What does "depreciation" refer to in insurance?

Depreciation in the context of insurance specifically refers to the estimated loss of value due to wear and tear over time. This concept is crucial when assessing the value of an insured item, particularly for vehicles and property. As items age, their functionality and aesthetic appeal may diminish, leading to a reduction in their overall value. Insurance companies consider depreciation to determine the payout amount in the event of a loss or damage claim. By factoring in depreciation, insurers gauge how much an item would likely sell for in its current condition, rather than its original purchase price. This ensures a more accurate assessment of the value of the asset when accounting for its usage and age.