Posted by news on July 28, 2006 at 10:44:29:
No depreciation in home's insurance? Look again
Tuesday July 25, 6:00 am ET
Michael Giusti
Paying attention to some fine print after filing an insurance claim could mean hundreds or even thousands more dollars in your pocket -- if you bother to file the required paperwork.
That's because many insurance companies are now expanding the use of a clause found in most homeowners policies and are holding back a portion of the insurance proceeds you might receive in the name of "recoverable depreciation."
Depreciation is the difference between the cost required to actually repair or replace something and its value before it was destroyed. While that amount may be withheld from you initially, it becomes "recoverable" once you file the required paperwork and ask that it be refunded to you.
In the past, industry observers say, whether an insurer invoked this policy clause often depended on what type of policy you held.
Not anymore.
"It used to be that if you had a replacement cost policy and your home's 20-year roof was blown off in a storm, the insurance company would just write a check for the whole cost of a new roof minus the deductible. That is, until this year," says J.D. Howard, founder and executive director of the Arizona-based Insurance Consumer Advocate Network. "Since claims have begun to go up and get more expensive, insurers are now depreciating policies more and more."
What's more, in the past when insurers did decide to depreciate a replacement-cost claim, they often applied the depreciation to either the structural damage portion of the claim or the personal property portion -- rarely both.
But in the wake of increasingly costly natural disasters -- from the Gulf Coast hurricanes to flooding in the Northeast and wildfires in the Southwest -- many insurance companies are now applying depreciation to both portions of the claim and essentially adding an extra step on the claims process.
Policy particulars
The two most common policy types are replacement cost and actual cash value. Recoverable depreciation is only an issue if you have a replacement-cost policy -- one in which the insurance company agrees to pay whatever it costs to replace what you lose, in the event of a tragedy.
If you lose a 24-inch television in a fire, the company agrees to pay to replace it with a similar 24-inch television -- less your deductible.
With an actual cash-value policy, the insurance company agrees to pay whatever it believes your property was worth at the time of the loss. In other words, your depreciated value -- less your deductible.
So, let's assume that 24-inch television was five years old and had an expected life span of 10 years. With an actual cash-value policy, the insurance company would pay you 50 percent of what it would cost to replace it. With a replacement-cost policy you'd receive the entire amount for a brand new, similar model without regard to depreciation or what it's actually worth on the date of loss.
But that's where it gets tricky.
Most replacement-cost homeowners policies today include a "recoverable depreciation" clause, allowing the insurer to hold back a portion of the proceeds until you prove your repairs (or replacement) are complete.
Why they do it
It's more than just a bureaucratic hurdle, says Don Griffin, a vice president at Property Casualty Insurers of America. Requiring you to prove the television was actually replaced, or that a damaged roof was actually fixed protects the interest of everyone involved, he says. "This is actually done to protect a lot of people. It protects the mortgage company, it protects the insurance company, and yes, it even protects the insured."
But Howard disagrees. "It makes policy holders jump through hoops," he says. Being required to file receipts and proving the work is actually being done is really about making you prove your endurance and dedication, he says. "For the insurance company, it is really quite effective. People get worn out and stop pursuing it. Other people just don't replace it, and then they are out of luck and don't get the full benefit their policy guarantees them."
And when the insurance company doesn't have to issue that second check, Howard contends, they can pocket that money.
But Griffin maintains that a more hands-off approach might encourage people to try to cheat the system.
"The last thing an insurer wants is for a homeowner to pocket the cash without making repairs, and then a second claim down the road comes along and the insurer is stuck paying the claim again, but this time for pre-existing damage."
Griffin says the insurance company could very well decline coverage on something months or years later if they don't have proof the original repairs were made.
"What it really does is it keeps you from taking the cash and running," Griffin says.
What it all means
The bottom line is that if you have a replacement cost policy and your insurer applied depreciation to your claim, you have some more work ahead of you after your repairs are done.
A typical claim would work like this: Say you have a replacement cost policy and a pipe breaks in your house, ruining everything on the first floor.
The insurance company would send an adjuster to your house and assess the cost to repair the damage and replace everything that got ruined.
The adjuster sends the report to the insurer, who then reviews the report and sends you a check.
Along with that check the insurer will send an itemized list detailing how they came to the bottom line. If the total includes depreciation, start saving your receipts.
Howard suggests using the first check to begin making repairs on the most crucial portions of your home. As those repairs progress, send a batch of receipts to your insurer for a second check and then begin a second round of repairs.
Working in waves ensures you don't have to front the money for repairs out of your own savings account.
One common misconception that surfaced after Hurricane Katrina roared ashore was a concern that once a homeowner cashed a settlement check, they waived all rights to pursue further reimbursements.
That's just not the case, says Bobby Ann Clark, spokeswoman for the Louisiana Department of Insurance.
"We as consumers have it ingrained in us to not sign the check because we think it is a release of liability," she says. There are some situations you should be cautious, she adds, such as when you are filing a claim against someone else's policy, or if there is a waiver of liability printed on the check. But in a typical case, "Just because you endorse a check, if that is for coverage you purchased, it's usually not considered as a release of liability," she says.
Don't delay
Dragging your feet on filing your depreciation claim can be a big mistake. Many policies include a time limit on filing for the depreciated amount -- often 180 days after the date of the loss. Wait too long and the insurer may have grounds to deny your claim.
But Griffin says insurers usually will work with a policyholder who runs into a problem rather than denying the claim on a technicality.
After a major disaster, for example, insurers know that the huge amount of work needed creates special circumstances.
"Insurers know you may run into problems getting in-demand materials and skilled labor," Griffin says. "The key is to just work with your insurer and spell out your circumstances in writing and they should be more than happy to work with you."
Many insurers even issue blanket extensions in some of the most extreme cases where entire communities are affected.
And in the event a skilled work force just can't be found, the insurance company will even pay handy policyholders if they make the repairs themselves.
Howard says insurance companies owe you for what it costs to make the damage right, regardless of who makes the repairs, as long as done legally and up to code.
"They have to compensate you for your labor, and they usually come to that amount by offering the lesser of what you get paid at your regular job or what a licensed professional would charge for doing the same job," he says.
One thing to keep in mind when you are buying replacements or making repairs, Griffin says, is that insurance is meant to get you back to the same condition you were in before the loss -- not a better one.
That means that if you are hoping to stick your insurer with the entire cost of replacing your 24-inch television with a plasma HD-TV, keep dreaming.
But, on the other hand, if you do spring for the upgrade, you can pay the overrun and file the receipt with the insurer, and they will pay you the full replacement cost for your old tube's model.
It pays to plan
If this all seems like a lot to process in the wake of a disaster, Griffin suggests having a conversation with your insurance agent every year -- before anything goes wrong -- to ensure you understand what you are buying and what needs to happen in the event of a crisis. That's when you should discuss things like depreciation and what to do when you file a claim. It might also help ensure you don't get caught holding the bag if you have a grossly undervalued insurance policy, written decades ago for housing prices that cost fractions of what they do today.