Actual Cash Value
Definition
The replacement cost of property minus depreciation at the time of loss. Actual cash value represents the fair market value of damaged property, accounting for age, wear, and obsolescence.
Example
A 5-year-old roof that originally cost $20,000 to install is destroyed in a hailstorm. The roof has depreciated 30% due to age and wear. The actual cash value would be $14,000 ($20,000 - $6,000 depreciation), even though replacing it today might cost $25,000.
In Practice
Actual cash value is commonly used in property insurance policies, especially for older items. It differs from replacement cost value, which pays the full cost to replace the item with a new one. Policyholders should understand which valuation method their policy uses, as it significantly affects claim payouts. Some policies offer replacement cost coverage as an endorsement for an additional premium.