Legal Definitions - deduction for new

The term "deduction for new" refers to a common practice, particularly in insurance, where a reduction is made from the cost of replacing an old, damaged, or lost item with a brand new one. This deduction accounts for the depreciation, wear and tear, or age of the original item. Essentially, even though a new item is provided, the payout or replacement value is lowered to reflect the fact that the item being replaced was not new itself.

This concept stands in contrast to "new-for-old" coverage, which is a type of insurance policy where an insurer replaces a damaged or lost item with a brand new equivalent without making any deduction for depreciation. When a "deduction for new" is applied, it means the policyholder will typically bear a portion of the cost difference between the depreciated value of the old item and the full cost of a new replacement.

Here are some examples illustrating the "deduction for new" concept:

• Homeowners Insurance for a Damaged Roof:

  Imagine a homeowner's roof is severely damaged in a storm and needs complete replacement. The roof was 15 years old and had an expected lifespan of 20 years. If the homeowner's insurance policy includes a "deduction for new" clause for roofs, the insurer might calculate the cost of a brand new roof but then deduct a percentage for the 15 years of wear and tear on the old roof. The homeowner would receive a payout for the new roof minus this depreciation deduction, meaning they would have to pay the difference out-of-pocket to cover the full cost of the new roof installation.

• Car Insurance for a Totaled Vehicle:

  A driver's five-year-old car is involved in an accident and declared a total loss. While the insurance policy might allow for the replacement of the vehicle, if it includes a "deduction for new" provision, the insurer would not pay the full cost of a brand new car of the same make and model. Instead, they would calculate the value of a new car and then apply a deduction based on the age, mileage, and condition of the five-year-old vehicle. The payout would be the cost of the new car minus this depreciation, reflecting the fact that the original car was not new.

• Appliance Replacement Under an Extended Warranty:

  A family's refrigerator, purchased three years ago, breaks down beyond repair while still under an extended warranty. The warranty agreement specifies that replacements are subject to a "deduction for new." When the warranty provider offers a new refrigerator, they calculate its current market price but then apply a deduction for the three years of use and depreciation of the original appliance. The family would then receive a credit or a new appliance, but with a value reduced by the amount of the deduction, requiring them to pay the remaining balance if they choose a new model at full price.