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What Is Actual Cash Value (ACV) In Insurance?
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How Is Actual Cash Value Calculated?
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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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