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David P Bennett (Whitey)
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Votes: 0 (Vote!) | | Posted on Sunday, February 18, 2001 - 3:01 pm: | 
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One example I have found that everyone understands is the new automobile. Everyone recognizes that when you buy a car new it immediately drops in value as soon as you drive it off the lot. I know this isn't a property example but it is something that everyone I have had to explain depreciation to seems to understand. Then of course with RC, I explain that the amount is withheld to insure that the repairs are completed and that the policy only owes the ACV at the time of the loss. The trick I guess, is finding an example that makes sense to you, that your comfortable explaining and run with it. |
Ric Vitiello (Ricvitiello)
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Votes: 0 (Vote!) | | Posted on Sunday, February 18, 2001 - 2:35 pm: |
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Hi Tom,
I use a similar example. I tell them if they bought a dozen eggs for a dollar and ate half of them that we would owe for the half that they didn't get to eat, Etc. |
Tom Toll (Tom)
Rating: N/A
Votes: 0 (Vote!) | | Posted on Saturday, February 17, 2001 - 7:12 pm: |
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Here is the technique I have used for many, many years. I tell them, "Lets pretend you bought a 12 inch candle and it cost $12.00. You lit it one day and burned 3 inches of it. Your child dropped it on the floor and it broke. In its present condition it has to be replaced. You have used 25% of the candle, so we are going to pay you 75% or $9.00 to replace it. That is what depreciation is related to actual cash value.
If they have RCV then explain that we are going to pay you 75%, or $9.00 and when you get the new candle, we will pay you the additional $3.00 |
Cecelia Sharpe (Cecelia)
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Votes: 0 (Vote!) | | Posted on Saturday, February 17, 2001 - 5:47 pm: |
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When insureds ask me to explain depreciation they usually want a definition of depreciation rather than an explanation for the exact amount of money being taken or the percentage applied. The first question "What is depreciation? I don't understand what you mean" is the starting point.
This may sound terribly elementary, but I have very few insureds, in any part of the country, who do not understand depreciation with the explanation I have been using.
I explain to the insured that they have 5 year old paint on their walls and a 10 year old roof (shingles) on their home. We owe ACTUAL cash value of the damaged items, which means we owe them 5 year old paint and a 10 year old roof. However, I explain to them, it is impossible to put 5 year old paint on their walls and no one sells 10 year old shingles. Therefore, we have to put brand new paint on the walls and brand new shingles on the roof. In order to pay them for what they had, the 5 year old paint and 10 year old shingles, we deduct an amount of money which makes our payment the equivalent of 5 year old paint and 10 year old shingles, but they get brand new materials.
If they have an RCV policy I explain to them that once they have replaced the paint and the shingles they are entitled to collect that depreciated amount. I tell them that once they have recovered their depreciation, after repairs have been completed, that they have been upgraded to brand new materials, at no cost to them.
Insureds think that is a wonderful thing.
If they question how much depreciation (and so far I really haven't had anyone ask about what percentages I've applied) I would be happy to share my depreciation schedule with them.
As I said, I know this sounds elementary, but it seems to clarify the idea of "depreciation". |
Herb Carver (Herbcarver)
Rating: N/A
Votes: 0 (Vote!) | | Posted on Thursday, February 15, 2001 - 5:49 pm: |
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I have always encouraged adjusters to explain depreciation in relation to the price of item and that item’s life expectancy. In the case of the previous example, the insured paid $X for a roof that would last 20 years. If you divide $X by the 20 years, you could show the insured how much use value (measured in $) he/she has gotten out of that roof per year. Since the policy calls for loss settlement on an ACV basis at the time of loss, the insurer owes the insured the amount of his/her financial loss. In other words, the number of years remaining (up to a max of 20) times the dollar amount per year. However, since it is impractical to allow for the insured to purchase 8 year old shingles to replace his/her roof, the insurer will reimburse the insured up to the cost of brand new roof provided there are RC benefits available.
When an insured comments as to amount of depreciation taken per year – perhaps suggesting 1% per year – then I recommend you use the same logic. If an item were to depreciate 1% a year, that item would have to be expected to last a century. Most insureds understand the implausibility of this occurring.
Lastly, keep in mind that the insurance contract obligates the insurer to indemnify the insured for his FINANCIAL loss. I have often heard adjusters say that it is their duty to estimate a loss with the intent of restoring the insured to the same condition they were in prior to the loss. This is inaccurate. It is our duty to restore the insured to the same FINANCIAL condition they were in prior to the loss. Since they purchased an item and got some use out of that purchase, the insurer owes them for the use that will not be enjoyed because of the loss – based on the amount of use that could have typically been expected had the loss not occurred. |
Old Dog
Rating: N/A
Votes: 0 (Vote!) | | Posted on Thursday, February 15, 2001 - 10:46 am: |
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Used 8 years of a 20 year roof and still has "14" years left???? I don't think Jay's insured is going to understand that either. I'm glad we have computers to do our calculations for us. |
mike stephenson (Photoadjuster)
Rating: N/A
Votes: 0 (Vote!) | | Posted on Wednesday, February 14, 2001 - 8:41 pm: |
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Using an example of a total loss to a 8 year old roof with a life expectancy of 20 years. Explain to Mr. Insured that what he lost was the future 12 years use of the damaged roof.That is his actual cash value loss. He had already used or consumed the first 8 years life of the roof and you can not lose something you have already used up. But since he has paid an additonal premium for replacement cost and if he actually replaces the roof, we will pay the 8 years or the part that was used up (the depreciated part of the loss) |
Jay Ennis (Jennis)
Rating: N/A
Votes: 0 (Vote!) | | Posted on Wednesday, February 14, 2001 - 7:12 pm: |
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One thing I have trouble with is explaining depreciation to the insured. Would anyone be willing to share their successful methods. Thanks in advance. |
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