What does Depreciation generally refer to?

Depreciation typically refers to the loss of value that an asset experiences over time, primarily due to wear, tear, and age. In insurance and finance, it acknowledges that as assets are used, they undergo a decline in worth which directly affects their resale value or replacement cost.

When an asset is new, it holds its nominal value, but as time progresses, and especially as it is utilized, it can become less effective or require repairs, leading it to depreciate in value. This is significant in property and casualty insurance, where determining the actual cash value of an insured item often involves considering how much depreciation has been incurred since its purchase.

Understanding depreciation is crucial for insurance adjusters when assessing claims because it helps determine the compensated amount for damages relative to the current condition of the property or item involved.