What does depreciation refer to in the context of insurance?

Depreciation in the context of insurance refers to the reduction in asset value over time. This concept is critical for understanding how property insurance policies handle claims for damaged or lost property. As assets age, their value typically declines due to wear and tear, obsolescence, and other factors.

In the event of a claim, insurers often consider this depreciation to determine the actual cash value of the property at the time of the loss. This is particularly relevant in property insurance, where the insured amounts are often linked to either the replacement cost or the actual cash value, which factors in depreciation.

By recognizing depreciation, it ensures that policyholders are compensated fairly based on the current market value of their asset rather than its original purchase price. This understanding helps insured individuals appreciate how claims may be evaluated and settled when they experience loss or damage to their property.