Insurance

Actual Cash Value (ACV)

Actual Cash Value is a property valuation method that equals replacement cost minus depreciation, representing what property is worth today after accounting for wear and tear.

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Exam Tip

ACV = Replacement Cost MINUS Depreciation. Pays LESS than replacement cost. Common on HO-2 policies.

What is Actual Cash Value?

Actual Cash Value (ACV) is a method of valuing insured property that accounts for depreciation. It represents the fair market value of property at the time of loss—what a willing buyer would pay a willing seller.

ACV Formula

ACV = Replacement Cost − Depreciation

Example Calculation

FactorAmount
Replacement Cost$1,000 (new roof)
Age of Roof10 years
Expected Life20 years
Depreciation50% ($500)
ACV Settlement$500

ACV vs. Replacement Cost

FeatureACVReplacement Cost
PaysDepreciated valueFull new cost
PremiumLowerHigher
Out-of-PocketMay need more to replaceCovered in full
Best ForOlder itemsNewer property

Where ACV Applies

  • HO-2 Policies: Personal property usually ACV
  • Auto Insurance: Total loss settlements
  • Older Roofs: Many policies shift to ACV after 10-15 years

Depreciation Factors

FactorImpact
AgeOlder = more depreciation
ConditionWear and tear reduce value
ObsolescenceOutdated features reduce value
Useful LifeTotal expected lifespan

Exam Alert

ACV settlements may leave policyholders short of funds to replace property. This is a key disadvantage compared to replacement cost coverage.

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