How to Apply Depreciation in Xactimate
Many Homeowners Replacement Cost Insurance Policies state that Coverage A damages be settled on an actual cash value basis until the repairs or replacement is completed. Insurance companies frequently determine actual cash value by taking the replacement cost value of an item and subtracting the depreciation. Xactimate defines depreciation "as a value deducted from RCV as a result of an item's age, usage, or general condition." when insurance company's adjuster takes the replacement cost and subtracts for the depreciation the result of this calculation is commonly referred to as ACV. Usually, the percentage of depreciation he uses is based on the life expectancy of the item being replaced, but how does the homeowner know if the correct % of depreciation is being applied to their loss?
Xactimate is probably the most widely used property estimating software used by insurance carriers. Xactimate allows line-items to be depreciated in one of the following ways: percentage, amount, or age/use. For years, the most common way of applying depreciation was by percentage. However, depreciating by age is now becoming a little more popular. The insurance adjuster will gather information from the client in-regard to the age of the items being replaced and then apply depreciation accordingly. However, is defining by age alone the most relevant factor or the only relevant factor the adjuster should consider? Read more about applying depreciation by Age and Use.
Let us look at an example of depreciating the paint on the walls in a room 20'x15'x8' using the age/use properties. Xactimate has determined the average life expectancy for interior paint is 15 years. If the paint on a wall is 3 years old, it would then be depreciated for 3 years @ 6.67% per year. Xactimate considers 6.67% depreciation per year the average amount that should be applied under average conditions. Should the insurance adjuster adjust this percentage amount if the rate of wear and tear on the wall paint does not fall within the category of average? Under what conditions should the adjuster apply more depreciation, and under what conditions should he apply less depreciation? These are two important questions that every adjuster should consider.
It may have merit to apply a greater percentage of depreciation to the paint on the walls if the home were occupied by family of 13. It may also be correct to apply a smaller amount of depreciation to paint in the home of a single family member. It may also be correct to apply less depreciation to a home only occupied 3 months out of the year. How can the adjuster account for this situation? Good news, Xactimate allows for this type of scenario and provides for the adjuster a venue to either accelerated or decreased depreciation in a drop-down box called "Use." Within this section of Xactimate, the user can stipulate if depreciation should be applied in normal(average), heavy (below average), or light (above Average)fashion. The adjuster could then choose heavy of more than the average amount of people occupied the home and caused more than average wear and tear to surface of the paint on the walls. Conversely, the estimator could choose light for the little old lady who maintains her home in a pristine condition and seldom hits or mars the walls. By choosing "heavy" or "light" the 6.67% depreciation per year is either increased or decreased in value. There are other settings for new items and replaced items.
In the example cited above the average amount of depreciation applied to the paint on the walls in a room 20'x15'x8' would be $53.76. If depreciation "use" were changed to heavy, the amount would be $75.26. If depreciation use were changed to light, the amount would be $32.26. So you can see depreciation is lowered about 40% when the "use" is changed to light and is increased about 40% when the "use" is changed to heavy. The further application of these "use" factors seemed to offer a better method to determine ACV when applying depreciation to the value of the loss. The question is why are not more insurance adjusters taking advantage of this feature in Xactimate? Very seldom do I see the "use" feature change to "light." If depreciation is being figured by age, and the adjuster is not modifying the Xactimate "use" feature when appropriate, is the Net Claim amount of the estimate correct?