Webster’s Dictionary defines betterment as:
Making or becoming better
- An improvement that adds to the value of a property or facility
The goal of insurance is to put you back in the position you were in prior to a loss. In other words, you should not profit or gain from an insured loss. For example, in an automobile collision the maximum amount your insurance company is going to pay is the cost to repair your vehicle to its pre-collision condition, or an amount equal to the current vehicle value if the vehicle is deemed a total loss. If you have owned your vehicle for a few years, it is not worth the same amount as when it was new. It has experienced some degree of wear and tear. Over time some parts wear out and need to be replaced as part of the regular maintenance of your vehicle. In the repair process after a collision, if partially worn parts are replaced with new parts you would have profited (gained) from the loss. Since the repair shop should be using new parts, betterment is a reduction in the reimbursement by the insurance company for the cost of new parts so that the settlement amount reflects and is equal to the value of the existing (pre-accident) parts. Let’s say that you paid $800 for a new set of tires several years ago. You get in an accident and as a result you need new tires. The insurance company appraiser completes an estimate of the cost to repair your vehicle. He notes that the tires are worn and 50% of the tread is gone. You have your vehicle repaired and replace the tires. Your insurance company is going to deduct $400 (50% of $800) of the cost of the new tires from their payment to you. That $400 is called betterment. The tires in your loss only had 50% of their value left so they were only worth $400. If the insurance company paid to put new tires on your car you would be in a better position than you were prior to the loss. The $400 deduction puts you back in the same financial position that you were in prior to the loss.
Examples of parts that the insurance industry typically considers subject to betterment include:
- Brakes have an average life of 50,000 miles. Betterment is calculated at 2% per 1,000 miles.
- Transmissions have an average life of 150,000 miles. Betterment is calculated at .667% per 1,000 miles.
- Exhaust Systems have an average life of 10 years. Betterment is calculated at 10% per year.
- Convertible Tops have an average life of 10 years. Betterment is calculated at 10% per year.
Betterment is the financial adjustment made in a loss settlement to reflect the depreciation of value of a vehicle part as a result of prior use.