What is Actual Cash Value (ACV)?
Actual Cash Value (ACV) is a term commonly used in insurance to describe the current value of an item or property, factoring in depreciation. It represents what the insured item is worth at the time of the loss or damage rather than what was originally paid for it. This valuation method considers the item’s age, wear and tear, and overall condition. In contrast to replacement cost value (RCV), which pays for the full cost of replacing the item with a new equivalent, ACV covers the item’s depreciated value.
For example, if a homeowner experiences damage to their property, the insurance company would determine the ACV by evaluating how much the item has depreciated since it was purchased. This could result in a lower payout than the cost of replacing the item with a brand-new version, as depreciation reduces its overall value.
ACV is commonly used in property insurance, such as for cars and homes, and significantly determines the compensation amount after a claim. In auto insurance, for example, if a car is totaled, the ACV reflects the current market value minus any depreciation rather than what the policyholder initially paid.
Policyholders should be aware that ACV may not always cover the full cost of replacing damaged or lost items, so some opt for replacement cost coverage to ensure they can fully replace their insured property.