What does the term "depreciation" refer to in property insurance?

In property insurance, the term "depreciation" refers specifically to the decrease in property value over time. This concept is essential in understanding how claims are settled and how insurance benefits may be calculated.

Depreciation occurs due to various factors, including wear and tear, age, environmental conditions, and market trends. For instance, a home that was worth $200,000 when it was purchased may depreciate to a value of $150,000 after several years due to natural aging and market fluctuations. Understanding depreciation helps policyholders and insurers accurately assess the value of property in case of loss or damage, influencing the amount of compensation a policyholder receives when a claim is filed.

The other options present concepts that do not align with the definition of depreciation. For instance, an increase in property value over time contradicts the notion of depreciation, making it an inaccurate choice. Similarly, the cost of repairs pertains to expenses incurred to fix property rather than its value decline, and the amount added to replacement costs does not relate to how value depreciates but rather to how claims are calculated based on current replacement values without considering depreciation.