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The insured owns an apartment building. A fire destroyed the building, and the insured is not going to repair. Building is sitting vacant at this time.

Under business income coverage, is depreciation a recurring expense?

California Subscriber

Depreciation on the property in the insurance sense of the word is not a recurring expense. For accounting purposes, most policies remain silent on whether it should be counted as a continuing or noncontinuing expense. The issue is tricky because depreciation expense is an accounting convention recognizing that a productive asset loses value as it is used over time, and loss of value should be recognized as an expense over the asset's useful life instead of all at once at the time of purchase. The depreciation is a noncash expense reflected over multiple accounting periods.

Many insurers argue that destroyed assets cannot be depreciated because they no longer exist. The court in Cohen Furniture Co. v. St. Paul Ins. Co. of Ill., 573 N.E.2d 851 (Ill. App. Ct. 1991 ) held that an allowance for depreciation can only be deducted during the useful life of an asset and that once the asset is destroyed, the insured cannot make a depreciation charge.

Some insurers state that the insured is compensated under the property policy. There is also the question of how the depreciation would be valued—using general accounting principles, as it is for tax purposes, or as it is under physical valuation methods.

The answer is that there is no definitive answer. Most of the information here was taken from our publication, Business Interruption, 2nd Edition, from a chapter titled, "The Top Ten Common Disputes." It comes down to the specific policy language and facts and may need to be decided by a trier of fact.

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