Depreciation and Your Roof

More than likely the first time you hear this term will be when you're talking to the adjuster on your front porch after they've inspected your home.

Depreciation is the most misunderstood part of the insurance claim process.

I'll do my best to explain it, but first, some background information.

Years ago when a homeowner filed an insurance claim for their roof, insurance would send and adjuster out. The adjuster would walk the property, confirm damage, put together an estimate, subtract the deductible amount from the estimate, and write the homeowner a check for the remaining balance. If a roof was estimated to cost $10,000 and the homeowner had a deductible of $1,000, the homeowner would get a check for $9,000 for the roof.

This was all good and fine for a while until insurance found out what happened after they wrote the check. The homeowner having a $9,000 from insurance would go around collecting bids from roofers. Typically the roofer with the lowest bid got the job and the homeowner avoided paying their deductible and pocketed the difference between what insurance paid and what the work actually got done for.

Insurance didn't like this because not only did the homeowner have no skin in the game, but in a lot of cases the homeowner was profiting from the claim.

In order to fix this problem and also to ensure that they would never overpay again, insurance started depreciation damaged property. What this mean is that they would determine the property's useful life and then figure out how much of its useful life it had left.

The way this works is if you file a claim on your roof and your roof is 10 years old with a 30 year shingle, insurance will depreciate your roof by 1/3 or 33.3% because your roof has used 1/3 of its useful life.

This means that if insurance is estimating that your roof is worth $15,000 to replace, they will withhold $5,000 of that until the job is done. Once the job is finished and the contractor sends insurance an invoice stating that the job cost $15,000 then insurance will release the $5,000 they initially held back.

If the contractor ends up replacing the roof for $14,000 instead of $15,000 then insurance will only pay out $4,000 of the $5,000 that it held back, ensuring that they don't overpay.

But what happens if it ends up that it costs the contractor $16,000 to replace the roof? Insurance will release the $5,000 that they held back and then if the contractor provides sufficient documentation to show that the extra $1,000 was legitimate then insurance will release that extra $1,000.