Even though your homeowners insurance includes replacement cost coverage, the claim reimbursement usually starts with an upfront payment based on the value of the damaged item at the time of the loss (or the depreciated value of the item).  If your policy includes replacement cost coverage, the settlement may involve two payments. The additional amount paid (which is sometimes referred to recoverable depreciation) is made once you repair, or replace the damaged or destroyed item. The insurance company will ask you to show proof of the replacement or repair.  Since the coverage is replacement coverage, the item must be repaired or replaced to receive the additional amount.

What if I don’t repair or replace the item?  You can certainly keep the initial payment. It’s important that you keep in mind, if you have another claim on the same item, you will not be paid again unless you have replaced or repaired the item. For example if you received an estimate for $10,000 to replace your roof and the insurance company withholds $2,000 for recoverable depreciation you can choose to keep the $8,000 and not repair your roof. If sometime later, you sustain damage from another storm to your roof you would not receive additional money since the repair had not been completed. You would also run the risk of the insurance company not paying for the additional water damage to the interior which resulted from the second claim.

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