Depreciation
Definition
The decrease in value of property due to age, wear, tear, and obsolescence. Depreciation is deducted from replacement cost to determine actual cash value.
Example
A 7-year-old HVAC system originally costing $10,000 is destroyed. The system has depreciated 50% due to age and expected lifespan. The actual cash value is $5,000, even though replacing it costs $12,000 today.
In Practice
Depreciation methods vary by property type and insurer. Common methods include straight-line (equal annual reduction), age-life (based on expected lifespan), and condition-based assessments. Replacement cost policies don't deduct depreciation. Understanding depreciation is important for policyholders choosing between actual cash value and replacement cost coverage.