Depreciation (Insurance)
The reduction applied to a damaged item's full replacement cost to account for its age, condition, and expected remaining life before the loss occurred, the specific calculation that creates the gap between an actual cash value payout and a full replacement cost payout.
Why it matters
Depreciation is applied item by item using standardized life-expectancy tables, not a flat percentage across an entire claim, and many states restrict or prohibit depreciating labor costs alongside materials, getting this calculation wrong, in either direction, changes what a policyholder actually receives.
On a real project
A water-damaged hardwood floor with an expected 30-year lifespan, already 10 years old at the time of loss, is depreciated by roughly a third of its replacement cost when calculating the actual cash value payout for that specific item.
Who this matters most to
An Insurance Adjuster applies depreciation using Xactimate's built-in life-expectancy tables for each damaged item rather than a single blanket rate. A Public Adjuster checks whether labor was improperly depreciated alongside materials, since several states restrict depreciating labor at all.
Where this goes wrong
An adjuster applies depreciation to both materials and labor on a claim in a state that prohibits depreciating labor costs, reducing the payout below what the policyholder is legally owed. A public adjuster catches the discrepancy while reviewing the itemized estimate, and the insurer has to reissue a corrected payment.