Damaged Property/Recoverable Depreciation

By Bea Lewis
Sr. Hazard Claims Specialist
Safeguard Properties Inc.

Most homeowners insurance policies provide replacement cost coverage on an insured dwelling.

Under Section 1 of the homeowners policy, the Loss Settlement provision states, "The insurer will pay no more than the actual cash value of the damage until actual repair or replacement is complete."

In other words, the claims examiner will adjust for depreciation and settle the claim with the insured based on the present condition cash value. The adjusted depreciation, or some portion of it, will be recoverable once repairs are completed per the adjuster's scope.

The Loss Settlement provision also states that if the insured intends to repair the property, the claim for any additional funds must be made within 180 days after the loss.  This does not mean that the actual repairs must be completed (or even started) within 180 days after the loss in order to make a claim for the holdback.  The insured must simply advise the carrier of the intention to repair the property. 

It is important that our clients understand that a mortgagee named on a homeowners policy has the same rights as the homeowner to make a claim for recoverable depreciation.

If an insured advises the carrier of the intention to repair the property within 180 days of the loss but fails to actually repair the property for two years, the insured may have a difficult time collecting the recoverable depreciation.  For example, if the repairs were not completed because the insured just didn't get around to it, the carrier would deny any claim for the holdback.

If, on the other hand, a mortgagee advises the carrier within 180 days of their intention to repair the property and the repairs are not completed for 2 years, the servicer may still be able to collect the recoverable depreciation, if they can provide a reasonable explanation for the delay in completing repairs.

If a property is in bankruptcy, in redemption, or pre-sale, these circumstances would serve for the mortgagee as a reasonable explanation for uncompleted repairs, and the mortgagee most likely would be able to collect the recoverable depreciation.

It is also important for our clients to realize that, if a property is repaired to convey condition rather than according to the adjuster's scope of repairs, the mortgagee may not be able claim all of the recoverable depreciation.

The adjuster writes his scope based on claimable damages.  Repairing a property to convey condition may not include all of the claimable damages on the adjuster's scope.  In cases where only a portion of the items on the adjuster's scope are repaired, the insured may claim recoverable depreciation only for those repairs that were completed.