The Insurer's Math: Deconstructing Depreciation and Betterment in New Zealand Insurance Claims

In the aftermath of a loss, a policyholder's expectation is simple: to be made whole again. However, the path to restoration is often complicated by two of the most contentious concepts in insurance law: depreciation and betterment.

While both are rooted in the basic principle of indemnity- i.e. that insurance should restore you, and not enrich you- their application in New Zealand can feel opaque and, at times, unfair.

Unlike jurisdictions such as California, which have highly prescriptive regulations that governing how insurers must calculate these deductions, New Zealand relies on a more principles-based approach, blending policy wording, common law, and recent legislative reforms. For a policyholder, understanding this landscape is critical to navigating a claim and ensuring a fair outcome.

Depreciation: The Cost of Time

At its core, depreciation is an accounting concept that recognizes that assets (like a roof, a carpet, or a car) lose value over time due to age, wear and tear, and obsolescence. In insurance, this is applied under a specific type of policy: an indemnity value policy.

The New Zealand Approach to Indemnity:

When your policy is for "indemnity value" or "actual cash value," the insurer's promise is to return you to the exact financial position you were in one second before the loss. This means they will pay the cost to replace a damaged item, minus a deduction for depreciation.

• How it's Calculated: The calculation is often a source of dispute. While an insurer might use a simple formula (e.g., a 20-year-old roof with a 50-year lifespan is 40% depreciated), this can be a blunt instrument. A more legally robust approach, and one policyholders should advocate for, is to determine the "actual" depreciation based on the item's real- world condition, maintenance history, and true remaining useful life.

• The Key Battleground: The fight is often over the "pre-loss condition." An insurer might argue a 10-year-old carpet is 50% depreciated. The policyholder, however, could provide evidence that it was a high-quality brand, was immaculately maintained, and had a realistic remaining lifespan of another 15 years, making a 50% deduction unreasonable.

This contrasts sharply with the Californian model, where regulations explicitly state that depreciation must reflect a "measurable difference in market value" and provide clear rules on what can and cannot be depreciated (for example, labour costs are generally exempt). In New Zealand, these matters are left to the negotiation between the assessor and the policyholder, guided by the general principle of fairness.

Betterment: The Unwanted Upgrade

Betterment is the flip side of the depreciation coin. It arises when a repair, by necessity, leaves your property in a better condition than it was before the loss. The principle of indemnity dictates that you, the policyholder, should not get a "free" upgrade at the insurer's expense. Therefore, you may be asked to contribute to the cost of this improvement.

How Betterment Applies in New Zealand:

1. "Wear and Tear" Parts in Motor Claims: This is the most common and intuitive application. If your car has tires that were 75% worn and they are destroyed in an accident, the insurer will replace them with brand new tires. They will argue that you have been "bettered" because you now have 100% new tires instead of 75% worn ones. They will likely ask you to contribute to the cost of that 75% "betterment." This is a standard and generally accepted practice.
2. Building Code Upgrades: This is a far more controversial area. Imagine a fire damages part of your home's wall. To repair it, the builder must use modern, insulated framing and bracing to comply with the current Building Code, which is a significant improvement over the 1970s timber that was there before. The insurer may argue this is betterment and ask you to contribute. o The Policyholder's Counter-Argument: This is where policy language is king. A well-advised policyholder would argue that the upgrade was not a choice but a necessity to complete the insured repair. The policy covers the "cost to repair," and if the only legal way to repair is to upgrade, then the cost of that upgrade is part of the insured loss. Many modern policies now explicitly include cover for the "increased costs of compliance," but for older policies, this remains a significant point of contention.
3. Matching and "Reasonably Uniform Appearance": If a repair to one part of a property (e.g., replacing a few faded weatherboards) makes the rest of the property look old by comparison, the question of "betterment" can arise if the policyholder demands the entire wall be repainted for a uniform appearance. While California has specific regulations requiring insurers to pay for matching, in New Zealand, this is governed by the specific terms of the policy and a general standard of reasonableness.

The Ultimate Shield: "Replacement Cost" Policies

The most powerful tool for a New Zealand policyholder to defeat arguments of both depreciation and betterment is to ensure their policy is a "Replacement Cost" or "Reinstatement" policy, often marketed as "new for old."

• How it Works: This type of policy fundamentally changes the insurer's promise. They are no longer just indemnifying you for your pre-loss financial position. They are promising to restore or replace your property to a condition "substantially the same as when it was new."
• The Effect: Under a true replacement policy, there is no deduction for depreciation. If your 10-year-old television is destroyed, they must pay for a brand new, modern equivalent. The concept of betterment also largely falls away, particularly for building code upgrades, as the promise is to rebuild "as new," which inherently means "as new by today's standards."

Conclusion: A Tale of Two Policies

The New Zealand insurance landscape creates a stark divide. For policyholders with indemnity value policies, the concepts of depreciation and betterment are ever-present risks. They face a negotiation where the burden of proof is often on them to justify the pre-loss condition of their property and to argue against unreasonable betterment deductions.

For policyholders with replacement cost policies, these issues are largely neutralized. They have paid a higher premium for a superior promise: the promise of full restoration, not just financial indemnification. The recently enacted Contracts of Insurance Act 2024, which comes into force by November 2027 with its focus on fairness and clarity, will hopefully push insurers to be more transparent about how these deductions are calculated and applied, but the fundamental difference between these two types of cover will remain the most critical factor in determining a policyholder's financial outcome after a loss.