Depreciation
The decrease in value of property over time due to age, wear and tear, or obsolescence.
Detailed Explanation
In homeowners insurance, depreciation is used to calculate actual cash value (ACV) settlements by subtracting depreciation from replacement cost. The rate of depreciation varies by item type, with electronics typically depreciating faster than furniture or building materials.
Practical Example
When Daniel's 5-year-old roof was damaged by a storm, his insurance initially paid the depreciated value (actual cash value) of $8,000 rather than the $12,000 full replacement cost, holding back the $4,000 depreciation until repairs were completed.
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