Full Payment: Keeping an Eye on Recoverable Depreciation

Many of our clients come to us with questions regarding insurance payments paid to repair some sort of covered loss to their property.  Water leaks, wind and hailstorm damage, and even fires are circumstances under which most insurance companies are obligated to pay to repair damage to both residential and commercial property.  Some Colorado insurance policies provide payments in two stages. As a general rule, once an insurance company makes a claims decision, the insured will receive an Actual Cash Value (ACV) payment.  This payment reflects the costs of the repair less any depreciation due to the age of the property repaired.  The second payment arises when the insurance company earmarks a portion of the depreciated amount as “recoverable depreciation.” The insurance company should distribute the recoverable depreciation amount to the insured in order for the insured to make repairs to the property that were covered under the claim. Unfortunately, recoverable depreciation often comes with strings attached that leave some policyholders unable to recover the funds needed to complete repairs. 

In most cases, the insurance company will make a decision on a claim and then notify the insured of that decision along with a calculation of the recoverable depreciation. Most insurance policies provide that, in order to release any recoverable depreciation, an insured must complete repairs within one year from date of loss giving rise to the insurance claim.  The problem comes when the claims adjusting process take several months, leaving the insured with a relatively short period of time to complete the repairs and still comply with insurance policy.  This problem is made worse when the ACV payment is tendered during the late fall or winter, leaving property owners constrained by the Colorado Winter.

A great way to help your insurance company help you, is to document all communications with the insurance company. If you have documentation of the communication, then you can make a timeline of all claims decisions and determine at what point you must apply for recoverable depreciation.  We advise clients to talk to the party making the repairs to their property and obtain a construction timeline that lays out when the project will be completed.  That way, if faced with only a few months to complete major repairs, the insured can ask the insurance company for an extension of the recoverable depreciation period that is based on the contractors reasonable expectation as to when the repairs will be complete. 

Insurance policies are contracts of adhesion.  One definition of an adhesion contract is that it is a contract “ . . . presented on a take-it-or-leave-it basis, commonly in a standardized printed form, without opportunity for the ‘adhering’ party to negotiate more reasonable terms except perhaps on a few particulars.”  This is significant in the insurance context as some of the terms of contracts of adhesion, in particular insurance policies, may not be legally enforceable.  With that in mind, an insurance company that unreasonably withholds recoverable depreciation by hiding behind terms buried deep within it’s own policy runs the risk of having a Court strike the objectionable sections of the policy.  At the end of the day, it comes down to the fact that the insurance company must be reasonable when asking the insured to make repairs to the property in a specific amount of time.