Actual Cash Value
A claims settlement method that pays the depreciated current market value of damaged property, not what it would cost to replace it new.
Actual cash value (ACV) is an insurance valuation method that compensates the policyholder for the current market value of damaged or destroyed property at the time of the loss, after accounting for depreciation. The formula is: replacement cost minus depreciation. Age, wear, obsolescence, and condition all reduce ACV below what it would cost to buy a brand-new equivalent item.
For example, if a five-year-old roof with a 20-year useful life is destroyed, an ACV policy pays only 75% of the replacement cost because the roof was 25% through its useful life (25% depreciated). The policyholder receives substantially less than what is needed to replace the roof with new materials.
ACV is the default in many older homeowners policies and most standard personal property coverages. Because ACV settlements often leave significant gaps, most insurance advisors recommend replacement cost value (RCV) policies when available, even though they carry higher premiums. The additional premium is usually worthwhile given the potential difference in claim payments.
Real-World Example
The 8-year-old HVAC unit destroyed in the fire had a replacement cost of $6,000 but was valued at only $3,200 under the ACV policy after 47% depreciation.