What is the definition of depreciation in the context of insurance?

Depreciation, in the context of insurance, refers to the reduction in a property's value due to wear and tear, age, or obsolescence. This concept is fundamental in understanding how insurance claims are assessed, particularly for property coverage. When a property experiences depreciation, its market value diminishes over time, often making it less valuable than the original purchase price.

Insurance policies often take depreciation into account when determining settlement amounts for loss or damage claims. For instance, if an insured item is damaged and a claim is filed, the insurer evaluates how much value the item has lost since the initial purchase, calculating the payout based on its current depreciated value rather than its full replacement cost.

Other options refer to concepts not directly related to the definition of depreciation. An increase in market value over time would be appreciation, not depreciation. The value determined after an appraisal pertains to current worth without considering how wear and tear has affected an item's value over time. The buying price of a new replacement refers to the cost required to replace the item, which does not factor in the loss of value from depreciation. Understanding these distinctions is crucial for effectively navigating insurance discussions regarding property value and claims.