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.
🎬 Video Explanation
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
| Factor | Amount |
|---|---|
| Replacement Cost | $1,000 (new roof) |
| Age of Roof | 10 years |
| Expected Life | 20 years |
| Depreciation | 50% ($500) |
| ACV Settlement | $500 |
ACV vs. Replacement Cost
| Feature | ACV | Replacement Cost |
|---|---|---|
| Pays | Depreciated value | Full new cost |
| Premium | Lower | Higher |
| Out-of-Pocket | May need more to replace | Covered in full |
| Best For | Older items | Newer 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
| Factor | Impact |
|---|---|
| Age | Older = more depreciation |
| Condition | Wear and tear reduce value |
| Obsolescence | Outdated features reduce value |
| Useful Life | Total 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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Replacement Cost
Replacement cost is a property valuation method that pays the full cost to replace damaged property with new items of like kind and quality, without deducting for depreciation.
Coinsurance (Property Insurance)
Coinsurance is a property insurance provision requiring the insured to carry coverage equal to a specified percentage (usually 80%) of the property value or face a penalty at claim time.
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