Depreciation is a loss of value over time. In the context of insurance, many types of insured items depreciate as time goes on, and a policy may reimburse the policyholder based on the initial value of the item or its current market value, which takes depreciation into account.
For example, cars start depreciating as soon as they are driven off the lot after a sale. The reason why cars and other items lose value over time is because wear and tear reduces the quality of the item, and oftentimes, newer models are produced. If a policy only covers the actual cash value, then the insurer will take into account depreciation when considering the reimbursement amount.
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