated it:
| Metric | Insurance Company Calculation | Public Adjuster Companies Calculation |
|---|---|---|
| RCV | $500,000 (underestimate) | $800,000 (real market value) |
| Depreciation | 50% ($250,000) | 50% ($400,000) |
| ACV | $250,000 | $400,000 |
Note: in this case, we did not even dispute the depreciation percentage. Our lead claims estimator focused on proving the real restoration cost by providing an $800,000 estimate.
Still, even with 50% depreciation, our client received an initial payment $150,000 higher than what the insurer initially offered. That’s what a licensed independent adjuster can do.
Insurer Tactics When Applying Depreciation
Insurance companies use depreciation not only as a calculation tool but also as a pressure tactic. Often, they resort to:
- Overstating the percentage of wear and tear. This is their main tactic. According to LegalClarity, insurers can apply depreciation of 50% or more. A roof with a 20-year lifespan, damaged in its 10th year, is automatically depreciated by 50%, even if its actual condition is much better.
- Applying depreciation to items that have little or no wear. They apply aggressive depreciation standards to items that have practically no wear, such as interior walls, electrical wiring, or the foundation.
- Refusing to release the holdback due to minor documentation issues. They will look for any small errors in your paperwork to deny the payout.
- Delaying payments. The longer they wait, the less likely you are to complete repairs and claim the full amount.
- Applying labor depreciation. A separate tactic where not only materials but also labor is depreciated. In some states, such as Maryland and Tennessee, this is prohibited, yet insurers still try to apply it, hoping the homeowner won’t notice.
We fight all of this by appealing to the actual condition, not just the age, of the property. Yes, a roof may be 20 years old, but if it’s in excellent condition, it cannot be depreciated that heavily. Proving this to the insurer is our job.
How a Public Adjuster Can Help
The team of local public adjusters at On-Site Adjusting works to ensure that depreciation calculations are fair – not a way for the insurance company to save money.
What we do:
- Conduct an independent assessment of the actual wear and tear of your property.
- Prepare a detailed estimate with real market prices for materials and labor.
- Handle settlement negotiations with the insurer to review inflated depreciation amounts, appealing to the actual condition of the property.
- Manage the process to ensure timely payment of the holdback after repairs are completed.
On-Site Adjusting is a licensed public loss adjuster representing policyholders’ interests – not insurers.
What to Do If Your Policy Includes a Depreciation Clause
Understanding how depreciation works is already half the battle. However, sitting idle is the most expensive mistake you can make. Here’s what we recommend:
- Carefully review the payment terms in your policy. Check how it defines RCV and ACV.
- Keep all receipts and documentation related to repairs. Without proof, receiving the holdback is denied in 99% of cases.
- Obtain an independent damage assessment from a damage adjuster. The specialist must not be in any way affiliated with the insurer. Subsequently, based on their report, you will be able to argue to the insurer that their calculation is underestimated.
- Hire a public claim adjuster. Delegating specialized work to a professional is the best solution. Especially if you do not want to manually verify calculations and negotiate accident settlement.
Do not wait until the first undervalued check is sent to you. Act proactively.
Final Thoughts
Depreciation – a line in the insurance company’s profit report that is paid from your pocket. Every percentage point by which they overstate wear is your money that you will not receive for home restoration. Not entirely fair, right?
The insurer counts on you not knowing the details and agreeing to the very first offer. Do not let them dictate the terms – involve the best public adjuster in the case.
Do you think your payout was undervalued due to depreciation? We offer a free review of your depreciation calculation. Call the On-Site Adjusting team at (866) 861-4992 or (866) 933-0404, or fill out our contact form.
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