When purchase insurance for your home or business, you expect that when calamity strikes such as the hail storms that hit Dallas recently, you will be able to get the entire amount necessary to rebuild your home. However, you may be surprised that after going through the process of your claim, you get an amount that is lower than what you expected. While it can help you start rebuild your home or business, it often is not enough. Now you find yourself asking if you received what was rightfully yours or if the insurance company cheated you.
Generally, the answer to your question is, well, not necessarily. In practice, insurance companies do not pay for the entire cost necessary to rebuild your home or business. If you read the fine print of your insurance policy, chances are you will find a provisions which state that you will get paid for the actual cost of your home at the time the storm or hurricane struck. You might find that unfair but insurance companies are allowed to take into account the depreciation of your home when they release your insurance proceeds.
Depreciation means that the insurance company will consider how you “consumed” your home or business over time. It takes into account the age of your house or business and how it was subjected to ordinary wear and tear over the years which diminished or reduced its value. The amount of the insurance proceeds you will be entitled to shall be less your property’s depreciation.
Depreciation may be computed by different methods. Before we discuss that, here are some terms you need to be familiar with:
- Residual Value. This is the future value of a property or good in terms of percentage of depreciation of its initial value.
- Useful Economic Life. This refers to the period over which to depreciate an asset or a property. The period varies depending on the asset involved.
Here are two common methods for computing depreciation:
- Straight-line Depreciation. This operates on the principle that each accounting period of an asset’s life has an equal amount of depreciation. An accounting period would usually cover one year. It is computed using the following formula:
- Depreciation = (Cost of the Asset – Residual Value of the Asset)
- Years of the Useful Economic Life of the Asset
This method is advisable if the benefits obtained from an asset are reasonably constant over its life as it results in a constant annual depreciation charge.
Reducing Balance Method. This method uses a high annual depreciation charge in the early years of a property’s life but the charge is reduced progressively as the asset ages. A fixed annual depreciation percentage is applied on the written-down value of the asset. Depreciation is computed as a percentage of the reducing balance. This method is ideal for assets where the benefits derived are high in the early years but decline as the property ages since it matches the depreciation expense with the pattern of benefits.
Admittedly, these concepts may be difficult to understand especially if you are still recovering from a traumatic experience.
To ensure that your interests will be properly protected and you will get what is rightfully yours, you should consult an experienced insurance claims attorney who can assist you on your matter.