What Is Actual Cash Value (ACV) In Insurance?
Actual cash value (ACV) is a way to determine the value of your business property that’s getting repaired or replaced after covered damage. Insurance companies calculate ACV by subtracting the depreciation from an item’s replacement cost value. ACV is an important part in understanding how some of your small business insurance
coverage works, like commercial property insurance
How Is Actual Cash Value Calculated?
In the insurance industry, actual cash value gets calculated by taking the replacement cost value of property and subtracting the depreciation from it.
For example, let’s say you bought your business computers for $10,000 and they end up getting damaged in a fire. Your computers were four years old and supposed to last 10 years for the business. This means your computers depreciated $4,000. At the time of the loss, the replacement cost value of the computers is $6,000. Your actual cash value is $2,000.
Actual Cash Value vs. Replacement Cost
When it comes to replacing property after a partial or total loss, there is a difference between actual cash value and replacement cost value. Replacement cost value (RCV) is how much it’d cost to replace your property at today’s costs.
The actual cash value is the difference between a property’s replacement cost value and depreciation. It accounts for age and wear and tear when you need to replace the damaged property.
Actual Cash Value vs. Recoverable Depreciation
Recoverable depreciation is the gap between replacement cost and actual cash value. As time goes on, property depreciates and loses value. Recoverable depreciation is part of replacement cost coverage. This allows you to claim the depreciation
from damaged or destroyed property. It’s not typically part of actual cash value insurance polices.
Let’s say you buy tools to operate your business totaling $1,000. Three years later, your tools get stolen from your business’ building. Your insurer determines the actual cash value of the tools is $400. With ACV insurance, you’ll get a claim check for $400 minus the deductible. With RCV coverage, you may be able to also claim the $600 in depreciation.
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